hdfc standard life insurance company ltd share price Management discussions

MANAGEMENT DISCUSSION AND ANALYSIS

A. MACROECONOMIC TRENDS

The financial year 2022-23 saw a return to normalcy after two years of COVID-19 related restrictions. The opening up of economies around the world saw a strong surge in consumption as a result of pent-up consumer demand. In case of large developed economies, demand was also fuelled by generous fiscal stimulus during the pandemic. The supply side response was however slow in responding to the surge in demand, as supply and logistics chains that stretched across the world, were hampered by the asynchronous relaxations of the COVID-19 curbs. The resultant supply-demand imbalance led to a sharp rise in inflation, across almost all economies.

The US saw peak CPI inflation at 9.1%, while inflation in European countries tipped into double digits.

The response to this sharp rise in inflation was also quite swift. Central banks raised interest rates at a rapid clip. The US Fed led the world in raising rates by 475 bps in a span of about a year. Other central banks too followed suit, though the extent of the rate hikes were lower.

Emerging economies faced the same surge in inflation, though, to a lower extent. Emerging economies had received far less fiscal stimulus during the pandemic, and the subsequent surge in inflation, post re-opening, was also quite modest. CPI inflation in India peaked at 7.8% in April 2022. However, EM central banks, too, followed the US Fed in raising rates, to fight inflation and stabilize their respective currencies. In India, the RBI raised policy interest rates by 250 bps over the last 12 months.

Domestic activity levels also saw a recovery over the year, led by full re-opening of the economy. The GDP is forecasted to grow by 7.0% in FY 2022-23. However, forecast for the next year, i.e., FY 2023-24 is expected to be around 6.5%, as per RBI projections, as the impact of rate hikes work their way into the economy.

Equity markets had a subdued year, as sharp gains over the previous years had factored in strong recovery from the pandemic, and markets were increasingly pricing in the impact of rate hikes around the world. Moreover, the sharp rise in inflation also squeezed margins for a number of industries, as the impact of rise in input costs was passed on to final prices with a lag. The equity markets were also buffeted by large FPI outflows, as rapid monetary tightening in developed economies led to lower global liquidity and a fall in risk appetite for global investors. The large cap Nifty index was almost flat for the year. Despite the subdued returns, domestic equity markets out-performed MSCI World index, which saw a deeper correction.

The domestic fixed income market also factored in sharp hike in policy rates, as the benchmark 10-year Government security yield rose to a high of 7.61% in the initial part of the year, but cooled down to 7.28% by the end of the year, compared to 6.84% at the end of the previous financial year. The change in 10-year benchmark, however, masks the change in the shape of the yield curve, where the shorter end of the curve saw a greater amount of rise in yields. The 1-year T-Bill yielded 7.28% at the last auction for FY 2022-23, versus 4.57% at the last auction for the previous year. The sharp rise in policy interest rates around the world led to a flattening, and in some cases, an inversion, of yield curves, as shorter end yields saw a larger rise than the longer end.

Locally, policy decisions are giving enough thrust which help India manifest as a global growth engine. Pradhan Mantri Jan Dhan Yojana was launched in August 2014, with the aim to promote financial inclusion, increase banking penetration and to provide at least one bank account per household across the country. Over the past 9 years, under PMJDY India witnessed 39% growth in deposits which reached Rs.2 lakh crore mark, 16% growth in number of beneficiaries which is about to reach 50 crore. Additionally, India witnessed 12% growth in issuance of RuPay debit cards over the last nine years breaching the 30-crore mark. While the usage of these accounts stands at ~85%, the fact that 90% of Indians aged above 18 have a bank account (individually or jointly) is a testimony to the policys success.

In July 2015, when Digital India was launched, Indias rank was 123 in terms of per capita data consumption. Currently, India consumes more data than US and China combined becoming the geography with the highest per capita data consumption and is number 2 in terms of total internet users (2/3rds coming from rural India). In January 2016, when Startup India was launched, India had ~450 registered startups. Currently, India stands third globally in terms of number of unicorns, second in terms of number of startups and first in terms of incremental startups adding every year. Indias gross Goods & Services Tax (GST) collections grew 22% in FY 2022-23 to cross Rs.18 lakh crore, an average Rs.1.51 lakh crore/month suggesting strong economic resilience.

Geopolitical uncertainty is at its peak with the war in Ukraine dragging into its second year on one hand and escalating US-China tensions on the other hand. This is in stark contrast to Indias foreign policy with many free trade agreements being signed and negotiated. India has signed FTAs with Mauritius, UAE and Australia and is currently negotiating FTAs with UK, EU, Canada and Israel. "Decoupling" has become a buzzword among global business leaders which will benefit India. India received 56% ($532 billion of $950 billion) of its total lifetime FDI in the past 8 years whilst creating a new FDI record ever year since FY 2014-15. In FY 2021-22, it received its highest ever FDI of $83.5 billion. The foreign investment came in 31 states and UTs across 61 sectors which reflects Indias inclusive growth. 93% of FDI received in FY 2021-22 came via the automatic route (without any approval) which is a testimony of easing regulations in India.

Outlook on the Life Insurance Industry in India

Globally, headwinds persist from an economic perspective with major economies experiencing a slowdown. However, India appears to be relatively better positioned.

Insurance as a sector continues to be a beneficiary of a relatively robust economy, stable savings trends and favourable regulatory regime. Insurance remains a multi decade opportunity in the Indian context and the sector is backed by the regulator whose vision is to have insurance for every Indian within 100 years of our independence.

Some of the growth drivers are elaborated below:

Key Opportunities

I. Growing workforce and middle-class population

India is the second-most populous country in the world and amongst the youngest, with a median age of about 28 years. As per UN population projections, ~95 crore people or 68% of Indias population currently belong to the working age group of 15-64 years. This cohort will increase by 10 crore over the next two decades, implying that more than 25% of the incremental global workforce will come from India. Middle income households (income Rs.2L-Rs. 10L) in India have been rising in the past decade growing from ~16% in FY 2011-12 to ~32% of all households in FY 2021-22. This segment is expected to reach 47% by FY 2029-30 which translates to roughly 18 crore households. Growth of the Indian middle class especially in rural and semi-urban areas presents an opportunity to increase penetration in new segments and geographies.

The life insurance industry helps in mobilisation of longterm savings, provides protection and long-term income and annuity solutions which would cater to the varied needs of customers. The rising middle-income households, growing working population along with improvement in financial literacy, access to information and awareness will lead to an increase in penetration.

II. Low insurance penetration and higher protection gap

As compared to other developed economies, India remains vastly under-insured, both in terms of penetration and density. The life insurance penetration in India is at 3.2% which is one of the lowest amongst developing countries.

The protection gap in India is amongst the highest in the world at 83%, as growth in savings and life insurance coverage specially in terms of number of policies has lagged economic and wage growth. The sum assured as a % of GDP in India is also amongst the lowest compared to other developing geographies further underlining the lack of adequate protection. The increase in disposable income, coupled with increasing financial literacy and awareness shall help increase penetration level.

The trend of increase in credit loans also indicates the opportunity for attaching group protection products at the time of borrowing.

The government has also taken initiatives to promote financial inclusion and helped increase insurance awareness including setting up small finance banks, payments banks and offering low-cost insurance schemes.

III. Increasing life expectancy and lack of proper retirement planning

Retirement is an equally large opportunity given Indias changing demographic profile given that Indias elderly population is expected to almost triple by 2060. Increase in life expectancy and lack of a formal social security system for the wider population will further spur the demand for such products.

As per a study by UN, the share of population over the age of 60 is projected to increase from 7% to nearly 17% in 2060.

India also recorded an improvement in life expectancy at 60, which was 16 years in 1995-2000, expected to grow to 19 years in 2030-2035. Further, in comparison to global benchmarks, Indias pension market is highly underpenetrated at 3% of GDP

This provides insurers an opportunity to offer long-term income and annuity products. There has also been a push by the government towards NPS solutions which further increases the potential for annuity products.

IV. Financialisaton of savings

India has the highest 5-year average GDP growth rate. Indias per capita income crossed the $2,000 threshold in 2021 which is the inflection when income crosses the subsistence expenditure level and moves on to spending and investments. Hence, favourable macroeconomic conditions coupled with rising awareness about need for life insurance, higher financial savings as a percentage of GDP, increasing urbanisation and increase in digitalisation would continue to aid the growth of the Indian life insurance sector.

The life insurance industry is uniquely positioned to cover a range of customer needs across fixed income and equity platforms. Over the long term, higher personal disposable incomes, resulting in higher household savings, are likely to be channelled into different financial savings instruments including life insurance. Share of life insurance as a % of GDP has largely remained stable over the past decade.

V. Digitisation

Changing technology is disrupting businesses rapidly with both customers and distributors wanting seamless end to end digital solutions. Technology and data are key for not only improving customer buying experience but also to underwrite effectively as life insurance penetrates new segments and geographies. Digital assets will be key for driving new business, customer service, claim pay-outs as well as risk management. Online is no longer a channel, but a way of life that permeates through the business as a whole. The pandemic has further accelerated the adoption of technology across all lines of business.

Given higher digital adoption by customers and distributors, it has become imperative for insurers to develop strong technological capabilities and highly efficient platforms. Customers expectation of personalised and improved service experience can be addressed by the use of artificial intelligence, cloud computing, machine learning algorithms and bots.

Risks and Concerns

The life insurance industry faces a number of risks primarily due to rapidly evolving customer behaviour, changing demographic profile, increasing competition, change in regulatory environment and dynamic macroeconomic conditions. The financial conditions and future prospects of companies may be significantly affected by factors such as market fluctuations, changes in tax rates or in interest rates. Risks also exist in the form of a change in the relationship with key distribution partners. While some risks are controllable, others are non-controllable like uncertainty in the global markets that can have an impact on domestic markets and consequently pose short-term pressures to the industry in terms of impact on domestic growth, inflation and erosion of disposable income.

Our enterprise risk management framework details the governance and management of all aspects of risks we face. Details of our Enterprise Risk Management Framework are included as section on page no. 73.

B. LIFE INSURANCE INDUSTRY OVERVIEW

I. Overview

The life insurance industry has evolved considerably over the last decade with private players steadily gaining market share in individual WRP There have been significant changes in distribution strategy as well as product portfolio with technology becoming a key enabler.

During FY 2022-23, the life insurance industry clocked 18% growth and collected new business premiums of Rs.3,70,500 crore as against Rs.3,14,300 crore in FY 2021-22.

Private insurers grew by 24% in weighted individual business, while group business saw a growth of 17%. The market share of private insurers in the individual business increased by 288 bps in comparison to FY 2021-22. Development of multiple channels of distribution and product innovation with higher focus on segments like non-par savings and deferred annuity have been the key drivers for growth in market share of private insurers in individual business, which has increased from 38% in FY 2012-13 to 66% in FY 2022-23.

Within the private sector, the top 10 insurers accounted for 88% of the market (in terms of individual WRP) in FY 2022-23. Strong growth in the proprietary channels and distribution arrangements with large banks and brokers have been key drivers for most of the large insurers.

In recent years, private insurers have increased their focus on individual non-par savings products. The focus on retirement solutions has also increased. There has also been an increase in demand for embedded protection products like return of premium, credit life, savings products with higher sum assured cover amongst others.

III. Distribution Mix across Private Insurers

Distribution mix has been steady over past many years with higher share of business coming from the bancassurance channel as it continues to grow with expansion in number of branches and widening reach across the Indian cities. The implementation of open architecture by some of the larger banks, has enabled insurers achieve scale, while also presenting the customer with more product choices.

There is scope to increase penetration in terms of number of policies especially in Tier 2 and 3 locations as banks and new payments and small finance banks expand into these areas.

Increasing digital awareness, coupled with the governments drive towards digitisation, is helping the online channel emerge as a key distribution channel, especially for younger customers. Insurers are also tying up with partners within the non-traditional ecosystem (e.g., e-commerce companies, fintechs, cab aggregators) to diversify their distribution mix further.

C. HOW ARE WE TRACKING BUSINESS PERFORMANCERs.

# What we track	Comments
1 a) Embedded	Consistent growth in EV (doubled in last 4 years), with steady Operating return on EV
value (EV): Sum of adjusted net asset value and the present value of future profits of a firm
b) Value of New	Margin neutrality, after considering the acquired business, was achieved well ahead of target with 37% growth in absolute VNB.
Business (VNB): Determines the expected profitability of the new business written during the year
	Note: For detailed EV related disclosures, please refer Embedded value report on "Page no.543"

# What we track	Comments
2 Persistency: Strength and quality of existing book	Healthy persistency across cohorts, led by focus on quality of business and leveraging technological capabilities to provide a superior customer experience
3 Assets under Management (AUM): Growth and net accretion to deliver healthy growth with balanced mix	AUM has almost doubled in the last 4 years. Debt:Equity mix stood at 70:30. ~99% of debt investments in Government bonds and AAA rated securities as on March 31, 2023
4 Distribution mix: Develop and nurture each channel, while ensuring business diversification	Diversified distribution comprises a wide spectrum of 300+ partnerships. This is bolstered by 498 pan-India branches and 1,79,435 agent workforce
5 Product mix: Balanced product mix with options for different risk reward profiles	Need-based selling and profitable growth continued to be the key focus areas

# What we track	Comments
6 Drive to increase protection: Higher focus on protection business across individual and group segments	There has been an increase in protection share in total NBP from 24% in FY 2021-22 to 29% in FY 2022-23. Our overall protection APE grew by over 20% in FY 2022-23. Retail protection trends remain encouraging with sequential growth of over 50%
7 Market share and ranking: Market leadership with sustained growth across segments	We continue to grow faster than the private industry and be ranked amongst the top 3 life insurers across individual and group businesses. Outpaced the private industry over multiple timeframes including, in the past 3, 5 and 7 years, thereby consistently demonstrating growth leadership.
8 No. of lives: Number of lives insured across individual and group business, an indicator of scale of business	Company insured 6.8 crore lives in FY 2022-23, an increase from 5.4 crore in the previous year

D. STANDALONE PERFORMANCE OVERVIEW

HDFC Life has delivered strong performance across key performance metrics. In line with our stated longterm strategy, we continue to drive business and create value for key stakeholders by catering to continuously evolving customer preferences, maintaining a balanced and profitable product mix, diversified distribution mix, continuous product innovation and reimagining insurance through effective use of technology. The standalone results presented below includes detailed analysis across key financial parameters tracked by us.

During the year, the merger of (erstwhile) Exide Life Insurance Company Limited into the Company got successfully completed w.e.f October 15, 2022 (Appointment date being April 1, 2022), pursuant to the Scheme of Arrangement filed. Accordingly, the business and financial numbers of the Company for year ended FY 2022-23 includes the impact of (erstwhile) Exide Life Insurance Company Limited. However, the business and financial numbers of the Company for previous year ended FY 2021-22 are on standalone basis (without impact of (erstwhile) Exide Life Insurance Company Limited), hence the year-on-year (YoY) comparative / growth numbers, to that extent, are not comparable.

I. Our Business Segments:

Lines of Business:

We offer long-term savings, protection and retirement or pension products. These products are grouped under three segments Participating (Par), NonParticipating (Non Par) and Unit-Linked (UL). A brief description of each product segment is set below:

1. Non-Linked segments:

Non-linked segment comprises the traditional products that offer reasonable insulation from market related risks. The non-linked segment is split into participating and non-participating segments.

a) Non-Linked Participating segment:

This segment covers insurance contracts that participate in the surplus generated from the segment, during the term of the contract. The policyholder is entitled to 90% of the surplus generated from this segment, which is added to the policy as bonuses. The shareholders share of surplus is one-tenth of the bonus declared for the policyholders. The balance surplus, if any, in the segment is accumulated under the head Funds for future appropriation in the balance sheet for future distribution to policyholders and shareholders.

b) Non-Linked Non Par segment:

This segment covers insurance contracts, which do not participate in the surplus generated from the segment. The surplus arising from this segment is transferred to Shareholders Profit & Loss Account on recommendation by the Appointed Actuary of the Company.

2. Unit Linked segment:

This segment covers insurance contracts that are investment cum protection plans that provide returns directly linked to the market performance of the underlying fund. The investment risk is borne by the policyholder. The surplus arising from this segment is transferred to Shareholders Profit & Loss Account on recommendation by the Appointed Actuary of the Company.

II. Performance of Standalone Financial Statements:

A) Income statement analysis:

The reported gross premium income witnessed growth in both individual and group premium. In comparison, operating expenses grew on the back of new business growth across segment and channels with calibrated investment in distribution and technology. We reported a Profit after Tax (PAT) of Rs.1,360 crore during FY 2022-23. As figures during FY 2022-23 are inclusive of corresponding figures of (erstwhile) Exide Life Insurance (w.e.f April 1, 2022), the YoY growth figures are not comparable.

Income statement

			(Rs. in crore)
Revenue and Profit and Loss Account	FY 2022-23	FY 2021-22	Growth
Gross Premium Income	57,533	45,963	25%
Reinsurance (net)	(769)	(567)	-36%
Total Premium Income (Net)	56,764	45,397	25%
Income from Investments
Policyholders	12,598	19,216	-34%
Shareholders	720	789	-9%
Income from Investments	13,318	20,005	-33%
Other Income
Policyholders	464	177	162%
Shareholders	63	-	-
Total Income (A)	70,609	65,578	8%
Less:
Commission	2,887	1,940	49%
Operating Expenses	8,500	5,655	50%
Interest on Non-convertible debentures	62	40	55%
GST on linked charges	376	369	1%
Benefits Paid	38,872	31,864	22%
Other Provisions	5	(287)	102%
Change in Valuation Reserves (net)	18,586	24,682	-25%
Change in funds for future appropriations	(110)	(50)	-120%
Total Expenses (B)	69,178	64,213	8%
Provision for tax:
Policyholders	159	184	-14%
Shareholders	(88)	(27)	-214%
Provision for tax (C)	71	157	-54%
Profit after tax (A-B-C)	1,360	1,208	13%

i. Premium earned: (Rs. in crore)

The following table sets forth summary of premium income at segment level for the periods indicated:

								(Rs. in crore)
Particulars		FY 2022-23				FY 2021-22
	Par	Non-par	Linked	Total	Par	Non-par	Linked	Total Growth*
New Business Premium (NBP)	3,041	22,451	3,592	29,084	2,435	18,242	3,478	24,155 20%
Individual	3,041	9,449	2,352	14,842	2,435	6,846	2,359	11,640 28%
Group	-	13,002	1,240	14,242	-	11,396	1,119	12,515 14%
NBP growth (%) as compared to FY 2021-22	25%	23%	3%	20%	3%	21%	28%	20%
Renewal Premium	9,665	9,976	8,808	28,449	6,618	6,640	8,550	21,808 30%
Gross Written Premium	12,706	32,427	12,400	57,533	9,053	24,882	12,028	45,963 25%
Less: Reinsurance ceded	(9)	(746)	(14)	(769)	(5)	(548)	(14)	(567) 36%
Net Premium	12,697	31,681	12,386	56,764	9,048	24,334	12,014	45,396 25%

* YoY figures are not comparable

Summary of Premium Income at Segment level:

Gross written premium increased by 25% from Rs.45,963 crore in FY 2021-22 to Rs.57,533 crore in FY 2022-23. Growth in premium was primarily driven by the focus on meeting customer needs through diverse and innovative products and a multi-channel approach. The product portfolio consists of 63 retail and 17 group products, along with 11 rider benefits covering savings, investment, protection and retirement needs of our customers.

a) Individual New Business Premium:

Individual new business premium grew by 28% from Rs.11,640 crore in FY 2021-22 to Rs.14,842 crore in FY 2022-23. The non-participating segment witnessed a strong growth of 38% partially driven by budget announcements with respect to changes in tax regulations, effective April 1, 2023. Around 10.5 lakh new policies were added during the year.

b) Group New Business Premium:

Group new business premium grew by 14% from Rs.12,515 crore in FY 2021-22 to Rs.14,242 crore in FY 2022-23. The growth was largely led by growth in group credit protect and annuity business. The rise in credit life business during the year is in line with increase in credit disbursement.

c) Renewal Premium:

Renewal premium grew by 30% from Rs.21,808 crore in FY 2021-22 to Rs.28,449 crore in FY 2022-23, on the back of higher new business growth in the previous year, (erstwhile) Exide Life renewal premium and improvement in persistency.

Distribution channel mix

Our multi-channel distribution network enabled us to service our customers effectively and adapt to changes in the external environment.

Our bancassurance channel grew by over 25% in FY 2022-23 based on individual APE. We are witnessing robust growth across our partnerships. Our collaboration with HDFC Bank remains strong as we strive to enhance insurance accessibility to the banks customer base.

Our Agency channel comprising 1,79,435 agents post merger, witnessed strong growth, surpassing Company level growth by more than 1.5 times in terms of individual APE. It has grown at a 5 year CAGR of 34%, almost doubling its share from 11% in FY 2017-18 to 20% in FY 2022-23 aided by strong performance in the market place as well as inorganic growth.

Our Direct sales channel is engaged in cross selling and up selling our products to existing customers without the involvement of any intermediaries. Our advanced online platform is user-friendly and customer-centric. It guides our customers and distribution partners right from on- boarding to policy issuance.

ii. Reinsurance ceded

The Company collaborates with the reinsurers to share underwritten risk. The reinsurance premium ceded increased from Rs.567 crore in FY 2021-22 to Rs.769 crore in FY 2022-23, in line with growth in reinsurable new business.

iii. Income from Investments

The following table sets forth, for the periods indicated, summary of income from investments:

						(Rs. in crore)
Particulars	FY 2022-23					FY 2021-22
	Policyholders					Policyholders
	Par	Non Par	Linked	Shareholders	Total	Par	Non Par	Linked	Shareholders	Total
Interest Income	3,153	7,087	1,676	652	12,568	2,216	5,039	1,519	462	9,236
Dividend Income	162	9	759	20	950	107	4	574	17	702
Profit on sale / redemption of investments	661	106	4,645	90	5,502	1,051	137	6,426	322	7,936
(Loss on sale / redemption of investments)	(72)	(227)	(745)	(42)	(1,086)	(251)	(68)	(837)	(12)	(1,168)
Transfer / gain on revaluation / change in fair value	(3)	(66)	(4,547)		(4,616)	(8)	(105)	3,412		3,299
Total income from Investments	3,901	6,909	1,788	720	13,318	3,115	5,007	11,094	789	20,005

a) Policyholders:

Non-Linked Segments (Par and Non-Par):

Par and non-par segments witnessed an increase in interest income from Rs.7,255 crore in FY 2021-22 to Rs.10,240 crore in FY 2022-23, on the back of higher asset under management (AUM), supported by higher inflows through existing and new business premium. Dividend income increased from Rs.111 crore in FY 2021-22 to Rs.171 crore in FY 2022-23 due to higher dividend payout by investee companies.

Net profit on sale of investment decreased from Rs.869 crore in FY 2021-22 to Rs.468 crore in FY 2022-23 on account of lower realization on sale of investment assets.

Unit-linked segment:

Investment income in unit-linked segment is lower by Rs.9,306 crore over the previous year largely due to the downside movement of Rs.7,959 crore in change in fair value. There was a corresponding release in reserves and hence minimal impact on profits for the year. The decrease in change in fair value was primarily on the account of tepid performance of equity markets during FY 2022-23, as BSE Sensex marginally increased by 0.7% compared to increase of 18% in FY 2021-22 and BSE 100 fell by 0.7% compared to increase of 19% in FY 2021-22. 10-year government security (GSec) bond yields have increased by 47 bps against increase 67 bps in FY 2021-22.

b) Shareholders:

Interest income in the shareholders account increased from Rs.462 crore in FY 2021-22 to Rs.652 crore in FY 2022-23 aided by increase in size of fixed income portfolio on account of capital infusion of Rs.2,000 crore by HDFC Limited. Profit on sale / redemption of investments has decreased from Rs.310 crore in FY 2021-22 to Rs.48 crore in FY 2022-23 due to lower profit realization on the equity portfolio.

Time Weighted Rate of Return (TWRR) for policyholders and shareholder accounts are detailed below:

		(Rs. crore)
Particulars	FY 2022-23	FY 2021-22
Investments:
Policyholders Investments	2,25,650	1,88,933
Shareholders Investments	13,132	15,238
A. Without Unrealised Gains/Losses
Shareholders’ Funds	6.30%	7.70%
Policyholders’ Funds
- Non-Linked
a) Participating	7.90%	8.70%
b) Non Participating	9.13%	9.11%
- Linked -Non Participating	8.26%	11.54%
B. With Unrealised Gains/Losses
Shareholders’ Funds	3.73%	5.84%
Policyholders’ Funds
- Non-Linked
a) Participating	4.31%	6.05%
b) Non Participating	5.41%	2.30%
- Linked -Non Participating	0.54%	13.61%

During FY 2022-23, TWRR without unrealised gains/losses for policyholders and shareholders decreased on account of proportionately lower profit realization. Lower TWRR with unrealised gains / losses for other than nonparticipating policyholders and shareholders funds is primarily on account of tepid performance of equity markets during FY 2022-23. TWRR with unrealized gains / losses for non-par funds increased due to lower rise in yields across maturities as compared to FY 2021-22. 10-year government security (GSec) bond yields have increased by 47 bps against 67 bps in FY 2021-22.

iv. Other income:

Other income mainly comprises interest on Income Tax refund, revival fees, interest on policy loans, and income on unclaimed amount of policyholders amongst others. During FY 2022-23, interest income on Income Tax refund accounted for Rs.247 crore (Rs.184 crore towards Policyholders Revenue account and Rs.63 crore towards Shareholders P&L account) against Nil in FY 2021-22. Other increase is on account of Interest on policy loan due to increase in volume of policy loans.

v. Commission:

The summary of commission expense is as follows:

					(Rs. crore)
Particulars	FY 2022-23				FY 2021-22
	First year	Single	Renewal	Total	First year	Single	Renewal	Total
Premium	11,324	17,761	28,448	57,533	8,054	16,100	21,808	45,962
Commission (A)	2,029	277	522	2,828	1,368	206	330	1,904
Commission % of premium	17.9%	1.6%	1.8%	4.9%	17.0%	1.3%	1.5%	4.1%
Rewards (B)*	59	-	-	59	36	-	-	36
Total commission (A+B)	2,088	277	522	2,887	1,404	206	330	1,940

*Represents rewards as defined under Insurance Regulatory Development Authority of India (IRDAI) (Payment of commission or remuneration or reward to Insurance agents and Insurance intermediaries) Regulations, 2016.

The commission expense increased from Rs.1,940 crore in FY 2021-22 to Rs.2,887 crore in FY 2022-23 due to the following reasons:

• New business commission increased by 47%, largely on account of higher business volumes with higher premium paying term and erstwhile Exide Life book

• Renewal commission increased by 58% in line with back book growth and erstwhile Exide Life book

vi. Operating expenses:

The following table sets forth, for the periods indicated, summary of operating expenses:

			(Rs. crore)
Particulars	FY 2022-23	FY 2021-22	Growth %*
Employees’ remuneration & welfare benefits	3,049	2,029	50%
Advertisement and publicity	2,469	1,884	31%
Business development expenses	1,583	784	102%
Information technology expenses	230	165	39%
Others
Volume Based	201	139	45%
Other expenses	905	612	48%
Operating Expenses Policyholders (A)	8,437	5,613	50%
Operating Expenses Shareholders (B)	62	42	48%
Oeprating Expenses (A+B)	8,499	5,655	50%
Interest on Non-convertible debentures	62	40	55%

* YoY figures are not comparable

The total operating expenses to total premium ratio over past 3 years is as below:

a) Operating expenses under Policyholders Revenue account:

The increase in expenses in FY 2022-23 have been to support organic growth as well as expenses pertaining to (erstwhile) Exide Life only included in the current year, post merger, thereby leading to an increase in the ratio of operating expenses to total premium from 12.3% in FY 2021-22 to 14.8% in FY 2022-23.

• Employee Remuneration:

Employee cost increased as compared to last year due to new manpower deployment in various distribution channels and yearly increments.

• Advertisement and Publicity Spends:

In line with our focus on increasing brand visibility and creating insurance awareness, there has been an increase in our advertisement and publicity spends. As part of our overall branding strategy, HDFC Life conducts various campaigns specifically targeted at locations with higher visibility in our target customer group.

• Business Development Expenses:

Business development related expenses mainly comprise name usage fees, events and meets expenses, contests amongst others. The increase is in line with the business activities.

• Information Technology Expenses:

This included, higher spend and deployment of digital assets for product system testing, development of various business applications, cloud projects etc.

• Others:

Volume Based Expenses:

The increase in expenses is due to increase in business volume of group credit protect and group term insurance resulting in higher stamp duty.

Other expenses:

Other expenses like travel, training, printing, communication and general office expenses were increased from last year due to expense normalization.

b) Operating Expenses in Shareholders account:

Expenses other than those directly related to insurance business increased by 48% from Rs.42 crore in FY 2021-22 to Rs.62 crore in FY 2022-23 primarily on account of higher CSR and other spends.

vii. Interest on Non-Convertible Debentures:

During FY 2022-23, the Company issued subordinated debt in the form of Non-convertible debentures (NCDs) of Rs.350 crore at a coupon rate of 8.20% per annum in addition to existing debt of Rs.600 crore issued in FY 2021-22 at the coupon rate of 6.67%. Interest expense of Rs.62 crore has been debited to the Profit & Loss Account during FY 2022-23.

Benefits paid:

The following table provides the summary of benefits paid:

					(Rs. in crore)
Particulars	FY 2022-23				FY 2021-22
	Par	Non Par	Unit Linked	Total		Non Par	Unit Linked	Total
Surrenders & Withdrawals	974	12,149	8,581	21,704	520	5,833	7,362	13,715
Maturity & Money back (including Annuity)	3,653	1,284	4,189	9,126	4,096	699	4,566	9,361
Protection Claims (Death, Health & Rider)	305	3,753	372	4,430	363	4,914	608	5,885
Discontinuance termination	-	-	2,445	2,445	-	-	2,618	2,618
Bonus	2,039	-	-	2,039	1,785	-	-	1,785
Total Benefits paid	6,971	17,186	15,587	39,744	6,764	11,446	15,154	33,364
Less: Reinsurance on claims	(12)	(845)	(15)	(872)	(7)	(1,475)	(18)	(1,500)
Net benefits paid	6,959	16,341	15,572	38,872	6,757	9,971	15,136	31,864

Benefits paid during the year increased from Rs.31,864 crore in FY 2021-22 to Rs.38,872 crore in FY 2022-23 largely on account of higher withdrawals reduced by lower death claims and maturities during the year. Further, as figures during FY 2022-23 are inclusive of corresponding figures of (erstwhile) Exide Life Insurance, the figures are not comparable.

a) Surrenders & Withdrawals:

Surrenders and withdrawals increased from Rs.13,715 crore in FY 2021-22 to Rs.21,704 crore in FY 2022-23. There is significant increase in withdrawals by group clients from Rs.4,527 crore in FY 2021-22 to Rs.11,758 crore in FY 2022-23, pursuant to the calibrated approach, taken by the Company in group business.

b) Maturity & Money back (including Annuity):

There is marginal decrease in maturity and money back payouts from Rs.9,361 crore in FY 2021-22 to Rs.9,126 crore in FY 2022-23.

c) Protection Claims (Death, Health & Rider):

With the claims normalization during the year, the protection claims decreased from Rs.5,885 crore in FY 2021-22 to Rs.4,430 crore in FY 2022-23. Overall claim settlement ratio was 99.7% and the individual claim settlement ratio was 99.3%.

d) Bonus:

While interim bonus increased from Rs.712 crore in FY 2021-22 to Rs.1,227 crore in FY 2022-23, in line with the growth in corresponding business, there is a decrease in terminal bonus from Rs.1,073 crore in FY 2021-22 to Rs.812 crore in FY 2022-23 largely due to lower maturity claims during the year.

viii. Change in valuation of policy liabilities

The following table sets forth, for the periods indicated, summary of the changes in valuation of liabilities:

		(Rs. in crore)
Particulars	FY 2022-23	FY 2021-22
Gross: policy liabilities (non-unit/ mathematical reserves)	25,053	21,485
Amount ceded in reinsurance	(2,735)	(2,665)
Amount accepted in Reinsurance	-	-
Fund reserve	(3,328)	5,555
Funds for discontinued policies	(404)	307
Change in valuation of liability in respect of life policies	18,586	24,682

Change in valuation reserves reflects change in the actuarial liability in respect of policies in force and for policies in respect of which premium has been discontinued but a liability still exists. The change in fund reserves includes the change in unit fund value of policyholders fund, under the unit linked segment.

During FY 2022-23, BSE100 was flat vs. 19.46% increase for FY 2021-22. The fund reserve reflects this along with any net change in liabilities due to premium receipt and any release due to benefits. The increase in change in reserves for the non-participating segment reflects the net increase due to higher new business and renewal premium collection. The increase in liability under these policies was offset by release of reserves on account of benefits paid.

ix. Provision for tax

I n FY 2022-23, the tax provision is lower during the year due to reversal of tax provision of prior periods, based on favourable orders received during the year.

x. Change in funds for future appropriation (FFA)

The reduction in FFA by Rs.110 crore in FY 2022-23 is primarily due to new business strain in line with business growth in the participating segment.

B) Financial Position/Balance Sheet analysis:

The following table sets forth, for the periods indicated, the financial position of the Company:

		(Rs. in crore)
Particulars	As on March 31, 2023	As on March 31, 2022
Sources of funds Shareholders funds	12,987	15,486
Borrowings	950	600
Policyholders funds	2,24,447	1,87,134
Funds for future appropriations	1,235	941
Total	2,39,619	2,04,161
Application of funds Investments	2,38,782	2,04,170
Loans	1,585	643
Fixed Assets	380	343
Current Assets (i)	6,977	5,233
Current liabilities and provision (ii)	8,105	6,228
Net Current Assets (i-ii)	(1,128)	(995)
Total	2,39,619	2,04,161
Contingent liabilities	908	1,082

Sources of Funds

i. Shareholders Funds:

The breakup of capital and reserves is as follows:

		(Rs. in crore)
Particulars	As on March 31, 2023	As on March 31, 2022
Share Capital	2,149	2,113
Share application money received pending allotment of shares	3	3
Reserves and Surplus	10,815	13,285
Credit / (Debit) Fair Value Change Account	20	85
Shareholders fund (net worth)	12,987	15,486

Net-worth decreased from Rs.15,486 crore at March 31, 2022 to Rs.12,987 crore at March 31, 2023 due to:

- Reserves and surplus reducing by Rs.5,469 crore on account of the impact of (erstwhile) Exide Life merger based on NCLT approved scheme, which allowed adjustment of negative amalgamation reserve arising out of merger of Rs.4,837 crore with the Share premium and brought forward losses of erstwhile Exide Life of Rs.632 crore.

- Offset by fresh capital infusion of Rs.2,000 crore @ Rs.558 per share by HDFC Limited in addition to profit transfer, dividend payouts and ESOP allotments.

- Net-worth has grown from Rs.8,638 crore as at March 31, 2021 to Rs.15,486 crore at March 31, 2022, majorly due to acquisition of (erstwhile) Exide Life Insurance Co Ltd for a purchase consideration of Rs.6,687 crore effective January 01, 2022.

Fair value change account represents the balance of unrealised gains/loss on valuation of equity securities in the shareholders fund. Decrease in fair value change in shareholders account from Rs.85 crore at March 31, 2022 to Rs.20 crore at March 31, 2023 is due to tepid performance of equity markets during the year.

ii. Borrowings:

During the year, the Company issued unsecured, subordinated, fully-paid, rated, listed, redeemable non-convertible debentures (NCDs) in the nature of Subordinated Debt as per the IRDAI (Other Forms of Capital) Regulations, 2015 amounting to Rs.350 crore at a coupon rate of 8.20% per annum. This is in addition to the existing debt of Rs.600 crore issued during FY 2020-21, making the total debt to Rs.950 crore as on March 31, 2023.

iii. Policyholders Funds:

The summary of Policyholders funds is as below:

		(Rs. in crore)
Particulars	As on March 31, 2023	As on March 31, 2022
POLICYHOLDERS FUNDS:
Credit / (Debit) Fair Value Change Account	1,976	2,170
Policy Liabilities	1,43,270	1,04,343
Provision for Linked liabilities	75,384	76,519
Funds for discontinued policies	3,817	4,102
Funds for future appropriations	1,235	941
Total Policyholders Funds	2,25,682	1,88,075

I ncrease in the policyholders fund during the year includes additions due to the scheme of merger, with the (erstwhile Exide Life). Further, the increase in policy liabilities is in line with new business growth and continuing premiums from existing policies.

Application of Funds

iv. Investments

The graph below provides a summary of our Assets under Management (AUM):

The break-up of investments as on balance sheet dates is as follows:

		(Rs. in crore)
Particulars	As on March 31, 2023	As on March 31, 2022	Growth %*
Investments
- Shareholders	13,132	15,238	-14%
- Policyholders (Non Linked)	1,46,449	1,08,310	35%
Assets held to cover Linked Liabilities	79,201	80,622	-2%
Total	2,38,782	2,04,170	17%

* YoY figures are not comparable

a) Shareholders Investments:

Shareholders investments decrease is due to merger related adjustment of Rs.6,687 crore pertaining to investment in the (erstwhile) Exide Life, offset by additional capital infusion of Rs.2,000 crore and other inflows (profit transfers, sub-debt issuance) during the year.

b) Policyholders Investments including linked liabilities:

The Policyholders Investment including linked Policyholders fund increased by Rs.36,718 crore. Increase in the policyholders investment is partially attributed to the merger with (erstwhile) Exide Life during the year. In addition to the merger, increase in investment assets is in line with business growth, with a reduction in linked investments primarily on account of capital market movements.

v. Loans against Policy:

Loans against policies (net of repayments) increased from Rs.643 crore as at March 31, 2022 to 1,585 crore as at March 31, 2023 primarily on account of merging the loan book of Rs.712 crore pertaining to (erstwhile) Exide Life, along with higher number of policyholders availing liquidity against their existing policies while continuing with their financial coverage. These loans are secured and are charged with prevailing rate of interest as per the terms of the policy loan contract. Such loans are disclosed net of the provision for standard assets, made in accordance with the applicable IRDAI Regulations.

vi. Current Assets:

The following table sets forth, for the periods indicated, summary of current assets:

		(Rs. crore)
Particulars	As on March 31, 2023	As on March 31, 2022
Advances Prepayments	124	57
Advance tax paid	926	536
Capital advances	6	0
Security deposits	121	43
Investment application - pending allotment	5	-
Other advances	82	55
Other Assets Income accrued on investments	2,370	1,871
Outstanding Premiums	743	468
Due from other entities carrying on insurance business (including reinsurers)	131	270
Due from subsidiaries/holding company	7	15
Investment sold awaiting settlement	422	57
Assets held for unclaimed amount of policyholders (including income)	511	662
Goods and Services Tax/ Service Tax Deposits	265	2
Others	127	110
Cash and Bank Balance	1,137	1,087
Total current assets	6,977	5,233

Key items of current assets and advances are:

a) Advance tax increased largely on account of Interest income booked on Income-tax refund based on a favourable order during the year.

b) Outstanding premium increased on the back of higher base of policies.

c) Income accrued from investments increased due to increase in the fixed income securities and equity holding.

d) Dues from other entities carrying on insurance business represents the net amount due from reinsurers pertaining to claims on policies covered by reinsurance, net of reinsurance premium payable to them. There is decrease in receivable from reinsurers during the year, due to reduction in corresponding claims.

e) Investment sold awaiting settlement represents sales proceeds pending to be received on sale of investments. The increase during the year is in line with the number of trades undertaken on the reporting date.

vii. Current Liabilities and Provisions:

The summary of current liabilities is as follows:

		(Rs. crore)
Particulars	As on March 31, 2023	As on March 31, 2022
Current liabilities Agents’ Balances	616	253
Balances due to other insurance companies (including Reinsurers)	17	2
Premiums received in advance	66	38
Unallocated Premium	714	512
Sundry creditors	4,122	2,793
Claims outstanding	1,050	1,467
Annuities due	4	4
Unclaimed amount of policyholders	511	662
Investments purchased - to be settled	273	104
Interest payable on debentures/ bonds	49	27
Payable to unit linked schemes	205	67
Others	351	208
Provisions Provision for employee benefits	101	62
Provision for taxation	26	29
Total current liabilities and provisions	8,105	6,228

The key items of current liabilities & provisions are as below:

a) Agent balances represent amounts payable to insurance agents and intermediaries towards commission as at the balance sheet date. The increase is in line with business growth and accrual for commission payable against the premium earned.

b) Unallocated premium represents premium received on policies that are in the process of issuance or pending due to underwriting requirements. Increase is attributable to premium received pending underwriting or receipt of additional documents.

c) Sundry creditors represent amounts payable/accruals for various services utilised by the Company for expenses like employee-related cost, marketing cost, operating expenses, interest payable on NCDs and provisions for litigations. Increase in sundry creditors

is due to usual business activities and negotiations carried out for better payment terms.

d) Claims outstanding include claims intimated during the year and outstanding as on the reporting date and claims intimated but not settled during the year.

e) Others include tax deducted to be remitted, Goods and Services Tax liability, proposal deposits and unclaimed dividend.

viii. Contingent liabilities:

The below table summarises the contingent liabilities:

		(Rs. in crore)
Particulars	As on March 31, 2023	As on March 31, 2022
Partly paid-up investments	726	940
Statutory demands and liabilities in dispute, not provided for	134	101
Claims against policies not acknowledged as debts by the Company (net of reinsurance)	47	41
Others	1	0
Total	908	1,082

Contingent liability for partly paid up investments decreased primarily due to payment of call amounts on the respective call dates of underlying investments.

C) Cash Flow Statement:

The following table sets forth, for the periods indicated, a summary of the cash flows:

		(Rs. in crore)
Particulars	FY 2022-23	FY 2021-22
Net cash generated from operating activities	6,882	5,540
Net cash generated used in investing activities	(10,072)	(1,402)
Net cash generated from financing activities	1,985	(238)

i. Cash flow from operating activities:

Increase in cash flow from operating activities by Rs.1,342 crore is primarily driven by premium received from policyholders net of payments towards benefits, commission and operating expenses.

ii. Cash flow from investing activities:

Decrease in cash flow from investing activities by Rs.8,670 crore mainly represents net increase in investment of funds in various securities such as government bonds, equity, corporate bonds/paper, money market instruments and liquid mutual funds.

iii. Cash flow from financing activities:

Increase in cash flow from financing activities by Rs.2,223 crore is generating largely from capital infusion of Rs.2,000 crore during the year and inflow of Rs.350 crore from the issue of non-convertible debentures during the year.

III. Key Analytical Ratios:

i. Profitability:

The following table sets forth, a break-up of underwriting profits into existing business surplus and new business strain and shareholders income over a period of three years:

			(Rs. in crore)
Particulars	FY 2020-21	FY 2021-22	FY 2022-23
Underwriting Profit:
a) Existing business surplus	3,232	3,485	4,422
b) New business strain	(2,500)	(3,045)	(3,833)
Total (I)	732	440	589
Shareholders surplus (II)	628	768	771
Total (I+II)	1,360	1,208	1,360

I. The overall underwriting profits increased from Rs.440 crore in FY 2021-22 to Rs.589 crore in FY 2022-23. Further, underwriting profit comprises:

a) Existing business surplus representing profits emerging during the year from business written over the years saw a healthy growth of 27%; and

b) New business strain on account of the long-term nature of insurance contracts where revenue is recognised over the period of the contract while costs are recognised in the period in which they are incurred grew by 26%, in line with new business growth.

II. Shareholders income represents investment and other income arising on shareholders funds, net of expenses.

ii. Capital and Solvency Ratio:

The movement in net-worth is largely due to additional capital infusion of Rs.2,000 crore by HDFC Limited, impact of the merger (adjustment of Rs.5,469 crore due to negative amalgamation reserve arising from the merger and brought forward losses of Erstwhile Exide Life) profit transfer, dividend payouts and ESOP allotments.

As against a regulatory minimum requirement of 150%, we have a solvency ratio of 203% as on March 31, 2023 as compared to 176% as on March 31, 2022. The increase in solvency ratio was aided by equity capital infusion and subordinated debt raised in FY 2022-23.

iii. Other ratios:

		(Rs. crore)
Particulars	FY 2022-23	FY 2021-22
Interest coverage ratio		47.46
Debt equity ratio	0.07	0.04
Current ratio	0.86	0.84
Return on networth	0.10	0.10

• Interest coverage ratio is calculated as Profit before interest and tax divided by interest expense due. Tax for the purpose of this ratio includes tax of the Company reduced by tax pertaining to the participating segment. The ratio was lower as on March 31, 2023, on account of additional debt of Rs.350 crore raised during the year and interest thereon, while change in profit before interest and tax remained in line with last year.

• Debt equity ratio is computed as Total borrowings divided by Equity. Equity is calculated as shareholders funds excluding redeemable preference shares, if any.

The ratio is higher as on March 31, 2023, on account of additional debt of Rs.350 crore raised during the year.

• Current ratio is computed as Current assets divided by Current Liabilities. Current Liabilities includes provisions. The net current assets as on March 31, 2023 is inclusive of corresponding balance pertaining to (erstwhile) Exide Life Insurance.

• Return on networth is calculated as Profit after tax divided by average networth as on the reporting date. The ratio remained stable during the period.

E. Performance of Subsidiary Companies

I. HDFC Pension Management Company

HDFC Pension Management Company Limited ("HDFC Pension"), a wholly-owned subsidiary of HDFC Life Insurance Company Limited, started its operations in August 2013. The Company has nearly 15.2 lakh customers as on March 31, 2023. It is the fastest growing PFM (Pension Fund Manager) under the NPS architecture (YoY growth of 60% in AUM) with an AUM of Rs.45,397 crore as on March 31, 2023.

In FY 2019-20, HDFC Pension started its operation as a Point of Presence (POP) in both retail and corporate NPS segments. Point of Presence enables opening of accounts on a platform. The Company closed FY 2022-23 with 2,013 plus corporates and 2.4 lakh plus NPS customers.

II. HDFC International Life and Re Company

HDFC International Life and Re, has successfully completed seven years of operations and is steadily building experience in GCC and the broader MENA region. HDFC International has been working with ceding insurers to provide reinsurance support for individual and group reinsurance programs.

During FY 2022-23, HDFC International generated Gross Written Premiums (GWP) of $ 17 million, registering a 10% growth. For the period under review, HDFC International reported a Net Profit of $ 0.4 million. Further, S&P Global Ratings assigned its "BBB" insurer public financial strength rating on HDFC International for fifth consecutive year during the year.

HDFC International has received approval from the concerned regulatory authority to establish a branch in GIFT City which will enable the company expand its global presence.

F. Internal control systems and their adequacy

The Company has institutionalised a robust and comprehensive internal control mechanism across key processes to ensure reliability of financial reporting, timely feedback on achievement of operational and strategic goals, compliance with policies, procedures, laws, and regulations. The internal audit function provides independent and reasonable assurance about the adequacy and operating effectiveness of internal controls to the Board and Audit Committee. Internal audits are conducted by an in-house Internal Audit (IA) team and by the co-sourced auditor (an external chartered accountant firm). The internal audit planning activity ensures coverage of the Companys information systems, business processes and transactions across corporate and branch offices. All significant audit observations and follow-up actions thereon are periodically reported to the Audit Committee and closely monitored for effective implementation. The internal audit function also tests and reports on adequacy and operating effectiveness of internal financial controls over financial reporting in line with the requirements of Companies Act, 2013.

The Company has a well-established Enterprise Risk Management (ERM) framework in place to actively manage material risks. The ERM framework aligns the Companys strategy and business decisions with the risk appetite of the Company. The ERM framework covers risks including:

• Business risks (subsidiary related risks, reputational, profitability, volume, people risk etc.)

• Non-financial risks (process risk, system risks, internal/external frauds, information security/cyber, technology and business continuity risks)

• Financial risks (interest rate, credit, liquidity, asset liability mismatch and solvency and capital risks)

• Insurance risks (mortality, persistency, expenses) and

• Emerging risks (ESG, Climate, Geopolitical risks, etc.).

The ERM framework of the Company is detailed under the ERM section (Audit & Risk Management) chapter of the Annual Report.

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