HDFC Life Insurance Company Ltd (HDFCLIFE) Q3 FY23 Earnings Concall Transcript

HDFC Life Insurance Company Ltd (NSE: HDFCLIFE) Q3 FY23 Earnings Concall dated Jan. 20, 2023

Corporate Participants:

Vibha Padalkar — Managing Director and Chief Executive Officer

Niraj Shah — Chief Financial Officer

Suresh Badami — Deputy Managing Director

Eshwari Murugan — Senior Vice President and Appointed Actuary

Analysts:

Suresh Ganapathy — Macquarie Capital — Analyst

Swarnabha Mukherjee — B&K Securities — Analyst

Madhukar Ladha — Nuvama Wealth Management — Analyst

Anshuman Deb — ICICI Securities — Analyst

Avinash Singh — Emkay Global — Analyst

Nidhesh Jain — Investec — Analyst

Sanket Godha — Spark Capital — Analyst

Nitin Jain — Individual Investor — Analyst

Shyam Srinivasan — Goldman Sachs — Analyst

Supratim Datta — Ambit Capital — Analyst

Abhishek Singhal — Naredi Investments — Analyst

Atul Mehra — Motilal Oswal Asset Management — Analyst

Bhavya Sanghvi — Fortress Group — Analyst

Pallavi Deshpande — Sameeksha Capital — Analyst

Neeraj Toshniwal — UBS India — Analyst

Amit Jain — Axis Capital — Analyst

Samyak Shah — Sameeksha Capital — Analyst

Dipanjan Ghosh — Citigroup — Analyst

Presentation:

Operator

Ladies and gentlemen, good day and welcome to Q3 and Nine Months FY 2023 Earnings Conference Call of HDFC Life Insurance Company Limited. As a reminder, all participant lines will be in the listen-only mode and there will be an opportunity for you to ask questions after the presentation concludes. [Operator Instructions] Please note that this conference is being recorded.

I now hand the conference over to Ms. Vibha Padalkar, MD and CEO of HDFC Life Insurance. Thank you, and over to you, ma’am.

Vibha Padalkar — Managing Director and Chief Executive Officer

Thank you, Rutuja [Phonetic] Good afternoon, everyone. Thank you for joining us for the discussion on our results for the nine months ended December 31, 2022. Our results including the investor presentation, press release, and regulatory disclosures are already available on our website as well as that of the stock exchanges. I have with me Suresh Badami, Deputy Managing Director; Niraj Shah, CFO; Eshwari Murugan, our Appointed Actuary; and Kunal Jain from Investor Relations. I will take you through the key highlights of our nine months FY ’23 results and would be happy to take questions post that.

As you are aware, we have completed the merger of our subsidiary, Exide Life, in October 2022. Henceforth, we will be reporting only the merged numbers as our businesses are now fully enmeshed. The previous year numbers hence might not be strictly comparable. While globally headwinds persist from an economic perspective, 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 favorable regulatory regimes. Against this backdrop, we continue to maintain a steady growth trajectory. In Q3, we grew by 17% in terms of individual WRP, which is ahead of industry growth. On a year-to-date basis, we grew by 13%, leading to a market share of 15.8% amongst private insurers. Despite intense competition, we have consistently been ranked amongst the top three life insurers across individual and group businesses. Our product mix remains balanced with non-par savings at 39%, participating products at 29%, ULIPs at 21%, individual protection at 4%, and annuity at 6% based on individual APE. Within the non-par segment, our shorter tenure tenor product, Sanchay FMP, continues to do well and now forms about a sixth of the segment.

HDFC Life remains enthused over the protection opportunity in India whilst balancing it with good risk management in a holistic and calibrated manner. We maintain market leadership in credit life by delivering strong growth of 52% across nearly 300 partnerships. While growth in retail protection remained tepid on a Y-o-Y basis, we saw sequential growth of 13% in Quarter Three. Online search trends indicate that we continue to be amongst the top searched companies in our peer set. There has been normalization of searches for term as a category to pre-pandemic levels. We have taken several initiatives to improve customer convenience such as development of an in-house automated underwriting engine, mobile cardiac assessment and MedTech solutions to measure heart rate, BMI, and other vitals, using video input from the customers’ mobile devices. With a combination of data analytics, insights into customer profiles, and calibrated risk retention, overall protection APE grew by over 20% in nine months FY ’23 and we expect individual protection to continue picking up in the coming quarters.

On the retirement funds, we have steadily gained market share in the annuity business. Our annuity business in nine months FY ’23 grew by 22% on received premium basis compared to a 1% growth for the industry. APE growth is much higher at 68% due to a pickup in our regular premium annuity products, Systematic Retirement Plan.

Moving on to key financial and operating metrics. We are on track deliver margin neutrality for the combined entity for the year, having delivered a new business margin of 26.5%, similar to that in nine months FY ’22. The value of new business is the INR2,163 crores, implying a year-on-year growth of 22%. Our embedded value stood at INR37,702 crores as on December 31, 2022, with an operating return on embedded value of 17.5% for nine months FY ’23. Profit-after-tax for nine months FY ’23 stood at INR1,001 crores, a robust year-on-year increase of 18%. The property emergence continues to be aided by strong growth of 30% in back-book surplus. Our solvency ratio was 209% as on December 31, 2022. Renewal collection trends continue to be healthy on the back of improving persistency. Our 13th- and 61st-month persistency for limited and regular pay policies stood at 87% and 52% respectively.

Next on channel performance. Our bancassurance channel grew by 18% in nine months FY ’23 based on individual APE. We have started seeing the positive impact of a closer collaboration with HDFC Bank as the merger progress is ahead steadily. We continue to see strong growth momentum across other valued relationship with us either increasing or holding our counter shares. Our distribution network has been growing with time as we build newer long-lasting partnerships. This quarter, we are pleased to announce our corporate agency partnership with AU Small Finance Bank. We believe AU Small Finance Bank with its vast presence and a customer base of more than 3 million customers will further strengthen our efforts and contribute significantly towards financially securing a large number of individuals. We look forward to creating new milestones as we walk ahead together in this journey.

We continue to grow well across the board. Our large channels other than HDFC Bank recorded growth of over 20% on a year-to-date basis. We would like to take this opportunity to thank all our corporate agents and bancassurance partners for their continued support. Our agency channel clocked more than 2 times company-level growth in individual APE in the nine months FY ’23. The share of the channel has increased from 14% to almost 18% in the merged entity. We continue to focus on improving activation and productivity across our base of financial consultants. We expect growth in this channel to be driven by deeper geographies and customer penetration. We’re happy to share that the post-merger integration and synergy realization from the combined business is progressing as per plan. This has been demonstrated by achievement of margin neutrality during this period. The newly added distribution partners now have access to HDFC Life products and digital capabilities. Our subsidiary HDFC pension management company’s AUM doubled in less than 17 months to reach the INR40,000 crore milestone on January 2, 2023. For nine months FY ’23, HDFC Pension has a market share of 40%, up from 37% last year with AUM growing by 63%. We’re pleased to announce that our subsidiary, HDFC International, has been granted the certificate of registration to set up a branch in GIFT City by the relevant regulator. The branch will commence business with an operation on receiving other statutory licenses and approvals.

Onto the tech front. We have initiated a technology transformation exercise with the objective of building intelligent systems and platforms for insurance reimagination, [Indecipherable] inspired to aid scale up our business. A new-age enterprise and data architecture will be built to enhance our go-to-market capabilities and also improve the overall customer experience going forward.

Moving on to regulations. There are many regulatory changes proposed by IRDA that are aimed at increasing insurance penetration and facilitating sustainable growth of the industry and ease of doing business. We welcome the relaxations provided by our regulator with respect to allowing certain categories of products to be launched through the use-and-file approach, relaxation and solvency requirements for ULIPs, dematerialization of insurance policies and allowing Insurance companies to raise alternative investments like subordinated debt and preferred shares without seeking prior approval of the regulator. Further, the IRDA is also examining implementation of risk-based solvency approach. We believe that this will benefit the sector by not just freeing up excess capital deployed, but also ensure capital required is in line with the risk on the balance sheet. We also welcome the changes recommended by Ministry of Finance including composite license and permission to distribute other financial services products. We believe that such changes can further the overall development of the sector.

To conclude, we remain enthused with the growth potential of the sector and are committed to increasing insurance penetration in a meaningful way. The detailed disclosure on our results is available on our investor presentation. We’re happy to take questions now.

Questions and Answers:

Operator

Thank you very much. We will now begin the question-and-answer session. [Operator Instructions] The first question is from the line of Suresh Ganapathy from Macquarie Capital. Please, go ahead.

Suresh Ganapathy — Macquarie Capital — Analyst

Yeah. Hi, Vibha. So, two, three questions I had. First, all these guaranteed return policies that you have been selling, can you let me know as a percentage of policyholders’ AUM, what would be the outstanding number?

Vibha Padalkar — Managing Director and Chief Executive Officer

Niraj, do you want to take this?

Niraj Shah — Chief Financial Officer

Yeah. Hi, Suresh. Yeah. So, this would be about, again, about 15%-odd of the number at overall level. But…

Suresh Ganapathy — Macquarie Capital — Analyst

Overall AUM? Policyholder AUM you mean to say?

Niraj Shah — Chief Financial Officer

Yeah. So, that’s about INR2,40,000 crores, right? So, the total amount will be around in the 12% to 14% range. But I don’t know if that’s the — where you want to really look at it, because the…

Suresh Ganapathy — Macquarie Capital — Analyst

Niraj, the context in which I’m asking this question is one of your competitors, obviously, said 3%. So, the number is hugely different than five times the number that you’re talking about. So, I know, of course, that — I mean, things could change, but you’re pretty confident about the fact that the interest rate risk is reasonably managed here, right?

Niraj Shah — Chief Financial Officer

Yeah. So, Suresh, honestly, the way to look at it is in terms of the scale at which you’re operating when you started this segment and also how you’re managing the risk in the particular — in fact, we don’t even look at it in the manner that in terms of total AUM, what is the kind of number that this. We basically look at it in terms of the various categories and how are we managing the risk on each of the categories. Are we comfortable with the level at which we’re operating? Answer is yes, because we are using the required heading mechanisms to manage the risk in that and managing the spreads by being fairly disciplined with the market in terms of repricing. So, all the fundamentals there are in place from that perspective. It really depends on at what point in time we started the business. And we’re not even sure how some of the folks are tracking it. A lot of it is also to do with the annuity business with a single premium which is part of this. Risk management is very, very different. On the group side also, there will be certain products. So, all of this is — it forms part of that base. So, I think it’s better to kind of look at it in isolation in terms of each of the categories and how the risk is getting managed there.

Vibha Padalkar — Managing Director and Chief Executive Officer

Another point to add here, Suresh, is that if you look at Slide 23 of our investor presentation, we have given sensitivity to interest rate changes. And also, for quite some time, ever since we launched this category, we have been giving sensitivity of just this category to interest rate changes as well. So, that is really what is important as against what is it as an overall. The overall is relevant — it is entirely unhedged or largely unhedged position.

Suresh Ganapathy — Macquarie Capital — Analyst

Okay. And almost a sense, I mean, of course, anecdotal evidence is revealed, Sanchay Plus has done very well this quarter. As a proportion of overall premiums, how much would be Sanchay Plus APE, individual APEs, if you can give that number?

Niraj Shah — Chief Financial Officer

So, overall, Sanchay Plus and Sanchay FMP is about 39% for the period. And Sanchay, as Vibha mentioned, Sanchay FMP is about one-sixth of that overall. So, about — Sanchay Plus would be about early 30%-s. The rest of it would be Sanchay FMP.

Suresh Ganapathy — Macquarie Capital — Analyst

For the third quarter you mean to say?

Niraj Shah — Chief Financial Officer

I’m sorry?

Suresh Ganapathy — Macquarie Capital — Analyst

For the third quarter?

Niraj Shah — Chief Financial Officer

No, I’m talking about for the period, for the period of nine months.

Suresh Ganapathy — Macquarie Capital — Analyst

Nine months? Okay.

Vibha Padalkar — Managing Director and Chief Executive Officer

Also, within Sanchay Plus, there are shorter-end variants, there longer-end variants, and so on. And of course, one-sixth of the business is Sanchay FMP, but also the balance also is various channels.

Operator

Thank you. The next question is from the line of Swarnabha Mukherjee from B&K Securities. Please, go ahead.

Swarnabha Mukherjee — B&K Securities — Analyst

Yeah. Thank you for the opportunity. So, three questions. First, on the margin side. So, if I look at the product mix, the product mix has remained fairly — the quality of the mix has not kind of significantly changed, and I think the share of higher-margin products look fairly steady in the mix. In fact, in certain cases like non-par or individual protection, it has gone up quite a bit. However, margins look fairly stable. It has not gone up to that extent in any way the way the mix has panned out. So, just wanted to know, is there a factor of also how the channel mix has played out in this, because I see that the broker channel has done quite well, now how could the cost structure be in that and whether it is impacting the overall margin profile or not? And if you could give… Yeah, so just one addendum to that question was that given that for the nine months, we’re at 26.5%, I think, in terms of VNB margin, and for the full year, our guidance was a flattish structure of 27.4% overall. So, last year Q4, we had a very spectacular performance in terms of margin. Are we kind of confident of repeating that again this time or would we be kind of bringing the guidance down? So, first question would be that.

Vibha Padalkar — Managing Director and Chief Executive Officer

So, I think just to answer your last point, yes, we’re reasonably confident of margin neutrality on a full-year basis versus last year. And just to clarify, this will be at overall consolidated level. Niraj, do you want to take the concern on the waterfall?

Niraj Shah — Chief Financial Officer

Yeah. So, the margin expansion that you see, you’re referring to is the function of a couple of things. On the product mix side, you’re seeing that unit-linked mix for the period has dipped significantly from 26% last year to 21%. And that has been replaced largely by the non-par business from the individual side. Also, there’s a significant shift in the annuity business as you can see, right? Between both individual and group annuity, the mix was about 5% to 6% last year. It’s moved to 8%. And that’s a very significant shift. Also in the other group businesses, the fund business, which is a low-margin business, has gripped significantly and the credit life business has grown at over 50% for the nine-month period, right? So, there’s a significant upgrade really in terms of the product mix that has happened apart from the usual elements around — on the expense side, you see a negative there. That is in terms of a function of a couple of things. One is in terms of — it is reflecting the overall business now including Exide Life, which was operating at a certain scale. And as Vibha did mention that all of this gets subsumed in the margin neutrality objective that we have for this period.

Swarnabha Mukherjee — B&K Securities — Analyst

Sure. So, I mean, if you are even comparing nine-month to nine-month, that thing what I wanted to ask was that I mean, I see that the product mix has evolved to be a higher mix of better margin products. But despite that here, the margin hasn’t — it doesn’t look like it has gone up that much. So, that’s what my query was like when — is it a function of cost only or anything else to look into that?

Niraj Shah — Chief Financial Officer

So, see the number that you’re talking about, 26.5% for the period nine months, is including Exide Life, right? And if you recollect in the previous period, for the six months, we had reported stand-alone margins for Exide Life and for HDFC Life. The Exide Life numbers, if you remember, were in single digits. So, that obviously, will have an impact in terms of the overall number, and that’s the reason why we talked about margin neutrality in the first place when we announced the transaction. And soon after that, we basically said the first objective is to obviously preserve the business and to achieve margin neutrality, which we have achieved in this period. And…

Vibha Padalkar — Managing Director and Chief Executive Officer

In fact, just to add there, we said margin neutrality will take about a year, and we have managed to advance it by about nine months. So, actually, the — if hypothetically, if we were to deconstruct before and after of the merger, then HDFC Life margin, you’re right to say that that has gone up and then offset by Exide Life margins. But even there, synergy extractions are happening as we speak, and that’s why we have been able to deliver margin neutrality sooner than what we had thought it would be possible.

Swarnabha Mukherjee — B&K Securities — Analyst

Great. That helps. Also, if you could give some comments on two product segments, one is individual protection, and the other, I think, group annuity. So, on the growth on these both two categories, if you could share some comments on, say for example, individual protection, what kind of products and what kind of channels we have happening? Is it ROP or PF term in group annuity? Have we got a sizable tender recently, which has helped the book? So, some comments on that.

Vibha Padalkar — Managing Director and Chief Executive Officer

Yeah. Sure. So, see, individual protection continues to trend upwards. So, sequentially, we have grown about 13%. NOP has also continued to move upwards. However, there is a — both in ticket size also calling to make a difference as well as all the headwinds that we’ve talked about in the past about medicals and so on, and that if you have 10 minutes with a prospective customer, what are you likely to sell and the surety of being able to convert and so on, while there is a need-based assessment, but at the same time, reality is that protection a customer would have to be a little bit more patient and go through, especially, they are slightly of an older age. So, you’re seeing all of that. but what we are fairly happy about now is that the reinsurer arrangement is now again back in the spirit of partnership. There is learning from both ends. Some of the things that perhaps were difficult for us to reinsure now there are conversations that are happening. So, in that sense in terms of supply side stability, that has happened.

Second is, we have raised INR2,000 crores of capital. So, we are — with the use of analytics, we are seeing other certain lives wherein we can take that on our books.

Thirdly, what we are saying is that in terms of digital, in terms of improving our journey, as well as through our partnerships, can we — and product innovation, how do we continue to make inroads into protection. Suresh, do you want to add anything on that?

Suresh Badami — Deputy Managing Director

So, just to add, I think, Vibha covered it, but we did launch C2P Super as a product this year. It has got good traction across a lot of our partners. We have, obviously, based on the specification and a lot of analysis in terms of the risk and analytics and which segment we want to play in, we’re slowly increasing our focus in terms of growing the retail protection. Of course, having mentioned that, we continue to ensure that in an overall basis, we are agnostic to both the credit life protection as well as this, which has grown for us 52%, which allows us to play very sensibly in terms of the overall risk that we’re taking on the retail protection. There has been a little bit of a muted response on the customer sentiment and the overall demands are low in the market. But having said that, our search for HDFC Life remains one of the topmost search names in terms of Google searches. So, we do have a brand presence. Our product has had a great presence across some of our key web aggregator platforms as well as our channel partners. We have received fairly good response and we believe in Quarter Four, will continue to show the sequential progress which is there.

Similarly on group annuity, I think we have a very, very strong presence. We have a large market share which happened on that, and that segment has grown significantly by almost 50% plus in terms of growth. So, that remains, like we had mentioned earlier, a key focus area for us. 56% actually is the growth that we have seen over last year. And that’s the kind of number that we believe we’ll continue to focus on. There, again, we see a large opportunity. In fact, it’s not just some group annuity. We were looking at seeing how can we scale up, even the open-market opportunity on the annuity business. So, there OMO opportunity also remains fairly large for us. So, I think a combination of product features, we are looking at some of the products which can get launched in this. Even in the term product, I think we are now looking at how do we look at products which can probably cater to the higher ticket size and look at how we price. And if you looked at over the last few quarters, we have priced our term product very sensibly as compared to what is the kind of risk that we want to take. And we will continue doing that over the next two quarters.

Operator

Thank you. Ladies and gentlemen, in order to ensure that the management is able to address questions from all participants, please limit your questions to two per participant. The next question is from the line of Madhukar Ladha from Nuvama Wealth Management. Please, go ahead.

Madhukar Ladha — Nuvama Wealth Management — Analyst

Hi. Good afternoon, and congratulations on a good set of numbers. First, I remember there has been some commentary around high competitive intensity. And there has been some share loss in the HDFC Bank channel as well at the start of that. So, can you update us on that part of the business? How is that moving? Are we gaining share again there? Second, there is a negative variance due to lower fixed-cost absorption of about INR150 crores. Is it more to do with Exide Life? And can you explain why this has arisen? And — yeah, and how do we see this moving? And finally, looking at business from the agency channel, Q-o-Q, there seems to be some drop over there. So, what is exactly happening? I thought that third quarter would be even stronger, and now we’ve got more Exide Life agents also. So, if you could update us on how that integration has progressed? How many of the agents have we able to retain? And, yeah, some color around that?

Vibha Padalkar — Managing Director and Chief Executive Officer

Yeah. Madhukar, I’ll start off with HDFC Bank, hand over the fixed-cost question to Niraj, and then agency channel to Suresh. On the HDFC Bank, so we’re working very closely together right from senior leadership to all the way down at the folks at their branches, and you will start seeing uplift. We’ve already started seeing that in some of the branches and some of the geographies where we were lagging. And also, what is noteworthy is that top line is also a function of what kind of risks one is willing to take on one’s balance sheet, what kind of risk one reinsures and retains and at what margins. So, each bank certainly understands those nuances. And what I can say is that there is a concerted focus on how the counter shares can certainly move upwards and stabilize. So, you will see more of that happening. And as a culmination of the merger starts, date of culmination starts coming closer, you’ll certainly start seeing more of that. What is noteworthy is that even ex-HDFC Bank, we have grown about 2 times, 2.5 times market growth. And that is really what is important, and this is nothing new because we — this is one of our stated objectives of having a balanced distribution mix. And that has stood us in good stead, whether winning new partnerships like AU Small Finance Bank, last quarter we won India Post Payments Bank, and so on. So, we’ll continue to do that. And while I will — Suresh will handle this later, but just top of the mind, recall agency channel was — has actually gone up in share from 14% to 18%. So, I’m not very sure and maybe we can take it offline as to where you’re getting the numbers from. But I’ll hand it over to Niraj on the fixed-cost absorption question.

Madhukar Ladha — Nuvama Wealth Management — Analyst

I’m calculating quarter-over-quarter. So, Q3 over Q2 of FY ’23, if I sort of back-calculate, if I subtract the numbers, then that’s what I’m getting. Maybe — yeah, we can also take it offline.

Suresh Badami — Deputy Managing Director

It’s because our Quarter Three growth over Quarter Two has been higher in agency. So, I’m not sure which number you’re referring to. But effectively, we’ll ask the IR team to give you back the specific numbers. But the growth has been stronger in Q3 in agency. In fact, we’ve had a very good Quarter Three in agency. And like Vibha mentioned, there’ll be proprietary channel growth, and other than HDFC Bank also has shown tremendous growth for us.

Madhukar Ladha — Nuvama Wealth Management — Analyst

Okay. Got it. And the INR150 crores, yeah.

Niraj Shah — Chief Financial Officer

Yeah. So, in terms of cost absorption, you’re right. Basically, what you see here is a combination of two things. One is, of course, the difference in the operating expense ratio of Exide Life and HDFC Life. So, that is something that is definitely some — what you see here as a significant component of this — the expense impact. The second bit is reflecting the market realities of increasing cost of acquisitions in the open architecture environment. So, that is both in terms of individual business as well as the high growth group, credit life business as well. So, it’s a combination of both of these. And as we discussed, the first objective was from the Exide Life integration was to absorb the business appropriately and then get to margin neutrality. We’ve done that. And you can see, as we do this, we continue to focus on synergy realization in terms of infrastructure, in terms of maybe all other expenses as well as in terms of how to effectively deploy the manpower that we have from there. So, all of these things are something that you will see regular updates from our end. But largely, it will get reflected in terms of how the margin expansion starts to happen once the consolidation is done.

Madhukar Ladha — Nuvama Wealth Management — Analyst

All right. Thanks. I’ll come back in the queue.

Niraj Shah — Chief Financial Officer

Sure.

Operator

Thank you. The next question is from the line of Anshuman Deb from ICICI Securities. Please, go ahead.

Anshuman Deb — ICICI Securities — Analyst

Yeah. Hi. Thanks for the opportunity. My question is regarding if I look at quarter-on-quarter VNB margin, and if I assume, let’s say, Exide Life is 8% margin, I know is an assumption, the stand-alone — apart from the standalone margin and the Exide Life margin, is there a negative additional to that because of the acquisition? Because, otherwise, it looks like the stand-alone margin could have been lower on a quarter-on-quarter basis pay if I assume an 8% margin for Exide Life.

Vibha Padalkar — Managing Director and Chief Executive Officer

No, I think, 8% margin, it is now very difficult because as you know, we move towards seasonality, and especially, for smaller companies, Quarter Three is a very big quarter. So, that assumption itself perhaps is not quite right. And also, if you look at the combined number of branches and so on, that kind of an easing off of those some of that infrastructure has already started happening. Yeah. Eshwari, do you want to add anything?

Eshwari Murugan — Senior Vice President and Appointed Actuary

Yeah. Just to add, the combined margin for H1 was 26.4%. And now — it was 20.2% in H1 and now it is 26.5%. So, all the components of the margin on a merged entity basis have increased in this quarter.

Anshuman Deb — ICICI Securities — Analyst

Yeah, understood. No, I was just saying because it was, I think, Quarter Two stand-alone would have been come by in the range of 28%. So, it might have been because of the seasonality that you are referring. It looks like there has been like, if I assume the margin, obviously, that’s an assumption.

Niraj Shah — Chief Financial Officer

So, if you recollect in H1, we had reported 26.2% on a combined basis versus 26.4% H1 last year on a stand-alone basis. There was a 20 basis-points gap which we said we will attempt to bridge over the rest of the year. And in nine months, we’ve done that, with 26.5% versus 26.5% last year.

Anshuman Deb — ICICI Securities — Analyst

Understood. Okay. And the second question that I have is on — you mentioned about the composite license, and I remember one of our annual reports also we mentioned about how we were eager to exploit that opportunity. So, any thoughts on the opportunity to sell health insurance?

Vibha Padalkar — Managing Director and Chief Executive Officer

So, this is no surprise because HDFC Life has been spearheading this opportunity not really to redistribute the pie with stand-alone health insurers or generally health insurers — general insurers, it is more in terms of how do we expand the pie with keeping customer incentives rather than asking the customer to go to different types of insurers for fulfilling different sorts of covers that they need. That was the intention. And so, we’ve been at there, at least, for the last three years and then a committee was formed as you would recall and I was part of the committee, a report was submitted over 18 months ago. Thereafter, there was — eight committees were formed under the new IRDA chairman, of which development and penetration committee was chaired by HDFC Life. And in that report, we did put the suggestion of composite license as a suggestion of being allowed health indemnity from a product innovation and increasing insurance penetration as an objective. So, we remain committed on that, and I’m sure all my peers will also be. So, it’s more in the spirit of joining hands to see how can we deliver more insurance to people, and that is the need of the hour.

Anshuman Deb — ICICI Securities — Analyst

Thanks a lot. I’ll get back in the queue.

Vibha Padalkar — Managing Director and Chief Executive Officer

Sure.

Operator

Thank you. The next question is from the line of Avinash Singh from Emkay Global. Please, go ahead.

Avinash Singh — Emkay Global — Analyst

Yeah. Good afternoon. A couple of questions. First, I mean, on sort of distributions, we see a kind of a direct share of being reduced. Of course, some part of it could be explained by Exide merger that would have worked [Indecipherable] but is it also to do something with any kind of struggle on retail protection overall and also ULIPs since being tapered, because I would assume, these two products would be kind of having higher selling index. So, that’s number one. Second, on this back-book surplus generation, yes, I mean versus INR23 billion last year, it looks a good number. But we also need to see in the context that, okay, your last year INR23 billion would have a material impact on COVID delta base. So, if, I mean, we were to see kind of another COVID loss or COVID death claims, other claims, then surplus — back-book surplus’ initial growth looks a bit muted. So, any sort of clarity on that? These are my two questions. Thanks.

Vibha Padalkar — Managing Director and Chief Executive Officer

Yeah. So, Suresh, do you want to take that one?

Suresh Badami — Deputy Managing Director

Yeah. Hi. So, look two, three things in direct. I think one, of course, there has been a little bit of a slowdown due to lower runs walk-ins and online business also has seen lower traffic. But I think primarily, we have been focusing on the quality of business in that. So, two, three things have happened. One, we have tried to see which segment and what ticket size we want to play to make sure that the persistency as well as the product mix improves in direct. So, that has kind of ensured that we bring the margins up in direct and led to a lower number of NOPs and growth. And it has been kind of a status strategy by us.

Second, of course, is the fact that look as and how we are looking at the Exide merger, we’re trying to kind of look at in terms of the overall consolidation of the structures between both of it. So, as that happens, the pickup in terms of numbers over the next two, three quarters will start showing again. Some of it also has been a realignment. Some of these partners like Policybazaar and all that have moved in from online direct kind of a web aggregator model to a broking kind of a channel. So, that’s how we are defining it. But overall, given the expanding customer base, we are looking at a direct growth. And as we expand our branch network, the bigger advantages with Exide we are getting a significant number of new branches, especially, in South in Tier Two, Tier Three. So, we should be able to get what we call the branch channel to activate all over again in terms of growth. But really, the flattening has been more in terms of quality of business and us exiting a smaller ticket size on the direct business over the last two, three quarters.

Avinash Singh — Emkay Global — Analyst

And quickly on this, on the branch thing, you are not looking to close down any sort of rationalized branches that you have acquired from Exide?

Suresh Badami — Deputy Managing Director

No. So, there is, obviously, a lot of synergy that we will deliver — we will be able to create in terms of looking at how do we map these two sets of branches. We have gone through a very detailed exercise as part of our integration workstreams where we have seen which are the branches. So, for instance, HLIC has 383 branches and ELIC had 204. Combined, we will have 584. We had 587 on the day of the merger. But we will merge and crores maybe around 140 of these branches. But the idea is not that we will shut down and not — we would look at how we can expand, because the customer segment that we are able to service as well as the employees who we need to place out of the existing branches has been completely mapped out. So, we have looked at the infrastructure which is available as a combined entity. So, where we believe that the ELI branches are better, our teams are moving in there. Where we believe the HLI branches are better, we’re moving in there. And we believe where both the branches need an upgrade, we have kind of looked at a new location and made sure that we are servicing the customers both from an IRDA perspective as well as our overall perspective. And we will then look at newer locations that we can expand on. So, there is clearly a cost synergy that we can get out, but that gives us the ability to invest in further branches in other towns that we want to get in.

Avinash Singh — Emkay Global — Analyst

Okay. Thanks. And my question on the back-book surplus generation?

Vibha Padalkar — Managing Director and Chief Executive Officer

On the back-book surplus, well, yes, for the YTD, it looks like 40% is a lower number, but if you look at the quarter, the EV surplus that two, three didn’t have any COVID impact, the growth is around 18%. So, that is a steady-state growth that we expect on the EV surplus around the range of 18% to 20% without any one-offs that may come through. So — and that is in line with what we expect the [Indecipherable] given the profile of products that we’ve been writing in the last four, five years.

Avinash Singh — Emkay Global — Analyst

Okay. So, 18% to 20% kind of back-book surplus digital growth for us?

Vibha Padalkar — Managing Director and Chief Executive Officer

Yeah. And if you look at FY ’22, this is pre-COVID, sorry, this is COVID, and if you look at FY ’21, the EV surplus we generated in the nine months is very close to that. So, obviously, for the full year, it’s very much higher than that.

Avinash Singh — Emkay Global — Analyst

Okay. And a new business then, of course, will be a function of from which kind of products you’re getting growth. Thanks.

Operator

Mr. Avinash Singh, does that answer your question?

Avinash Singh — Emkay Global — Analyst

Yeah. Thanks.

Operator

Thank you. The next question is from the line of Nidhesh from Investec. Please, go ahead.

Nidhesh Jain — Investec — Analyst

Thanks for the opportunity. Firstly, on protection, how are the trends in pure protection ex of ROP, what are the growth trends, and if you can share what is the share of ROP pure retail protection?

Vibha Padalkar — Managing Director and Chief Executive Officer

It’s about in the region of 20%, Nidhesh, and doing well. But, again, we’re not going overboard on it. We’ve been selling it for quite some time now. And we’ll continue to do that wherever the customer preference is for ROP.

Nidhesh Jain — Investec — Analyst

And in pure protection ex of ROP also, we are seeing growth? So, you mentioned 13% sequential growth excluding ROP. So, excluding ROP, what could be the growth Q-on-Q?

Vibha Padalkar — Managing Director and Chief Executive Officer

Yeah, go ahead.

Niraj Shah — Chief Financial Officer

So, we don’t necessarily track it that way, Nidhesh, because with a multiple of 150 on ROP, that’s also is pure protection the way we see it. So, whether it’s limited pay, regular pay, ROP, overall, this is the sequential growth that we’re speaking about. We’re kind of seeing that across the segment. It’s not that — our ROP proportion has been in the 15%, 20% range for the past two to three quarters. So, it’s not that, that segment has exploded in any big way. It is definitely becoming more meaningful but in a gradual manner. So, this whole sequential growth that we’re seeing is something that we are seeing across each of the categories.

Nidhesh Jain — Investec — Analyst

Sure, sir. Thank you. And secondly, what is our share of — how much of our APE is coming from HDFC Bank of nine months and the third quarter?

Niraj Shah — Chief Financial Officer

About 45% to 47% is coming from HDFC Bank.

Vibha Padalkar — Managing Director and Chief Executive Officer

The individual business.

Nidhesh Jain — Investec — Analyst

Okay. Thank you. That’s it from my side.

Operator

Thank you. The next question is from the line of Sanket Godha from Spark Capital. Please, go ahead.

Sanket Godha — Spark Capital — Analyst

Thank you for the opportunity. Vibha, you said in the call that we are closely collaborating with HDFC Bank. So, in that context, just wanted to understand that last year, we paid around INR1,130 crores as an advertisement spend at HDFC Bank branches or ATMs. So, do we see this number to grow at a rate which is substantially lower or in line with the APE growth, which was not the case last four, five years? So, just wanted to understand that could be potentially a lever for margin expansion going ahead. So, when you say closer collaboration, it is market share or cost or what exactly you mean to say in that sense?

Vibha Padalkar — Managing Director and Chief Executive Officer

See, right now, given that the merger is yet to be consummated, it is still in terms of working together but not into deep strategic level conversations when they become apparent and sit at the board level, strategize with us, and so on, right? Those are conversations perhaps for another day. But right now, it is more in terms of, how does our counter shares stabilize, because ultimately, when you’re competing with unlisted players, there is, like I said, top line is often a function of how much risk one is willing to underwrite, how much — how strong are one’s underwriting practices, and what is that at what cost, right? So, some of that calibration is what I was referring to. Other things in terms of what is the cost of business and so on, I think the very fact that no insurer today that holds more than 50% — no bank that holds more than 50% has even — does not have open architecture at all, forget about even commercials, right? So, I think, those sorts of things are more strategic level discussions which will follow.

Suresh Badami — Deputy Managing Director

And some of these costs will also be based on how HDFC Bank expands. Their number of branches is going to increase to almost 700. We would want to make sure the visibility of our products is across all these branches. So, some of them will grow in tandem. And also — and then it is a product which is fairly competitive, and we need to ensure visibility across all their branches.

Sanket Godha — Spark Capital — Analyst

Got it. But have you seen the counter market — market share and the counter increase in — since the announcement of merger has happened?

Vibha Padalkar — Managing Director and Chief Executive Officer

We are beginning to see in a lot of geographies.

Sanket Godha — Spark Capital — Analyst

Okay. Fair point. And second question is more on data keeping. So, the economic variance number of INR1,160 odd crores, so can you break it down into how much was driven by debt and is there any impact of equity on the term, INR1,160 odd crores?

Vibha Padalkar — Managing Director and Chief Executive Officer

Do you want to take it? Eshwari?

Eshwari Murugan — Senior Vice President and Appointed Actuary

So, it is mainly coming from the increase in the yield curve at the short end. If you see the yield curve from one-year to five-year has increased in the range of 1% to 2.25%, average about 1.6%. And if you look at our sensitivity, for 1% increase in interest rates, the EV falls by around 2%. And so, an average of 1.6%, the EV has fallen by around 3% odd, which is about INR1,030 crores. And the balances from the equity volatility because of the lower equity returns during the nine months, we have some negative impact of around INR125 crores. These are the two broad reasons for the negative investment variance.

Sanket Godha — Spark Capital — Analyst

Sure. So, why I was asking this question is that we said in the call, at the start of the call, start of this year, that we’re baking in lower unwind rates because you expect equity returns to be lower. So, do we see a positive surprise there, any possibility, or it will remain the level what it is expected today?

Vibha Padalkar — Managing Director and Chief Executive Officer

It’s expected to remain at the current level because there’s a lot of volatility. Only in Q3, there’s been a small upside. But again, we see some stress.

Sanket Godha — Spark Capital — Analyst

Got it. Perfect. And last one from my side. If you really — do you want to disclose the hedge coverage ratio which you might be calculating internally based on what are the instruments you have internally like FRAs, equities and internal cash flows from the other products? So, if you want to put a number against the hedge coverage ratio against the likely cash flows you should get in the guaranteed products, any number you want to suggest how is our hedge coverage ratio?

Niraj Shah — Chief Financial Officer

So, Sanket, a couple of things here. One is basically two kinds of guaranteed products. One is the single premium guaranteed products, which are basically duration-matched through just matching the asset and liability duration. On the regular premium products, we said that this is basically cash flow matching using three large areas. One is internal cash flows from lower duration liability products. Second is the FRAs. Third is partly paid bonds and then some sort of G-Sec stripping. So, these are three or four components that we use. We don’t necessarily want to talk about each of the numbers because it’s dynamic at the back end. We do take calls based on how the interest rates are moving, how the FRA spreads are moving in the market. And this multipronged strategy helps us do that from time to time. And through a combination of each of these, we want to stay as closely cash flow-matched as possible.

Sanket Godha — Spark Capital — Analyst

Okay. Perfect. Thank you. That’s it from my side.

Niraj Shah — Chief Financial Officer

Thank you.

Operator

Thank you. The next question is from the line of Nitin Jain [Phonetic] from an individual investor. Please, go ahead.

Nitin Jain — Individual Investor — Analyst

Hello. Am I audible?

Operator

Yes.

Vibha Padalkar — Managing Director and Chief Executive Officer

Yeah. Hi, Nitin.

Nitin Jain — Individual Investor — Analyst

Yeah. Hi. So, thank you for the opportunity. So, my question is, you mentioned that company has achieved margin neutrality in the nine months FY ’23. So, will this continue going for the full year, because for FY ’22, the VNB margins were north of 27%? So, can we expect to maintain margin neutrality for the full year as well?

Vibha Padalkar — Managing Director and Chief Executive Officer

Yeah. Based on trends that we’re seeing right now, don’t see any significant threats. All things being equal on the economic front.

Nitin Jain — Individual Investor — Analyst

Right. And this will be on a consolidated basis, right?

Vibha Padalkar — Managing Director and Chief Executive Officer

Yes.

Nitin Jain — Individual Investor — Analyst

Okay. And just a follow-up to that, although the pre-merger numbers are not disclosed in the press release, will it be possible to share the VNB margins pre-merger?

Vibha Padalkar — Managing Director and Chief Executive Officer

No. So, that’s the point that I made in my comments, that actually it’s not that we have it and we’re not disclosing it. Everything is completely enmeshed. So, it’s not, for example, that they had a broker, broking business or they had some other business, and we didn’t have it. Whatever they had, we had. So, it’s all — management teams are now all — the hierarchy has been collapsed, the locations have been collapsed, like Niraj mentioned, branch rationalization has happened. So, even internally, now we call it Bangalore office and Mumbai office. So, there isn’t even — and there are people movement completely fungible. Even as senior executive management team, we have a presentation, and so on. So, we just don’t track that anymore.

Nitin Jain — Individual Investor — Analyst

Okay. So, just in terms of qualitative comment, have you seen an increase in that pre-merger VNB margin Q-o-Q?

Vibha Padalkar — Managing Director and Chief Executive Officer

Definitely. Yes, absolutely. And that’s why, our earlier estimates were that it would take earlier 12 months and maybe a little bit more for us to get there. But we’ve been able to deliver this in a much earlier, almost three quarters earlier.

Nitin Jain — Individual Investor — Analyst

Okay. Perfect. Thank you so much.

Vibha Padalkar — Managing Director and Chief Executive Officer

Yeah. Thank you.

Operator

Thank you. Ladies and gentlemen, please limit your questions to one per participant. The next question is from the line of Shyam Srinivasan from Goldman Sachs. Please, go ahead.

Shyam Srinivasan — Goldman Sachs — Analyst

Thank you for taking my question. I have — and good evening. Just first one on composite license, just going back, which are the areas that you think you will show more priorities on? Is it like health insurance? Could there be organic or inorganic options that you will look at? Also, M&A, so I just wanted to get a sense, do you think this opens up M&A not only for you, maybe for the industry as well?

Vibha Padalkar — Managing Director and Chief Executive Officer

Yeah. I think all — various permutations with the merger, but I’m also of the belief that it’s not going to happen overnight. And the reason I’m saying it is look at FDI today, right? People are allowed to invest up to 74% and we are far away from that. So, just because there’s an enabling provision, these — some of these things are group-level decisions, there are capital allocations, there are multiple companies in the group, there are different valuations, costs, tax, because taxation aspects are very different, and the horizon is very different for a life company versus general company. And our — the way we look at it is that let us see. In terms of what is the — what are the contours of eventual regulations, and then we will see. Of course, we have done some homework, but it’s not slam dunk. And also, we don’t have to be a manufacturer in every case. In some cases, we might just be a distributor. In something, we might be, have this as a rider. So, there are various aspects. Even today we work — we have combined product with HDFC ERGO, and that’s doing well, which effectively we’re able to distribute health protection cover for our customers and so on. So, various models will emerge. And actually, speaking with a regulator, that’s also the intention, wherein what I understand is that you don’t have to be a full bells-and-whistles insurer, you could be your specialized insurer, only doing crop or only doing rural or only doing disability and so on, which might require lesser capital than the onerous capital requirements of a life insurer. So, we’ll have to see. But apart from composite, we’re also enthused — and this is also there in the development and penetration committee report that why not allow insurers to also distribute other products, each other’s products which are, first of all, any way governed by our common regulator. And secondly, if banks can distribute life insurance and general insurance, why can’t remobilize some of those other financial services products and be a distributor, especially, in our branches, our feet on street, our direct channel, our online channel, and so on. So, we would be equally enthused with if some of that were to come.

Shyam Srinivasan — Goldman Sachs — Analyst

Got it. And quickly sneaking my second question. Deposit rates have seen a very sharp jump as banks have fallen over each other to raise rates. Despite that, I think non-par savings even for the quarter Q3 have been strong. So, any — are you seeing any early signs that as rates go up, that you’re seeing pressure on your guaranteed income products? Have you responded by raising our own rates? So, just the dynamics around this and maybe the path forward for these two classes? Thank you.

Vibha Padalkar — Managing Director and Chief Executive Officer

I’ll start off. Suresh, you can add. So, like we mentioned last quarter, when there was a lot of questions in terms of what’s going to happen because deposit mobilization, and we put numbers into perspective, wherein it is less than 2% in terms of new mobilization and about 0.2%, 0.3% if you include the back-book of bank. So, that is number one. Number two is that these non-par Sanchay Plus category products, which now has — in a way, has been born, have caught the imagination of people and how they’re able to do asset allocation in terms of their savings from. Some portion might be for liquidity purposes and bank fixed deposits. At the same time, this is a lifelong guarantee or some other forms of longer-term guarantee, which also they want. So, it’s not really fungible as such. And that’s exactly why, like we said, and that’s what’s panned out not only for us but for the sector also. No real big-ticket impact or dent because of this drive towards deposit mobilization. Yeah.

Suresh Badami — Deputy Managing Director

I mean, I think Vibha covered it, but frankly, this segment on the non-par side has almost grown by some 60%, 67% for the industry. So, like it’s created a section by — segment by itself, and it’s a question of asset allocation to this. In fact, we are fairly agile in terms of our pricing. It need not necessarily be that we need to increase. Right now, we’ve actually brought a little bit of a reduction to maintain profitability of this particular segment. And we do believe over a period of time, we will probably see the industry following this. So, it’s not that we need to compete with deposits. I think this has a space for itself and we will do it with an independent pricing to make sure that this segment remains profitable for us.

Shyam Srinivasan — Goldman Sachs — Analyst

Thank you, and all the best.

Operator

Thank you. Participants are requested to please limit your questions to one per participant. The next question is from the line of Supratim Datta from Ambit Capital. Please, go ahead.

Supratim Datta — Ambit Capital — Analyst

Thanks for the opportunity. So, I’ll just continue from the last participant. So, typically, with the yield curve flattening, the profitability of guaranteed products reduced. So, just wanted to understand that what needs to be the spread between the short-term and long-term yield for this product to remain viable?

Niraj Shah — Chief Financial Officer

Yeah. So, I think that’s one factor, I guess, which you can’t control in terms of the slope of the yield curve. So, what you have to do is some of what Suresh mentioned and what we’ve been talking about in terms of being disciplined in terms of pricing. Whether it’s the annuity product or it’s regular premium guaranteed products, you, largely, first of all, ensure that your risk management is appropriate in terms of matching your cash flows at, especially, for the regular premium products, and duration matched for the single-premium products. That’s something that’s top priority. Then you figure out what kind of credit risk that you’re willing to take to try and get the yield pickup. Within tolerance, you do that to try and get the maximum yield that you can out of the assets that match the liability. Then you figure out what’s the kind of competitive landscape that is around to be able to not be the highest rate but at least be in the vicinity. And then, of course, you have your margin sort of profile in mind. And all of these things are something that need to be considered to be able to manage the profitability. So, irrespective of which way the — when we launched the product, we had a fairly steep yield curve, as you know, about three and a half years back. And today, we have a flattish yield curve. But we’ve been able to manage our spreads broadly given the pricing discipline that we followed in terms of both the annuity as well as the non-par savings products.

Supratim Datta — Ambit Capital — Analyst

Okay. And…

Operator

Sorry to interrupt you, Mr. Datta. May we request you to please rejoin the queue? We have participants waiting for their turn. Thank you. The next question is from the line of Abhishek Singhal from Naredi Investments. Please, go ahead.

Abhishek Singhal — Naredi Investments — Analyst

Good evening. Thanks for taking my question. As the company got permission to do health and business, if you have got it, so would you do some business now and health insurance plan will be on or third party? And second and last question, more aggressively, HDFC Bank is opening its branches. It is not affecting their premium, then will — then when will the effect on the insurance premium start?

Vibha Padalkar — Managing Director and Chief Executive Officer

So, on the first part, like I mentioned to one of the earlier callers, that right now the exchange regulations do not permit us to seek or file any license for — to do health indemnity. So, we will have to wait based on what the finance ministry and whether that is able to — in what form or shape we see final light of day on composite, health, and so on. So, we’ll have to wait for some time. What I did allude to earlier was that we continue to remain interested in being able to incorporate some of these things that we’re not allowed to do today into having features within our products so that we can have product innovation and not have these artificial constructs as to where does a life company start, where does a general company start, where does a stand-alone health, where is pension, and so on, because we have to keep customer in the center of what we do. And ease of giving solutions to some of the risks being faced for the common person, I think, that is really what all of us should be focused on. So, we’ll wait and see, and we’ll hopefully have some clarity towards the end of this financial year.

On your second point, on HDFC Bank opening up new branches, while they are opening and we are certainly there in the new branches, new branches do take some time because they’re fledgling branches, often start with a very small area. It is stabilizing in terms of their banking activities. And it takes a good two to three years before it starts focusing on distributing third-party products. But we’re in most of the branches. You will start seeing some of the uptick like I mentioned to you, as — over the next six to 12 months in terms of closer working with the bank and they’re stabilizing.

Abhishek Singhal — Naredi Investments — Analyst

Okay. Thank you so much.

Vibha Padalkar — Managing Director and Chief Executive Officer

Thank you.

Operator

Thank you. The next question is from the line of Atul Mehra from Motilal Oswal Asset Management. Please, go ahead.

Atul Mehra — Motilal Oswal Asset Management — Analyst

Hi. Good evening, and thanks for the opportunity. In terms of the composite license, as and when hypothetically it goes through, would there be meri as in one mega organization of HDFC, both the health insurance, basically, the general insurance business and the life Insurance business coming together? And do you see like the two companies coming together then and creating one large insurance for all the needs? Do you see merit in that or do you believe both would perhaps do better individually? Thank you.

Vibha Padalkar — Managing Director and Chief Executive Officer

So, we have this model across the world. And even where there are — this is a possibility, both models exist. There are some groups that have composite, some groups that are bespoke only for one or the other. And there are merits and pros and cons in both. So, I mean, obviously, the merits would be that you would require lesser overhead, you would probably be able to have better end-to-end view of your customer. Your customer doesn’t have to go elsewhere for their insurance needs, up-sell, cross-sell, all of those things. And some of the negatives could be that these are very different perhaps products, especially, when you’re looking at crop and motor and P&C. There could be different capital requirements, investment horizon could be very — the outlook could be very different. Taxation could be different, and so on. So, these are really for shareholders to take a view on and more of strategy level calls rather than a company operating level calls.

Atul Mehra — Motilal Oswal Asset Management — Analyst

Got it. Thank you very much. All the best. Thank you.

Vibha Padalkar — Managing Director and Chief Executive Officer

Thank you.

Operator

Thank you. The next question is from the line of Bhavya Sanghvi from Fortress Group. Please, go ahead.

Bhavya Sanghvi — Fortress Group — Analyst

Hello. Thanks for taking my question. My question has been answered. I’d just like to get some data points for bookkeeping. Could you just give us the data for HDFC Bank’s counter share within individual business over the past few years, like FY ’20, ’21 and ’22 year-end on channel mix?

Vibha Padalkar — Managing Director and Chief Executive Officer

See, we’re not giving specifics of — because counter share and so on is also because at the same time, if you were to look at counter share or value of new business, it’s a very different outcome if you look at counter share of what is the risk on the balance sheet. These are very different outcomes, and so on. I think what is important is that our growth in the, say, in this quarter, Quarter Three, for example, has been faster than industry-level growth regardless of any counter shares or regardless of any of the other dynamics of open architecture that we thrive in, and ability to attract new partners. So, just defocusing on just one relationship of any kind has been our core stated strategy and that has stood us in good stead, time and again.

Bhavya Sanghvi — Fortress Group — Analyst

Got it. Thank you.

Vibha Padalkar — Managing Director and Chief Executive Officer

Thank you.

Operator

Thank you. The next question is from the line of Pallavi Deshpande from Sameeksha Capital. Please, go ahead.

Pallavi Deshpande — Sameeksha Capital — Analyst

Yeah. Thank you for taking my question. So, I think in the previous answer, you alluded to the fixed-cost absorption being actually a split between a higher cost of acquisition and the Exide Life business. If you could just give us a sense of how much of it should we take it as the split? And just also on this cost of customer acquisition, again, that which channel would that be that you’re seeing it?

Niraj Shah — Chief Financial Officer

Yeah. So, you could take it as broadly half-and-half. Directionally, you could take it as that. And we did mention to you in terms of our plans to get the synergy realization out of the combined business now. That is something that you will — I mean, we’ve already started delivering on that. Margin neutrality is the first proof of that, and we’ll see expansion as we go forward. As far as cost of acquisition going up, that’s something that is happening across the board, largely in corporate distribution with open architecture. And that’s something that we’ve been — in all our relationships, that’s something that we are seeing across the board in terms of increase in cost of acquisition, in terms of partners as well as in terms of give the expansion, putting in more manpower, be acquiring new distribution that companies such as India Post Payments Bank in the last quarter, and more recently, AU Small Finance Bank. We scaled up our partnerships with Yes Bank, IDFC, Saraswat, as well as Bandhan Bank in a very big way. All of that requires a fair bit of investment. And that is something that we would expect to continue. Of course, we will try and get synergies out of any fixed-cost absorption that will come out of our proprietary distribution. That’s the reason why we want to continue growing that to get more fixed-cost leverage. But as far as corporate distribution is concerned, we do see this investment continuing as we go forward. And our margin realization, VNB growth as well as cash generation through PAT something that would happen after absorbing all of that.

Pallavi Deshpande — Sameeksha Capital — Analyst

Right. So, the fixed-cost absorption for Exide, is that over — will we see more impact of that in the fourth quarter?

Niraj Shah — Chief Financial Officer

No, that’s something that is baked in. We will obviously keep chipping away here that as we go forward.

Pallavi Deshpande — Sameeksha Capital — Analyst

All right. Thank you so much.

Niraj Shah — Chief Financial Officer

Yeah.

Operator

Thank you. The next question is from the line of Neeraj Toshniwal from UBS India. Please, go ahead.

Neeraj Toshniwal — UBS India — Analyst

Hello. Yeah. Hi. So, wanted some sense on life beyond FY ’23 post margin neutrality, how do we see APE, VNB and kind of growth we are pecking in after because we are seeing some green shoots in terms of HDFC Bank coming back into productivity improving, mix improving, protection will be coming back? So, just wanted your sense on how we are factoring in and what kind of growth we can view?

Vibha Padalkar — Managing Director and Chief Executive Officer

Yeah. Hi. So, we should grow — we should be back on track to grow faster than this industry. And all our channels should do well. We’ve demonstrated and to then my comments about banks all our other bancassurance partnerships doing very well and agency being 2 times our company-level growth. So, we expect that trend to continue. And also, the distribution synergies to kick in with the merger, especially, in some of the geographies, which we’re not — wherein we were not clearly focused on. So, that should come through. And also, in terms of profitability, we should continue to inch upwards and deliver about VNB in the range of about 18% to 20% growth.

Neeraj Toshniwal — UBS India — Analyst

Okay. And anything on persistency given we have been delivering improvement on persistency for quite some time? Do the levers been available or even probably we are lagging? And is it on actuals and EV right now or we have some of them keeping capacity bandwidth available? How one should think about it?

Vibha Padalkar — Managing Director and Chief Executive Officer

So, right now, we are tracking well. What is also noteworthy, I think is, on — while you talked about margin neutrality, we have also reached close to neutrality on 13-month persistency despite, as you know, Exide Life being much lower. And as we write new business of emanating out of distribution strength of Exide Life, we will put in a lot of rigor, and you’ll start seeing that new business delivering fairly decent levels of 13-month, inching upwards two ours. Having said that, I think — we are very enthused to be present meaningfully in the non-Tier One segment. And the way we’re going to be looking from next year onwards is, obviously, we don’t want to dilute the high-quality business that we have built in the Tier One segment. So, that is something we’ll be monitoring separately. But at the same time, in terms of a mix, we will see some level of — different level of persistency in Tier Two and Three because that is really the nature of that geography. And as you see with the persistency or mortality, there will be a haircut to what you see in Tier One outcomes. So, you’ll see some of that. And that’s how we’re building our projections going forward. Also, if you were to look at it — I just mentioned that we have tied up with AU Small Finance Bank, India Post Payments Bank, and all of this is with a purpose, apart from being great partners and franchises, but also that is the place — those are the places that interest us and you will see more penetration into those geographies. So, there will be a mix impact in a nutshell.

Neeraj Toshniwal — UBS India — Analyst

Got it. And this is very helpful. Last question, in terms of VNB triangulation, if I compare to stand-alone margin work last quarter in terms of — there have been two impacts in terms of both the product mix and the fixed cost bit. So, we have talked about product mix also, I think we have done well. So, how fast we can ramp up or have we categorized these two which will ramp up faster in terms of movement given the mix is improving? Any road map for that?

Niraj Shah — Chief Financial Officer

It’ll have to be a bit of both, really. No real clarity in terms of how much will be contributed by each of these. It could really depend in terms of what period of the year are we talking about. But both of these would be equally important as we go forward. One, I mean, VNB growth is going be a function of three things. It’s going to be a function of the growth. We’ve already articulated our aspiration to grow faster than the sector. And inching up margins that will come out of some of these shifts. I mean, from a medium- to long-term perspective, we know that protection will become a larger part of the business. Annuity is already scaling up. We’ll continue to do so as we go forward as well. So, product mix, shifts over a period of time will continue to be meaningful. And as we expand our proprietary distribution, operating leverage is also something that will be very meaningful as we go forward apart from the shorter-term synergy realization from the combined business.

Neeraj Toshniwal — UBS India — Analyst

Got it. Thank you so much. This was very helpful. And all the best.

Vibha Padalkar — Managing Director and Chief Executive Officer

Thank you.

Operator

Thank you. The next question is from the line of Amit Jain from Axis Capital. Please, go ahead.

Amit Jain — Axis Capital — Analyst

Yeah. Hi. Thanks for taking my question. So, I just wanted to check that in terms of HDFC Bank, so do you see any particular product segment which is selling higher, or it is like sort of uniform? And how does that fair to other bank partners? Thank you.

Suresh Badami — Deputy Managing Director

So, there has been a little bit of a focus across most of our bank partners on the non-par segment. That has grown — even if you were to look at it, that segment has grown in banks from almost 30% in FY ’21 to 38%, which is reflecting in our number also. It is also the — and the whole segment for the industry is almost 67% is our estimate in terms of what kind of numbers we’re looking at. Similarly, there has been a growth on the annuity business also. So, these are actually flavors of the year in terms of how the product is positioned. We will probably see some focus coming back in terms of retail term over the next one year. But clearly, we have always managed to maintain a balanced product mix. It’s just that will we are slightly vary off in terms of that it shouldn’t go beyond a certain percentage. I think we mentioned in earlier calls also that we want to ensure that each of our channels is profitable, and we make sure that the product mix is appropriate to the channel to make sure that the channel by itself remains profitable. So, depending on how we want to push at HDFC Bank or agency channel or our other bank partners, we kind of maintain this mix across each of these channels.

Amit Jain — Axis Capital — Analyst

Sure. Thank you. That was helpful.

Operator

Thank you. The next question is from the line of Madhukar Laddha from Nuvama Wealth Management. Please, go ahead.

Madhukar Ladha — Nuvama Wealth Management — Analyst

Hi. Good evening. Thank you for taking my question again. So, you mentioned in your opening remarks about approvals that you applied for opening a branch at GIFT City. So, can you talk a little bit more about what sort of business would you look to build from there?

Suresh Badami — Deputy Managing Director

This was in the initial stages. We have opened a branch of our HDFC Life and Re subsidiary out of DIFC at the GIFT City. We have a distinct advantage in terms of being able to operate as a branch, and in some sense, a lead into the market. We are evaluating our products heavily, but we are looking at dollar-denominated products, whether it’s in terms of health, whether it’s in terms of education, or whether it’s in terms of annuity. We have certain frameworks in mind. But we are still waiting for the overall guidelines to emerge from the regulator there. Once the guidelines have fallen into place, we will confirm which products we’d want to launch. We are in some sense ready with our business plan and operating plan. But clearly, these are different segments, different markets. But it will be a huge opportunity for the NRI customers who can look at these products coming out of a brand like HDFC in India, and also an opportunity for the Indians to be able to take dollar-denominated products for coverage of health and some of these education-based kind of products. So, there are initial thoughts and concepts. Some of them we have formed up. But we are waiting for the overall clearances to come in and we should be quick to launch on this.

Amit Jain — Axis Capital — Analyst

And what’s the sort of expected timeline? Can you — who is exactly the regulator in DIFC for insurance? And yeah, what would be the timeline for something like this?

Suresh Badami — Deputy Managing Director

So, timelines in some of this is not very easy to predict as such. The IFSC is regulated by IFSCA which is a GIFT City unified regulator which is there place. We also have DFSA, who manages our overall regulations for the subsidiary out of the Dubai subsidiary. We have recently got a certificate of registration which has been set up by the IIO and the IFSC branch will be an IIO setup, and this came in November. But some of the other regulations are expected to come in. We will, obviously, wait for the product guidelines in terms of who will approve these products. But clearly, this will have to be first cleared by the IFSCA here in India in terms of what kind of products will be allowed for us to sell.

Amit Jain — Axis Capital — Analyst

Got it. I’ll connect with you more offline on this. Thank you.

Suresh Badami — Deputy Managing Director

Sure. Yeah.

Operator

Thank you. The next question is from the line of Avinash Singh from Emkay Global. Please, go ahead.

Avinash Singh — Emkay Global — Analyst

Yeah. One question because [Indecipherable] repeat, again, the budget is around the call. I mean, there have been lot of noise on both the ends. But if at all, I mean, life insurance or maturity proceeds, they are to be brought under the ambit of taxes. If — then — do you see that the products like the non-par guaranteed products will remain viable to be sold profitably?

Vibha Padalkar — Managing Director and Chief Executive Officer

So, Avinash, here, since it’s hypothetical and also given the need for actually having more tax benefits and lesser just given that our insurance penetration has gone down than moving steadily upwards, but hypothetically if you were to say you’re referring the 10, 10B, if that were to go away, I still think that that category has been born. Why is that category born? Because people are saying that, if I were to retire in the next 10 years or thereabouts, I don’t know what are going to be the interest rates and what am I going to earn at that point in time. It could be low-single-digits. And I want to remove this volatility from having a worrisome retirement time. So, I want certainty, and which is exactly our campaign which says my first salary after retirement. That has caught the fancy of people to say that there is — this particular aspect will be completely non-negotiable regardless of any macro events, any other economic events, and so on. So, it Is lesser to do with tax. Yes, one has to be competitive on IRR. So, that is something we have to see. But this birth in category is not a tax-led demand, but more in terms of having certainty of cash flows when one is in the retirement phase or later on in life.

Avinash Singh — Emkay Global — Analyst

Yeah. I mean, understood [Indecipherable] scenario. I mean, on the annuity side, any annuity is taxable, so I understand that part. I was sort of a bit on this non-par guaranteed [Indecipherable] well, of course, I know that maturity proceeds have been tax free, that particularly for the affluent class who have high [Indecipherable] I mean, of course, hypothetical, [Indecipherable]. Thanks.

Vibha Padalkar — Managing Director and Chief Executive Officer

Thank you.

Operator

Thank you. The next question is from the line of Samyak Shah [Phonetic] from Sameeksha Capital. Please, go ahead.

Samyak Shah — Sameeksha Capital — Analyst

Yeah. Thanks for giving me this opportunity. So, you mentioned reinsurance is very complicated…

Operator

Sorry to interrupt you, Mr. Shah, but we are unable to hear you. Your voice is echoing.

Samyak Shah — Sameeksha Capital — Analyst

Hello. Am I audible now?

Operator

You are not clearly audible, sir.

Samyak Shah — Sameeksha Capital — Analyst

Hello. Is it fine now? Is it better?

Operator

Management, shall we continue with the question?

Vibha Padalkar — Managing Director and Chief Executive Officer

Yeah. We’ll try and take this question. Go ahead.

Operator

Sure. Please, go ahead, sir.

Samyak Shah — Sameeksha Capital — Analyst

Yes. So, do you expect any reduction in reinsurance premiums or can they be flat going ahead?

Vibha Padalkar — Managing Director and Chief Executive Officer

So, I’ll start off and Niraj, you can add. There are different ways of us getting a better arrangement on reinsurance. Price is one. And like I had alluded to earlier in one of the questions, that we are beginning to see a lot more reasonable and collaborative approach quite rightly by reinsurers now that COVID fears have receded. And so, that in a way helps us write more business and defray some of our costs. So, we’re seeing that. Hypothetically, can it happen? Niraj, do you want to take this question?

Niraj Shah — Chief Financial Officer

I’m sorry, just to be clear, was your question in terms of rates coming down or… Yeah, okay. So, we — I mean, see, directionally, the way we’re going is, we are looking at increasing penetration, expanding into Tier Two, Tier Three, expanding beyond covering just for salaried, high-income individuals, right? So, when we are directionally moving that way, you can expect risk profiles, the consequent underwriting process that Vibha spoke about, as well as pricing to need to reflect that, to be able to build a sustainable business. So, pricing should be appropriate. We have no real preference for which way they would go. We would want it to be appropriate in terms of offering meaningful cover. At the same time, business being profitable with risk being appropriately priced. If there is expansion that’s going to happen in higher-risk segments, pricing should reflect that. Any business that was done without keeping that in mind, we believe may not be sustainable. Even today, we are seeing different practices in the marketplace in terms of pricing as well as in terms of underwriting. I guess, for a product which typically has a term of 20 to 40 years, it’s only appropriate that pricing takes that into account.

Pricing is one factor. It’s important, but not the only one. There are also the avenues which are important in terms of being able to assess the profile of an individual being able to use data more effectively, being able to use underwriting models more effectively, to be able to improve the customer acquisition process. So, a lot of these things we believe will be enablers as we go forward with more and more data not just on demographics in terms of income, but also in terms of health, over a period of time based on customer consent should be available. That should make the process a lot more efficient and pricing finer based on customer segments that we are going to be offering.

Operator

Thank you. Ladies and gentlemen, this will be the last question for today, which is from the line of Dipanjan Ghosh from Citigroup. Please, go ahead.

Dipanjan Ghosh — Citigroup — Analyst

Hi. Good evening. Hope I’m audible.

Vibha Padalkar — Managing Director and Chief Executive Officer

Yes. Please, go ahead, Dipanjan.

Dipanjan Ghosh — Citigroup — Analyst

Yeah. Just a few questions. One is on the annuity segment. We have seen the market-leader take multiple price hikes on few products. So, in that context from a medium-term perspective, how sensitive is the segment to pricing? And in that — I mean, how do you see the margins in that segment shape up? Second, on the non-par side, it seems that there has been a marginal increase in tenure and also a bit of increase in the regular pay variance. So, from a sequential perspective, has that had some impact on margins? And lastly, a data keeping question, if you can break your operating variance YTD.

Vibha Padalkar — Managing Director and Chief Executive Officer

Yeah. On your first point on annuity pricing, we keep calibrating it. At the same time, like with everything else, it is never only the price; it’s a whole host of things. There is a lot of engagement on the ground, there are engagements at various levels, with corporate, with — that sort of on the group side, on retail business, with nodal officers, with — many, many aspects. So, yes, price is important, like even in retail business, but I would say that it is one of the levers that is there. And we stay away from taking really aggressive calls that is — it is very tempting to go down that path. But if you’re not able to really earn that spread, then we would really question as to why are we doing this, because that way, we could do many other things. We could be very aggressive on protection, we could be very — so, why only in annuity business, right? So, it’s always a balance in terms of either mortality or financial risk management. At the same time, you have to stay in the game and — with a healthy dose of strong partnerships and building bottoms-up connect. Do you want to add anything, Suresh, on annuity?

Suresh Badami — Deputy Managing Director

No. I think, Vibha, right in sense that we have been calibrating like we mentioned, we see a huge opportunity on the OMO segment. We try and look at the group annuity based on relationships as well as in the process and how we’ve been able to work with a lot of large corporates in terms of being able to get this business. The brand helps us get a clear leverage in terms of the pricing. And I think it is important because a lot of people who would want to invest would want to stay with HDFC over a large — longer period of time. But we remain competitive. We have a very large, trained workforce on the ground who is able to explain the benefits. We’re trying to build an ecosystem around what kind of a platform we’ll be able to offer the customers in this particular segment. So, it is a very, very large opportunity and I think in some sense, we’re happy if more and more people come in, because we could only expand the pie on this particular segment. So, we’re focused. I think we’re very clear. And it’s always good to stay within the limits of tolerance in terms of what kind of the overall business is there. And we keep coming in and out of this segment because we’re fairly well-diversified. So, for instance, on group term, we have been quiet for quite some time, and we feel that, look, we can probably play larger on the group term now that things have stabilized. So, these are some of the players that we have between the term and annuity kind of reserve.

Vibha Padalkar — Managing Director and Chief Executive Officer

I think on the next one on non-par tenure you had, do you want to take that one? You’re saying that it is more on the longer…

Dipanjan Ghosh — Citigroup — Analyst

So, my question was, I mean, it seems that there has been some increase in customer demand towards the longer tenure regular pay variance as a whole for the industry and to some extent maybe for HDFC Life also. So, that — from that perspective, is it — has that had any benefit on the margins?

Niraj Shah — Chief Financial Officer

So, this entire return guarantee segment over the last 3.5, 4 years, we’ve actually seen a fairly broad spectrum of customer demands. It has been at the longer end for sure. It also has now with Sanchay Fixed Maturity Plan that we’ve launched a few quarters back. It’s at the shorter end as well. Folks who are preferring to pay maybe one premium or maybe five premiums and have a 10-year horizon instead of a 20-year horizon, that’s also a fairly meaningful segment of our business. We had mentioned about one-sixth of our non-par business is coming from there. And also, within — at the longer end also, there are preferences for either taking bullet payments or lump-sum payments or some preference for taking income over a period — extended period of time. So, there are multiple such options that exist and there is preference around that. As far as margin delivery is concerned, again, it’s a function of managing the spreads. Of course, longer-term products will be more profitable compared to shorter-term products. But even within shorter-term products, we had mentioned that it is — with pricing discipline, you can manage fairly respectable margins out of that as well.

Dipanjan Ghosh — Citigroup — Analyst

Sure. And lastly, if you can just quantify the operating variance breakup for year-to-date?

Vibha Padalkar — Managing Director and Chief Executive Officer

It’s mostly persistency variance model. It is a small positive and expense is moderately positive. So, most of the operating variance is coming from better persistency.

Dipanjan Ghosh — Citigroup — Analyst

Sure. Thank you and all the best.

Operator

Thank you. Ladies and gentlemen, this was the last question for today. I would now like to hand the conference over to Ms. Vibha Padalkar for closing comments.

Vibha Padalkar — Managing Director and Chief Executive Officer

Thank you, Rutuja. We would like to thank you all for attending the call. Have a great weekend.

Operator

[Operator Closing Remarks]