HDFC Life Insurance Company Ltd (HDFCLIFE) Q4 2022 Earnings Concall Transcript

HDFC Life Insurance Company Ltd (NSE: HDFCLIFE) Q4 2022 earnings concall dated Apr. 26, 2022

Corporate Participants:

Vibha Padalkar — Managing Director & Chief Executive Officer

Niraj Shah — Chief Financial Officer

Srinivasan Parthasarathy — Chief Actuary

Suresh Badami — Executive Director

Analysts:

Suresh Ganapathy — Macquarie Capital Securities — Analyst

Arav Sangai — VT Capital — Analyst

Ravi Naredi — Naredi Investment Private Limited — Analyst

Deepika Mundra — J.P. Morgan — Analyst

Swarnabha Mukherjee — B&K Securities — Analyst

Jayant Kharote — Credit Suisse — Analyst

Hitesh Gulati — Haitong Securities — Analyst

Nischint Chawathe — Kotak Securities Limited — Analyst

Prakash Kapadia — Anived Portfolio Managers Private Limited — Analyst

Dhaval Gada — DSP Mutual Fund — Analyst

Avinash Singh — Emkay Global Financial Services Limited — Analyst

Shyam Srinivasan — Goldman Sachs — Analyst

Sanketh Godha — Spark Capital Advisors Private Limited — Analyst

Abhishek Saraf — Jefferies — Analyst

Nidhesh Jain — Investec India — Analyst

Mayank Gulgulia — Star Union Dai-ichi Life Insurance Company — Analyst

Unidentified Speaker —

Rishi Jhunjhunwala — IIFL — Analyst

Roshan Chutkey — ICICI Prudential Mutual Fund — Analyst

Anand Bhavnani — White Oak Capital — Analyst

Presentation:

Operator

Ladies and gentlemen, good day, and welcome to HDFC Life Insurance Company Limited FY ’22 Earnings Conference Call. [Operator Instructions]

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

Vibha Padalkar — Managing Director & Chief Executive Officer

Thank you, Faizan. Good afternoon, everyone. Apologies for the delayed start. Thank you for joining us for the discussion on our results for the year ended March 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, Executive Director; Niraj Shah, CFO; Srinivasan Parthasarathy, Chief Actuary; Eshwari Murugan, our Appointed Actuary; and Kunal Jain from Investor Relations.

As you know, we listed our company in FY ’18, and we thought it would be good for us to share our performance over the past four years. We are proud to share that we have at least doubled our new business premium, renewal premium, protection APE, assets under management, value of new business and embedded value. Further details can be found on Slide 5 of our investor presentation.

I will take you through the key highlights of our FY ’22 results, and we’ll be happy to take questions post that. We clocked a growth of 16% in individual WRP in FY ’22 with the market share of 14.8% and 9.3% in the private and overall sector respectively. Despite very trying times during the two year pandemic, our two year CAGR of 17% was almost 2 times industry growth of 9%. Demand remained robust across most channels and segments. And hence, we continue to be optimistic about the growth prospects for the life insurance sector in the coming years.

We are closely tracking the worrisome geopolitical situation and its potential impact on inflation and consumption trends. In our view, life stage products such as annuity and protection are relatively insulated from such external factors. With the severity of COVID infections having waned, we have returned to normalized mortality experience. However, we remain watchful and we’ll continue to keep an eye on the emerging situation.

Moving on to our business update. We continue to maintain a balanced and profitable product mix with non-par savings at 33%, participating products at 30%, ULIPs at 26%, individual protection at 6% and annuity at 5% based on individual APE. Almost a fifth of our non-par savings business, in received premium terms, post the launch of Sanchay FMP in the second half of the year, consisted of single-pay products and these are relatively simpler to hedge. This gives us the ability to allow for a higher proportion of non-par savings in our business.

Overall, protection grew by 24% in terms of APE and 47% in terms of new business premium. This was largely led by a 55% growth in credit life new business premium on the back of higher disbursements. On the individual side, demand continues to be healthy in terms of number of applications logged in. However, proportion of policies actually issued still remains a constraining factor at our end on account of tighter sourcing guidelines, lack of a centralized medical database and underwriting challenges in Tier 2, Tier 3 locations.

Through the combination of data analytics, insights into customer profiles and calibrated risk retention, we expect to be able to grow individual protection in FY ’23. Some of the initiatives taken by us in this space include, development of an in-house automated underwriting engine, platform for scheduling medicals in real-time, facilitating video medicals and integrating technology to measure heart rate, BMI and other wild case using video input from the customers’ mobile.

On the retirement side, our annuity business recorded 24% growth vis-a-vis industry growth of 3%. Annuities now contribute over a fifth of our new business premium. We have been able to almost double our business in the last three years. We believe that protection and retirement solutions are multi-decade opportunities and will continue to grow faster than other segments.

We covered 54 million lives in FY ’22, registering an increase of 36% over FY ’21. We settled close to 3.9 lakh claims during FY ’22. Gross and net claims were at INR5,804 crores and INR4,328 crores respectively for FY ’22. The results created during the year have been more than adequate to address increased mortality on account of COVID. As on 31 March, ’22, we carry reserves of INR55 crores into FY ’23 as a prudent measure towards COVID.

Moving on to key operating and financial metrics. Our renewal premiums recorded a steady growth of 18% with our 13-month persistency ending at 92%, up from 90% in the previous year and our 61st month persistency ending at 58%, up from 53% in the previous year. Further, 13th and 61st month persistency for limited and regular paid policies was at 87% and 54% respectively, up from 85% and 49% in the previous year.

New business margin for FY ’22 was 27.4% versus 26.1% for FY ’21. On the back of our robust growth and margin expansion, we delivered a value of new business for FY ’22 of INR2,675 crores, 22% higher than FY ’21. Our value of new business has grown at a 20% CAGR over the past five years and has almost tripled in the last five years.

Our embedded value as at March 31, 2022 was INR30,048 crores. We have been able to almost double our embedded value in the last four years. Operating return on embedded value after factoring excess mortality reserve or MSR, which was created during FY ’22, was at 16.6%. Excluding EMR, operating return on embedded value would have been 19% as against 18.5% for FY ’21.

Profit after-tax for FY ’22 was INR1,208 crores, a decline of 11% versus FY ’21 due to higher mortality reserve created during the year. Post Wave 2, our profit after-tax in Q3 and Q4 improved steadily with profit after-tax for Q4 registering a 12% Y-o-Y growth. The board has recommended a dividend of INR1.70 per share, translating to a payout of 30% of our profit after-tax in line with our dividend payout ratio of FY ’21 and earlier.

Solvency as on March 31, 2022 stood at 176% post the cash payout of INR726 crores to Exide Industries as part consideration for the acquisition of Exide Life. Excluding impact of this cash payout, solvency ratio would have been 189%. Our board has approved a sub-debt raise of INR350 crores, which should increase solvency by around 600 basis points. In order to further strengthen solvency to fuel growth, we will continue evaluating raising capital through a mix of equity and debt.

Next, on channel performance. All channels continued to perform well with bancassurance growing by 13% this year and 21% based on two year CAGR. Proprietary distribution, which includes our agency, direct and online channels, grew by 18% this year and 11% based on two year CAGR on individually APE basis. Over the last five years, our share of proprietary distribution increased to 33% from 23%. Our agency channel grew by 26%. The channel added more than 40,000 agents in FY ’22, which is the second highest amongst private players. Our Agency Life initiative aimed at capability development continues to see healthy participation. Moreover, we are focused on building a women financial consultant model, which we believe would give us higher activation, retention and productivity.

Moving on to product innovation and sustainability. We continued with our efforts to stay relevant to customers’ needs, offer new propositions and provide a seamless and pleasant customer experience. During the year, we launched non-par savings plan, Sanchay Fixed Maturity Plan, which now contribute more than 15% of our non-par savings mix. We also rolled out our retiral product, Systematic Retirement Plan, which is a regular pay deferred annuity. Further, we introduced a bundled solution, QuickProtect, which combines our Click2Protect protection plan and riders to also cover against the three Ds; debt, disease and disability.

On the ESG front, we have signed up for the UN supported Principles of Responsible Investment, PRI, joining a network of more than 4,800 organizations around the world that have publicly demonstrated their commitment to responsible investment.

Now an update on our subsidiaries. Our pension subsidiary, HDFC Pension, ended FY ’22 with the AUM of INR28,414 crores, an uptick of 73% versus previous year. Additionally, as per National Pension Scheme Fund Performance Report published in March ’22, we continued to rank number one in terms of fund performance across categories. As on 31 March, 2022, HDFC Pension had a market share of 37%, retaining its number one position as private pension fund manager in terms of NPS AUM. NPS continues to contribute significantly to our annuity business. Our wholly-owned subsidiary, HDFC International Life and Re generated gross written premiums of $15.64 million, registering 18% year-on-year growth.

Our third subsidiary, Exide Life, recorded a healthy growth of 22% based on individual WRP in FY ’22, well above the industry overall growth of 16%. Its embedded value as on March 31, 2022 was INR2,910 crores. The merger process has been initiated with NCLT and is expected to be completed in the second half of this financial year. We continued to make progress in being able to seamlessly integrate both the businesses post-regulatory approval. We are confident about continued margin expansion on a standalone basis at HDFC Life and Exide Life and aspire to be margin neutral on a consolidated basis in FY ’23. However, we will prioritize value preservation and investment in expanding the franchise.

On the regulatory front, our new IRDAI Chairman, Shri Debasish Panda, unveiled his vision of independent India being an insured India as we celebrate Azadi Ka Amrit Mahotsav on our 75 years of independence. He mentioned, a, revamping regulatory framework to align with international benchmarks; b, outcomes and tech-based supervision; c, simplifying regulatory processes; d, moving towards product certification by insurers as the principles laid down by IRDAI; and e, supportive of tech-led initiatives. These initiatives would help provide impetus to ease of doing business. Further, the Chairman has laid out a roadmap on how insurers would help drive the above with eight thematic groups already having been constituted and having kick-started work. With these path-breaking initiatives, we are very optimistic of the prospects of our sector.

To conclude our objective remains to bring more individuals under the financial safety net by offering multiple innovative solutions, increasing customer connect and continuing to expand our offline and online distribution. The detailed disclosure on our results is available in our investor presentation. Wishing everyone success as we embark on a new financial year.

We are happy to take questions now.

Questions and Answers:

Operator

Thank you very much. [Operator Instructions] The first question is from the line of Suresh Ganapathy from Macquarie. Please go ahead.

Suresh Ganapathy — Macquarie Capital Securities — Analyst

Yeah. Hi, Vibha. Congratulations on your good full year performance. Just three quick questions. One is on the 80 basis point change in operating assumptions impacting margin. What exactly is that?

Niraj Shah — Chief Financial Officer

So Suresh, this is basically the mortality assumptions that we had at the beginning of the period given what we’re seeing in the portfolio. So that’s something that has put through at the beginning of the period itself and that’s the getting reflected both in the embedded value walk as well as in our VNB walk in the investor deck.

Suresh Ganapathy — Macquarie Capital Securities — Analyst

Sorry, the mortality assumptions you are saying, right?

Niraj Shah — Chief Financial Officer

Correct.

Suresh Ganapathy — Macquarie Capital Securities — Analyst

Okay. Now these are the recurring feature, because I don’t know, I mean, this can again occur next year. I mean, are you confident that this is done invested or do you feel like this can evolve?

Niraj Shah — Chief Financial Officer

So Suresh, I mean, the good thing is that it is done upfront and it’s not something that is left for later. As you see that mortality experience evolves, this is something that we would continue to put through in our embedded value to take whatever charge that we need to take. But it’s something that is not expected to be a routine element. As you know, the protection journey is fairly recent in India, right? Over the last few years, we now have slowly started expanding from the top 10 cities and from the salary segment into Tier 2, Tier 3 and to beyond the salary into self-employed and professional. So as that happens, the mortality experience will evolve. And that is something that will stage mortality experience as we go forward and that will get reflected in new pricing as well.

Suresh Ganapathy — Macquarie Capital Securities — Analyst

Okay. Two general questions, Vibha, one is on the merger with HDFC Limited and Bank, the merger. How does it change the equation in the sense that do you see more opportunities on anything which you are not doing earlier you can do it more or any challenges? That’s the first generic question. And the second question is, how do you see LIC’s IPO changing the equation? In the sense, have you seen them on the ground, getting more aggressive on the non-par segment? Are they launching new products? How the competitive environment will change? And any perspective on that would be great, yeah.

Vibha Padalkar — Managing Director & Chief Executive Officer

Right. Yeah, very valid. On the first one, while HDFC Bank was always part of the group, now with this merger going through, we will become a subsidiary of HDFC Bank or at least eventually post regulatory approval. So there will be a direct alignment. That is number one.

Number two is that cross-sell opportunities, I think every group is looking at — every major business group is looking at cross-sell opportunities in a very structured manner, which had somewhat probably — that the focus has not been there so far, because there was enough that was happening in respective individual companies. So that is number two. And with the use of digital and with data protection, we will see as to someone who is anyway well disposed towards buying from HDFC Group of Companies that whatever you need in terms of one-stop-shop you can get it from this. So more of that will happen.

Suresh Ganapathy — Macquarie Capital Securities — Analyst

Was Limited selling Credit Protect policies of Life in a big way?

Vibha Padalkar — Managing Director & Chief Executive Officer

Yes, they were. Yeah. They were selling it, but we would not probably have a lot of upsell or cross-sell to them in terms of other products. So there would be a loan taken, there would be a coverage of the loan and then loan is repaid, cover is closed. So these are all affording customers. So — and we are known as a product innovator. So for us to keep going back to say have you thought of this? For example, deferred and not known maybe four years ago or non-par was we were the ones to launch non-par the way it is on the sort of the category today and so on, and we’ll continue with more. So that kind of an upsell, cross-sell, more of that can happen. Also product innovation in terms of solutioning whether it is a combination with HDFC ERGO and us, not that we were not doing it, but a lot more can happen with, again alignment all of it’s sitting under HDFC Bank.

So this is just the beginning, Suresh. We are of course brainstorming with CEOs of respective companies. That’s already more than started happening. So I think certainly the intention is very clear that how do we leverage the power of the group to be able to give solutions to the customer. Of course, it will be done respectfully in terms of how the customer is looking to be serviced. But there’s still a lot that can be done within that arena. So that is on the first question.

If I can move to the second question, Suresh? Can I do that?

Suresh Ganapathy — Macquarie Capital Securities — Analyst

Yeah, yeah, please.

Vibha Padalkar — Managing Director & Chief Executive Officer

Yeah. On LIC, see, the way I see it is that just from an India Inc. perspective, the largest financial institution not being lifted was probably not really comfortable. It’s good that they’re listing. It is good that there will be lot more disclosure. Ultimately, the shareholders and your customers, hopefully there is an overlap, and that’s all a good thing I think. Yes, there might be some short-term turbulence in terms of FII, maybe repositioning, reallocation and so on, but I do believe that that’s a short-term. Now from what I read, it is a INR21,000 crores outlay as against maybe a 2 times of that, again, anecdotally that we read earlier. So it’s not enormous in the scheme of things, but I think overall the positives are certainly there.

I think you also talked about growth and so on. For some reason, I think that growth has lagged overall industry, private-sector growth, but they are akin to the large public sector insurer, and I’m sure there is enough. We should focus on expanding the pie rather than just trying to cannibalize one another. They also operate in a slightly different segment. Their ATS, their ticket size is about a fourth of our ticket size, so slightly different segments of operation, but it is — nevertheless, I think there is enough. When if you triangulate that with life insurance penetration, pension as a percentage of GDP and so on, I think there is enough for everyone.

Suresh Ganapathy — Macquarie Capital Securities — Analyst

Any feedback from agents those on the ground? I mean, from competition standpoint, what they are doing or trying to do?

Vibha Padalkar — Managing Director & Chief Executive Officer

Yeah. So Suresh, I have all monthly business review of my zones, okay, zones and regions. And I can tell you — and that’s why my day long meeting starts off with financial consultants that I meet. Up to none of my meetings have they ever cribbed that so and so is happening on the ground. And as you know, this would be — this would definitely be on their agenda if it was really consuming them or it was really topical. That’s not to say it’s not happening, I’m sure it’s happening in bits and pieces, but it’s not consuming their mind on it.

Suresh Ganapathy — Macquarie Capital Securities — Analyst

That’s helpful. Thanks, Vibha. All the best.

Vibha Padalkar — Managing Director & Chief Executive Officer

Sure. Thank you so much.

Operator

Thank you. The next question is from the line of Arav Sangai from VT Capital. Please go ahead.

Arav Sangai — VT Capital — Analyst

Yeah. Hi, good evening, ma’am. Hope all are doing well.

Vibha Padalkar — Managing Director & Chief Executive Officer

Yeah, all well.

Arav Sangai — VT Capital — Analyst

Ma’am, the first question is on the growth part, like if we see the last couple of months and when the basis started trading high and even the base might remain high for the say next couple of months, the growth for the industry as a whole has moderated. And even in a rising interest rate environment and a tough macro situations, how do you see the narrative changing around some of our savings products or how do people react to like historically when we have approached them for these products? Like, how do you see the growth panning out for the industry, because this is a very big concern among investors right now?

Vibha Padalkar — Managing Director & Chief Executive Officer

So I think that concern — I just want to put that into perspective, because optically it looks like growth has in quarter four for the sector has drained somewhat. But if you look at the base effect, for us — we, for example, grew 40% in quarter four of last year. We’re just coming out of one wave of pandemic and so on. But if I were to look at on a CAGR basis, if you’re looking at the growth of 17% two year CAGR, I don’t think that’s a bad growth against the pandemic. Yes, the industry growth was in — was 9%, but it’s not very bad.

Also, if you were to look at standalone quarter four, the two year CAGR was 23% for us. For the total industry, it was 19%. So even for the total industry, very close to 20% kind of a two year CAGR was not — you will agree that it’s not any — by no means the tepid growth. But yeah, optically it looks like that because of high growth on a standalone basis in Q4 of last year. So not really worried. Also if you triangulate that with the GDP, say, 8%, 8.5%, one can quibble, maybe it is 100 basis points, lesser or whatever. But I think you’ll agree that it’s not unlikely to be 4% GDP growth. So at 7%, 8%, 8.5% we should grow 2 times of that, and that has been the trend all these years.

Arav Sangai — VT Capital — Analyst

Okay. That’s helpful, ma’am. My second question is on the expense front. I think one of our other peers also, they also mentioned that they will be investing a little much more in this year to maybe expand their franchise and all. So is it a trend? Like, if you’re expending extra, will it affect VNB margins in the order of our acquisition expenses increasing? Is there any effect on our margins in the next year?

Vibha Padalkar — Managing Director & Chief Executive Officer

So our margins will continue — on a standalone basis, it will continue to trend upwards like we have consistently done over the past several years. Along with Exide Life as a combined margin what we hope to end is to be flat against our FY ’22 margins, that will be a good outcome. But on a standalone basis, expansion. So see, expenses, unless there is something very unusual like an acquisition that is happening, it will be very much part and parcel of what we’re doing.

Arav Sangai — VT Capital — Analyst

Okay. Just one last question, ma’am, on book-keeping. Like, since we increased our retention last quarter, will it affect our mortality sensitivity going ahead as the new mix becomes a bigger proportion of our overall protection products?

Vibha Padalkar — Managing Director & Chief Executive Officer

I’ll hand this over to Srini.

Srinivasan Parthasarathy — Chief Actuary

So the mortality retention should on the new business should grad — should be slightly higher, but the EV sensitivity should not really change materially because the retention is applicable only for the new business.

Arav Sangai — VT Capital — Analyst

Okay, all right. That’s it from my end. All the best for the coming quarters.

Vibha Padalkar — Managing Director & Chief Executive Officer

Thank you.

Operator

Thank you. The next question is from the line of Ravi Naredi from Naredi Investment. Please go ahead.

Ravi Naredi — Naredi Investment Private Limited — Analyst

Vibha ma’am, fantastic results. So far growth is there. My point is there, what is the profit from unrealized investment gain as on 31 March, ’22.

Vibha Padalkar — Managing Director & Chief Executive Officer

So this is nothing but the mark-to-market of our equity. There is also debt component in that, but simply mark-to-market. So as on 31 March, whatever is the market rates, that is what — and the underlying assets under management, that will be mark-to-market. And there will be a mirror — in the unit linked book, for example, there will be a mirror entry. So from 100 you go up to say 120, you will have a similar movement in reserves and it will be neutral on the profitability or in terms of PAT.

Ravi Naredi — Naredi Investment Private Limited — Analyst

Okay. And then can you tell in merged entity of HDFC and HDFC Bank how much equity HDFC Bank may have — may hold in HDFC Life?

Vibha Padalkar — Managing Director & Chief Executive Officer

So whatever is currently 47.6% that HDFC is holding that is what will go to HDFC Bank. They’re all the same. Now they have asked for regulatory approval to take it up to 50%.

Ravi Naredi — Naredi Investment Private Limited — Analyst

And after merger, how the working of HDFC Bank will enhance our business growth in compared to HDFC at present?

Vibha Padalkar — Managing Director & Chief Executive Officer

Yeah. So like I mentioned to the earlier question, there will be a complete alignment because of us subsidiary of HDFC Bank. And therefore, also paying a lot of attention on how do we give the customer a one-stop-shop for all financial services solutions. Right from perhaps opening up a small savings account when he just or she just starts her job to subsequently giving a mortgage when you get married or want thereabouts in terms of lifestyle, you get your first promotions, when you’re having a kid, health insurance, top of mortgage and thereafter some fixed deposits, the retirement solutions, so everything. Mutual funds in terms of your surplus that you want to reinvest. So all of that, how does one do it in terms of harnessing the power of HDFC Group, a lot more work has commenced on that now.

Ravi Naredi — Naredi Investment Private Limited — Analyst

Okay. Thank you very much, and all the best.

Vibha Padalkar — Managing Director & Chief Executive Officer

Thank you.

Operator

[Operator Instructions] The next question is from the line of Deepika Mundra from J.P. Morgan. Please go ahead.

Deepika Mundra — J.P. Morgan — Analyst

Hi. Good evening, Vibha. Thanks for taking my questions. Firstly, just can you walk us through capital requirements for the business going forward? I mean, savings you’re already at a fairly balanced mix with protection expected to go up, like you mentioned, and higher retention. How should we view the solvency requirement for next year? And at what levels would you be comfortable with the solvency?

Vibha Padalkar — Managing Director & Chief Executive Officer

So I’ll just start off on this question, Deepika, and I will hand over to Niraj and Srini. We started off with our solvency of 190% as of 31st of March. There was a cash payout to Exide Life and that is back to 13%, the INR726 crores. We ended at 176% as of 31st of March. Now we will be raising sub debt. We typically have said that we will hover around the 180% in terms of solvency. So I just wanted to set that fixed. And over to you, Niraj, do you want to add? Srini?

Niraj Shah — Chief Financial Officer

So Deepika, I think each of these business segments have their own considerations in terms of capital. And as the new — as the existing business continues to become larger and larger, that funds the new business growth, as you are aware. That’s the reason why the self-sufficiency in the model is really working that way.

As far as protection business is concerned, yes, it will require more capital compared to some of the savings components. But as you are aware, even within savings, unit linked product, for example, apart from the solvency capital, there is also a fair bit of gap between the cost of acquisition and the product charge. So that is something which consumes a fair bit of capital as well. And over a period of time, as you are aware, that we are expecting to move to a risk-based capital approach and that will release significant capital for the industry. And that’s something that we need to keep in mind over the next maybe three year period as well. So for us, clearly, given where we are as a company and the stand that the promoters have taken, we do not expect capital to be a constraint for growth, which is a way we look at it.

And on retention. As such, it doesn’t really impact so much because the retention really has gone up from 20 lakh to 40 lakh and that’s only for new business going forward. A large part of the solvency, I’ll ask, will really come from the backbook, which is still at the retention levels of the past. So that’s how we need to look at it. And lot of these things will progress over a period of time and things will evolve. And for us, the bottom line really is that where there is an opportunity to grow and create value, we will not let capital be a constraint.

Deepika Mundra — J.P. Morgan — Analyst

Okay. That’s very clear. So, if I may just follow-up with one more question. I’m not sure if I missed it, but what would be the total backbook exposure now to guarantee products in total? And again, over here, do you have a level in mind in which you’re comfortable with?

Niraj Shah — Chief Financial Officer

So Deepika, I think if you were to look at our new business product mix across each of the segments, today non-par is about 33% of our total new business. And the way to kind of look at it would be in terms of how much would this really — what does this really mean in terms of — either in terms of profitability or in terms of risk or in terms of capital requirements. That’s how we look at managing product mix going forward.

Of course, it all really depends in terms of how the customer demand is really looking at in each of these areas. So we’ve launched a product in the last couple of quarters, Sanchay Fixed Maturity Plan. A large part of that product category, as we discussed last time as well, is coming through in shorter premiums including single premium. The risk management on that is reasonably straightforward, as you could expect. And from a hedging perspective also, it works fairly well. It helps us actually hedge the business that we’ve written at the longer end as well. So the capacity to write non-par is probably only going to increase from here on given the way our business has created for diversification and also the external support that is available through hedging instruments.

Deepika Mundra — J.P. Morgan — Analyst

Thank you so much.

Vibha Padalkar — Managing Director & Chief Executive Officer

Thank you.

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. Good afternoon, ma’am. So my first question is related to the par products. If you could highlight that the trend why the de-growth has been? So is there a conscious effort to manage the product mix or is there some kind of demand softness that you see at the end of some of the category might be cannibalizing on this, if you could highlight?

Suresh Badami — Executive Director

Hi. This is Suresh here. I mean, just to add, it’s not really that we are trying to push one particular. I think we — like we have mentioned in many other earlier forums, the product mix that we have been looking at is in terms of, one, what is good for the customer, which value proposition we want to take across. Two, the capability of each of our channels to be able to sell that particular product across on to whichever segment we were looking at. And three, the internal drive to make sure that every channel is profitable as well as make sure that look we have a balanced product mix.

So we really can’t look at it in quarter-on-quarter basis, on an annualized basis we will really look at it. We have got a very clear balance and very similar to the kind of product mix that we had over last year. Just to kind of share with you that, look, we are looking — last year there was a higher growth in par, and that was the base which had come in. So our whole objective is to make sure that we balance between what the customer needs, what has been the base. And you would find that typically our two year CAGR of par has been fairly good. If we were to look at it, it’s almost 44% coming up with innovative products.

It also depends on what new products have been launched when — especially at that time, the new product of Sanchay Par had got launch. We had kind of ensured that everybody on the field, whether it was SPs of our partner banks, whether it was the FCs or whether it’s our own direct employees had a much greater focus and attention to launch something in the market and that led to a huge growth.

So these things tend to normalize over a period of time. And now we are focusing for instance on Sanchay FMP, we are focusing on some of those new products. So I won’t read too much to say, look, par has come down, I think our market share has grown on par. We have managed to maintain our overall product-wise market share on par, and we will continue to do that. So for instance, there was a time that we slowed down on term in terms of like taking a calibrated approach. But now that we believe things are normalizing, you will find us coming back in terms of term growth.

Swarnabha Mukherjee — B&K Securities — Analyst

Okay. That’s helpful, sir. So then in terms of the margin guidance that was mentioned that they sequentially improve, we then — we’ve been looking at individual protection as a incremental lever for margin improvement because higher other — I think higher VNB margin kind of products now have quite a sizable base. So if we look at the non-par savings or the Credit Protect book, they have grown quite well over the last couple of years and the base is quite high. So the incremental VNB growth and VNB margin, where do you expect it to come from?

Vibha Padalkar — Managing Director & Chief Executive Officer

Couple of things here. One is growth itself, because as we continue to do well on growth, like we have done, our costs are not going to increase in the same proportion. So that becomes an additive point in terms of margin. Second is on non-par itself. In the past we have said that about one-third will be around non-par. Now we’re getting more nuance, it’s also there in our presentation, wherein the new non-par product, the Sanchay FMP has a shorter tenure.

And so we are seeing that in a different light than some of the other longer tenure non-par. And so they’re really there. No constraint in how much we are going to sell that, it is as much as we are able to sell it. That also will and should lead to margin expansion. Credit Protect also is continuing to do well. And hopefully, all our partners will continue to do well. And we would — we will piggyback on that growth and continuing to give relevant products there. So it’s a combination of all of these things, wherein we will see that increase.

And finally, and to your point on retail protection, for the past couple of years, for various reasons, especially pandemic, reinsurers, repricing, all of that meant that we have remained more or less flat. Some quarters we have grown well, but largely we’ve remained flat. We are targeting at least a double-digit — comfortable double-digit growth in retail protection and we are reasonably optimistic of being able to get there. So that also will add to accretion with margins. So all of this will contribute to it.

Swarnabha Mukherjee — B&K Securities — Analyst

So ma’am, if I understood you correctly then for the non-par bit you mentioned that you actually now intend to sell slightly higher tenure product for incremental margin. Is that the correct understanding?

Vibha Padalkar — Managing Director & Chief Executive Officer

On the other hand, it’s a lower premium tenure so that hedging becomes easier, either single premium or limited premium.

Swarnabha Mukherjee — B&K Securities — Analyst

Okay, okay. All right. That’s very helpful. One quick book-keeping question if I may ask. So if you could give the break-up of the operating variance that is there in the EV walkover around INR150 crores and the reason for the negative economic variance?

Niraj Shah — Chief Financial Officer

Yeah. So the operating variance is broadly two-thirds can be positive persistency variance and about one-third it is expense variance positive. So that’s broadly the break-up of operating variances. Economic variance, largely two things. Over the year, things have moved in different directions. But overall, from the equity perspective, it has been positive and largely on the interest rate side because of the increase of interest rates at the shorter end — higher increase at shorter end — longer end has resulted in a negative variance. So that imbalance as such, for the year, it’s been fairly flat. The two have in some sense canceled out each other. So different quarters have different — behave differently. But for the year, broadly, this is really the summary.

Swarnabha Mukherjee — B&K Securities — Analyst

Got it. That’s very helpful. Thank you so much. That’s all from my side.

Operator

Thank you. [Operator Instructions] The next question is from the line of Jayant Kharote from Credit Suisse. Please go ahead.

Jayant Kharote — Credit Suisse — Analyst

Hi. Thank you for the opportunity. I wanted to understand about the guaranteed longer term product. There were some news articles about regulator not being comfortable with some of these products. I think there is an element of move on forward in them. So I mean, what would be your view? And I mean, basis that, what would be the mix for our hedging? And then how much should FRAs be contributing to the overall guaranteed, let’s say, hedging pool?

Niraj Shah — Chief Financial Officer

So first of all, we did look at the article and we’ve in fact interacted with all the counterparties that we are working with. And we believe that it’s clearly unfounded in terms of what the facts really are, because if you recollect, RBI allowed the structure of FRAs towards the end of 2019. After doing a lot of — getting a lot of comfort around the structure and what it really means both in terms of risk as well as in terms of what it means for the counterparties, which is basically the banks. And after that the approval was given for this structure. We don’t believe there has been any change in that regard. In fact, there is a thought of further liberalization on that front. So we do not believe there is any issue at hand as far as that is concerned.

Having said that, from our perspective, as you know that we have started writing non-par products prior to RBI allowing us to do forward rate agreements, and we had this internal hedging capacity which continues to-date given the way our CD book has grown. And added to that, there are other instruments as well and also a new product that we’ve launched actually help us move this cross hedge internally itself. So our dependence on FRA is probably a lot lower than maybe overall at an industry level. And we manage dynamically in terms of how — which hedging instrument is going to be more effective from multiple fronts at the back end — at regular intervals.

So it is an effective instrument. As we go forward, we believe that with a very forward thinking regulator, we may in fact get ability to actually borrow directly from the market as well and that would further expand the way in which this business can be written. So nothing really of any concern as far as the ability to hedge or in terms of instruments that may be available and options that may be available going forward.

Jayant Kharote — Credit Suisse — Analyst

So as we speak, is BAU with banks on an FRA?

Niraj Shah — Chief Financial Officer

Yes, absolutely.

Jayant Kharote — Credit Suisse — Analyst

Okay. And secondly, a couple of quarters back, Mr. Parthasarathy has spoken about the longevity assumptions on the protection side. And he mentioned it has come down from around 92 to around 85, 87, if I’m not wrong. If you can update us where is that number right now and directionally where should it stabilize?

Srinivasan Parthasarathy — Chief Actuary

See, these numbers actually are fairly stable, it doesn’t change quarter-on-quarter. So I think whatever numbers that I talked about was based on a report published by the actuarial profession. It gets updated probably once in three years, four years. So there is no more — any more recent update than what I spoke couple of quarters ago.

Jayant Kharote — Credit Suisse — Analyst

And those numbers for us — I mean, I think you spoke about the industry level. So for us, in HDFC Life this number would be similar?

Srinivasan Parthasarathy — Chief Actuary

Yeah, it’s very ballpark, yeah.

Jayant Kharote — Credit Suisse — Analyst

Okay. Thank you very much.

Operator

Thank you. The next question is from the line of Hitesh Gulati from Haitong Securities. Please go ahead.

Hitesh Gulati — Haitong Securities — Analyst

Yeah. Thank you for giving me the opportunity. I just had a question on economic variance. I just wanted to understand last — in the last calls, you mentioned that unwind above 8.5%, we will be showing — or above or below 8.5% we will be showing it through investment variance. Is that one of the reasons that the economic variance is so low, just negative INR50 crores despite rising yields?

Niraj Shah — Chief Financial Officer

Yeah. So Hitesh, couple of things, right? The equity movements have canceled out the slope change on account of the interest rate. And also, yes, I mean, we can’t completely take credit before taking the unwind rate at very close to where we are at the end of the year. But yeah, I mean there is a fair bit of thought that goes into what is likely to happen, which goes into the unwind rate that’s incremental at the beginning of the year. It so happens that the economic variance is basically almost zero because the two movements have actually canceled out each other. So both of these things are I guess in a way playing a role. The equity and the debt changes kind of canceling out each other and the expected rate being fairly close to what we have actually realized.

Hitesh Gulati — Haitong Securities — Analyst

Yeah. And Niraj, this was — do FRAs also have a significant impact on how we book in economic variance, because some of the peer companies have shown quite a negative impact in economic variance? So just trying to understand that.

Niraj Shah — Chief Financial Officer

No, Hitesh, that could not really play a role at all.

Hitesh Gulati — Haitong Securities — Analyst

Okay.

Niraj Shah — Chief Financial Officer

Yeah. I mean, if you are completely hedged, this should not really play a role at all as far as the economic variance is concerned. Economic variance has only be really in terms of the actual movements, which are different from what you anticipated, both on the equity side and on the debt side.

Hitesh Gulati — Haitong Securities — Analyst

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

Operator

Thank you. The next question is from the line of Nischint Chawathe from Kotak Securities. Please go ahead.

Nischint Chawathe — Kotak Securities Limited — Analyst

Hi. Just one question from my side. What really explains margin expansion if we look at the business from a fourth quarter basis, which is added in the quarter-on-quarter and a year-on-year basis?

Srinivasan Parthasarathy — Chief Actuary

So Nischint, if you look at Q-on-Q really — I mean, apart from the assumption change mortality, which we did discuss, large part of it is largely coming through in terms of the product mix shift. We’ve written more annuities in this period. And the CT business continues to do reasonably well. We managed to reprice a large part of the business over the last 12 to 18 months, and that is something that has helped us as well. And as such, even in terms of the group business composition, margin business is lower this year compared to same time last year. So it’s a combination of these two, three facts. On the non-par side, there has been a slight expansion in the quarter from 32% to 35%. So each of these three or four things have played a role in the expansion.

Nischint Chawathe — Kotak Securities Limited — Analyst

Has the duration of policies in the non-par also gone up?

Srinivasan Parthasarathy — Chief Actuary

No, not. Okay. So I’m just sorry. Before that, the last bit is also in terms of some sort of leverage that has come through in terms of scale. So that also has played a role in the expansion. So not really, Nischint. What’s happened is that, if you recollect, we’ve launched Sanchay Fixed Maturity Plan, which basically is a 10-year product, give or take. And a large part of that business is single premium, so it’s a 110. Some of the business is 510. So that in fact has actually on a overall basis would have actually reduced the policy term on non-par.

Nischint Chawathe — Kotak Securities Limited — Analyst

Sure. Thank you.

Operator

Thank you. The next question is from the line of Prakash Kapadia from Anived Portfolio Managers. Please go ahead.

Prakash Kapadia — Anived Portfolio Managers Private Limited — Analyst

Thanks. My questions have been answered. Thank you.

Operator

Thank you. The next question is from the line of Dhaval Gada from DSP Mutual Fund. Please go ahead.

Dhaval Gada — DSP Mutual Fund — Analyst

Yeah. Thanks for the opportunity. So I had two questions. First one was on margins. So I understand your guidance of maintaining margin on merged business. Just wanted to understand from a medium term perspective, we know can the margins move closer to 30%? And the context is, if you look at the last four years, we’ve seen a large part of the margin increase being driven by product mix change. And this has come despite sort of negative assumption changes, which Suresh also alluded earlier. So just how much more headroom is available to sort of take the margins higher closer to 30% in the next three to four years, which effectively means…

Vibha Padalkar — Managing Director & Chief Executive Officer

Dhaval, it should be possible. In all things being equal on regulation, so it should be possible, and that’s what we will be working towards. It will kind of stabilize around that, and this is of course with the caveat that we don’t drop a market share. Assuming that we hold our number three position amongst all the listed companies, including LIC. So without dropping that, without dropping our market share, but yeah, we still are running for getting close to 30%. And thereafter, if there are no further regulatory relaxation or enablers, then having a compounding story of about 20% year-on-year or close to that in terms of value of new business.

Having said that, we are hopeful given the tone set by the new IRDAI Chairman about a lot of things on technology, on ecosystems on use and file, a lot of speed to market, collaboration perhaps with other regulated entities, pension, general insurer, health insurance and many, many more. I don’t personally think that it’s going to be status quo, it will be an enabler. But I’m not counting that in, because I don’t know in what form or shape. So all things being equal, yes, we should be getting towards 30% in the medium term.

Dhaval Gada — DSP Mutual Fund — Analyst

Okay, thanks. And just one final thing on the sort of capital just again. So if you look at the free surplus movement, if you could explain that? In the last year, I mean, it’s dropped about INR350-odd crores. And just within — and related to this is, what will trigger an equity raise? I mean, if you could just help me understand what one should look for in terms of your willingness to go towards an equity raise that would be helpful?

Vibha Padalkar — Managing Director & Chief Executive Officer

So while — I’ll leave the first part of the question to Niraj on the net worth. But we will, over a period of time, in order whatever we need to support growth and opportunities. We will have to have adequate capital. And yes, we will not rule out equity, combination of equity or debt like I had mentioned in my opening remarks.

Niraj Shah — Chief Financial Officer

Just to add to that, we are fairly close to the levels that we want to be, like Vibha had mentioned. So we are at 176%. We would like to be in the 180%, 190% range given what is expected going forward. So the distance between where we are and where we need to be is not very high. So the number that we’re talking about is not going to be very significant. That is one.

On the net worth front, of course as you are aware, the multiple things have happened on an ongoing basis. Typically you add your accretion from the backbook, which is your PAT that comes through, then you have any sort of capital movements largely in terms of dividend payouts in the beginning of the period after the AGM. And any sort of capital that comes through in terms of the ESOPs that get exercised. Apart from that, largely the big movements are in terms of any sort of MPM movements on the shareholder funds. And in our case, this time the big movement really was in terms of the cash that went out because of the Exide Life acquisition. So these are the four or five aspects which go into how the net worth has or the free surplus has moved in this period.

Operator

Thank you, Mr. Gada. May we request that you return to the question queue for follow-up questions. Thank you. The next question is from the line of Avinash Singh from Emkay Global. Please go ahead.

Avinash Singh — Emkay Global Financial Services Limited — Analyst

Hi, good evening. A couple of all questions. First, if you can just help us understand the supply side and demand side realities on the retail protection. So how do you see sort of a growth and margin just in that first? And then again going on the free surplus part, if I recall, you’re sort of — your required capital level [Indecipherable] is around 180%. So I mean, just you can help me, at 176% sort of how is sort of again free surplus coming in?

Vibha Padalkar — Managing Director & Chief Executive Officer

So Avinash, on your first point, just to understand, you’re saying margins on health, is it?

Avinash Singh — Emkay Global Financial Services Limited — Analyst

No, no. I was saying that considering the supply side and demand side, the changes that has happened over the year, how do you see retail protection shaping out in FY ’23, both from the growth and margin perspective, retail protection.

Vibha Padalkar — Managing Director & Chief Executive Officer

Right, understand. So we are flat so far because of, like we mentioned, pandemic and reinsurer and pricing and all that. We are fairly optimistic of being able to grow double-digit. And as against last year, industry was did not grow, we also were flattish. From HDFC Life’s point of view, while following — I’m continuing to follow our risk calibrated approach. We are hoping to grow double-digit on individual protection. And this is without necessarily keep retaining a lot more on our books and so on. We have said that we will retain about 40 lakhs on our books, we’ll continue with that. But nuanced approach we hope to grow. That is number one.

Credit Protect should continue to grow well. We grew about 55%. We hope to continuing to see that traction. We’ve also repriced quite a few relationships in light of pandemic. That’s an ongoing exercise and part and parcel of how get covering mortality risk. Both these put together, we should grow. We have grown about 26% on an overall protection basis, but we are — we remain fairly optimistic of our ability to continue to grow.

Avinash Singh — Emkay Global Financial Services Limited — Analyst

And any price changes in retail protection you are taking in FY ’23 or not?

Vibha Padalkar — Managing Director & Chief Executive Officer

Nothing, but that is on the path right now.

Avinash Singh — Emkay Global Financial Services Limited — Analyst

Okay. And my question on the free surplus?

Niraj Shah — Chief Financial Officer

Yes. Avinash, on the free surplus, if I’ve understood you, you’re referring to the level of the solvency. So as you are aware, regulatory solvency 150%. For the purpose of the EV, we basically like 170%. So right now we have something in excess of that. So that’s just…

Avinash Singh — Emkay Global Financial Services Limited — Analyst

Yeah, yeah. It’s very clear. That will contribute to 170, 180. Okay, thanks.

Niraj Shah — Chief Financial Officer

Yeah, yeah.

Operator

Mr. Singh, does that answer your question?

Avinash Singh — Emkay Global Financial Services Limited — Analyst

Yes.

Operator

Thank you. The next question is from the line of Shyam Srinivasan from Goldman Sachs. Please go ahead.

Shyam Srinivasan — Goldman Sachs — Analyst

Hi. Thank you for taking my question. Just laboring on retail protection. I think in opening remarks, Vibha, you mentioned about video checks and stuff, right? You’re connecting to be customer mobile. If you can elaborate how that can? And then just tying it to your original comment that while applications come through, we are still not able to process. So where is — that number I recollect some quarters back was like 60%. So just help us understand how debottlenecking some of your own processes could help you improve growth, specifically related to retail protection?

Vibha Padalkar — Managing Director & Chief Executive Officer

Right. So [Technical Issue] one is that looking is it out of every 100, like we have mentioned in the past, we’re converting about 61. So we are taking reasonably realistic targets to say instead of 61, even if I converted say 70 or 75 that will get me to that answer. So that’s what we’re looking at is that we are trying to solve for the entire process. So we have launched MediEasy. This you’ll find on Slide 21 of our investor PPT. What it does is that it walks our frontline sales person step-by-step, because what we did find is that the rules keep changing because of pandemic, because of reinsurer, because of what we ourselves are looking at in terms of addressing new and emerging risks and so on. So all the right reasons. However, the guy on the field is very confused. There is attrition whether we like it or not. There is a people movement. And then there is a lot of back and forth and the customer gives up or the frontline sales person gives up or a combination of these aspects.

So that — so how can we have this iteration win, the first step is to say, okay, we read this document. Okay, if you don’t have this document or rather the customer doesn’t have this document, then we have a call center which has an assisted call center with Charted Accountant to say, okay, instead of this, especially for the non-salaried, this should be fine or this proxy can be fine and so on. So because the guy is sitting with the customer and/or sitting virtually with the customer and he is able to get that other than it’s coming back to central operation, going back and forth and so on.

Similarly looking at what other data points were resulting in us in that same 100 minus 61. Why has there been a drop off. And is there some other ways of getting to the same answer. For example, today we don’t have a deduping between our credit life database and our individual database. Now with the use of technology if we can try and see personas of what is behind this person in terms of both financial risk as well as medical risk. That again could help us address some of that drop-off that we are seeing currently.

Similarly with reinsurers, we are finding that reinsurers — and we’ve been partnering with reinsurers and that has been well appreciated. In fact, reinsurers have come back to us to say that we are erring a little bit on the side of caution, and they are obviously fairly pleased about that and willing to look at certain personas. If you also look at Meditech, for example, whole host of things. Again, on Slide 21 on the bottom right hand side. How do we get a proxy for diabetes, how do we get a proxy for any heart-related illness without that individual going in for a medical, which obviously given the pandemic, she is hesitant to do that and we understand that. So for us to be again able to triangulate that with age, with various other data points and his or her resistance to go in to get a medical, being able to use Meditech to be able to solve that.

Another point, we’ve just gone live on this wherein — underwriting engine, which although we have only right now launched for savings, but that is now — that has an error rate of 0.001% now and it’s AML. So it’s machine learning tool, which is getting even better as we speak. So we have rolled that out, wherein human underwriters are being substituted so that the customer can be given a straight through processing, can be given much better experience and so on.

Now the next phase is to start taking baby steps to look at our term as well. What this will do is that, again, how do we reduce the drop off rate. Yes, we need to increase the funnel also, admittedly, but that is one part of it. We are saying that people have come in, out of my example of 100, people have paid money, filled in their proposal and we are not able to issue them with a policy and we returned their money. So let us focus on the drop off first. And that’s what we will be giving and have been giving disproportionate management bandwidth to reducing drop-out.

Shyam Srinivasan — Goldman Sachs — Analyst

Thanks so much, Vibha. All the best.

Vibha Padalkar — Managing Director & Chief Executive Officer

Sure. Thank you.

Operator

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

Sanketh Godha — Spark Capital Advisors Private Limited — Analyst

Yeah. Thank you for the opportunity. Sir, the simple question what I have is that, you gave us the — I mean, I just wanted to understand how much FMP contributes to the total individually FDV — total non-par is 33 percentage. So sir — and just wanted to understand if the incremental focus is on this particular product from risk management point of view, how much this 33 contribution of non-par can potentially go to say 40, 45 kind of a number. Any number you have in your mind which could be the margin driver going ahead? So that’s the first question what I had.

And the second question…

Vibha Padalkar — Managing Director & Chief Executive Officer

Can I take the first question first, Sanketh, and then you can move on to the second question?

Sanketh Godha — Spark Capital Advisors Private Limited — Analyst

Sure, sure. Go ahead.

Vibha Padalkar — Managing Director & Chief Executive Officer

Yeah. So on the first one, what you’re saying is that long-tenured policies that we sell, we will have a overall cap, which we have had, but on shorter tenure we have no cap.

Sanketh Godha — Spark Capital Advisors Private Limited — Analyst

So basically, you mean to say that if there is a decent demand for single premium FMP plan, then you can even take the total non-par mix even beyond 40, 50 kind of a number if…

Vibha Padalkar — Managing Director & Chief Executive Officer

Yeah. Hypothetically, yes. Yes, hypothetically.

Sanketh Godha — Spark Capital Advisors Private Limited — Analyst

And the margin of single premium FMP will be better than the company average?

Vibha Padalkar — Managing Director & Chief Executive Officer

It will definitely be better than some of the other segments like par and UL obviously. So there will be a substitution — it could be a substitution for that and thereby taking it up because of the substitution.

Sanketh Godha — Spark Capital Advisors Private Limited — Analyst

Got it. Got it. Perfect. And the second thing was that, I mean, just from the HDFC Bank merger perspective. So we make an advertisement spend thing HDFC Bank as a channel of around INR800 crores, which we did in nine months FY ’22. So just wondering how this will play out if it becomes say direct DD of HDFC Bank that given it’s a direct subsidiary now, then do we expect these advertisement spends coming off? And if it happens, will this be a very big lever for margin expansion? How do we read this to play out?

Vibha Padalkar — Managing Director & Chief Executive Officer

Little bit premature, Sanketh, because it’s just been announced. I think over a period of time, we will work very closely with HDFC Bank folks to see how as a parent subsidiary we can — the dynamic obviously will change, but little bit early in the day. Now the advertisement is really — what happens is there is multi-tier. And the reason for the advertising budget is that when people walk into the 6,000 branches and engage with them virtually and so on, we need to be out there. We need to be able to say this is Sanchay FM, this is our retirement — new retirement plan and so on. And that visibility has to be there and that’s why the advertising.

Now how things will change down the line, we’ll have to see. There will always be some advertising to — because the bank has said there will be multi-tier and multi-tier we believe is good for the customer. Yes, there could be — how much of multi-tier is a different question — some level of multi-tier wherein you’re giving customers the choice to buy various products. And I also personally believe that most banks eventually will open up to multi-tier. And so some level of this will be there. We’ll have to see in terms of how things pan-up.

However, what is important is how do we expand the pie rather than just which cost might not be there and those sort of thing. The focus will be on how do we cross-sell, because that just hasn’t been done in a systematic manner as of today. And like I mentioned with one of the earlier caller, it has been somewhat in a standalone company view rather than a financial conglomerate, and that lens will change. We will look at our balanced product mix, we will look at how can we, like I mentioned earlier, upsell relevant to the customers’ needs, and that itself will give us the kind of uplift.

Sanketh Godha — Spark Capital Advisors Private Limited — Analyst

Got it. Got it. Just can you tell me the current FMP contribution to the total APE, if you’re okay to disclose that number, exact number?

Vibha Padalkar — Managing Director & Chief Executive Officer

APE value — it makes sense, not on APE…

Niraj Shah — Chief Financial Officer

So Sanketh, that has been launched a few months back. So since launch, it’s about 15% of the business.

Operator

Thank you, Mr. Godha. May we request that you return to the question queue for follow-up questions. Thank you. The next question is from the line of Abhishek Saraf from Jefferies. Please go ahead.

Abhishek Saraf — Jefferies — Analyst

Yeah, hi. Thanks for the opportunity. I just had two quick questions pertaining to Exide Life, just a quick one. So if you can just give me some number on what could be the VNB margin post-war? In fact, I joined late, probably I might have missed that, if you mentioned it. And secondly, if you can give some color on the cost savings that we are doing. So if any number around rationalization of branches or other number that you can share where we are able to save cost? And then I have one follow-up question after this.

Srinivasan Parthasarathy — Chief Actuary

Yeah, hi. On the margins that you’re talking about, we are on the low [indecipherable] We do believe that we will be able to scale this up in the natural course of business once it merges with us. And over a certain 36 to 48 months period, we should be able to — and maybe even lesser than that, we should be able to bring it close to our kind of margins. So that should not really be a problem.

On the other piece in terms of how the integration and how we are trying to get to value capture and synergies, let me tell you that, look, there are some 23 work streams working on every aspect of the business between both the teams. And we are looking at the best practices across both the companies. There is a clear focus in terms of where we’ll be able to get wider distribution focus. We are looking at the entire product portfolio between what Exide has and what we have got. Also in terms of how we will be able to take some of our technology and digital tools across to their set off.

So branch rationalization is one of the piece. Obviously, there are a few branches which we look at which are close to each other. We are open to look at which of the Exide branches are probably better fit and better catchments and we’ll probably be able to merge. So on both sides we are looking at finally as a merged entity which are the best resources. We do believe that we will get scale for the entity and we’ll be able to expand into markets.

The good thing like we mentioned earlier in many forums was that look in Exide a lot of the business that they do is in South in some of the Tier 2, Tier 3 markets, which is clearly expansion for us. So we do believe that some of that we’ll be able to scale up, we’ll be able to expand our geographic presence. And similarly and based on their agency model, we’ll be able to expand it to other parts of the country.

Abhishek Saraf — Jefferies — Analyst

Sure. Thanks for that. So I think, I mean, did we do any branch rationalization in the last three months as that happened?

Srinivasan Parthasarathy — Chief Actuary

No. As of now we have done is we have just looked at the value [Technical Issue] like we clearly mentioned that it is going to run as a separate entity subsidiary till we receive the NCLT approvals. As of now, we are just looking our back end exercise in terms of what we can do. There are few branches which you have understood, but we have not done any rationalization as of now. But we do believe, we understand which are the markets that we are able to cater to. And our objective, like has been clearly mentioned, is to make sure that we continue to get the upside from the Exide merger over the short to mid-term and then look at how synergistically we can grow as a merged entity.

Operator

Thank you, Mr. Saraf. May we request that you return to the question queue for follow-up questions. The next question is from the line of Nidhesh Jain from Investec. Please go ahead.

Nidhesh Jain — Investec India — Analyst

Thanks for the opportunity. Sir, two question, first on the retail protection. Are we sensing any change in stance from the reinsurers as of now? Are they becoming more open to doing business the way they were doing pre-COVID or still they remain as strict as what we have seen last year?

Vibha Padalkar — Managing Director & Chief Executive Officer

Sorry, Nidhesh, it’s I think a little bit too early. My personal sense is, down the line, I don’t know what timeframe, I think depending on Wave 4 and so on. Till that is out of the way, I think there will be some level of concern in their minds. I don’t see that happening immediately now. But over a period of time, yes, the high alert situation that we have been in, that should ease off a little bit, but it’s still some way away.

Nidhesh Jain — Investec India — Analyst

Sure. So what was the conversion rate before COVID — the 50% conversion rate that we have today, what was that before COVID?

Vibha Padalkar — Managing Director & Chief Executive Officer

We used to convert maybe around out of 100 — convert at least 75.

Nidhesh Jain — Investec India — Analyst

Sure. Lastly on non-par product. In a rising rate environment, so in last three years interest rates have been declining and demand for non-par product was very, very strong. Probably, the alternative savings instruments have seen significant decline in the yields that they were offering. But in a rising interest environment, how do we see demand for the non-par product? And since we are hedging the bulk of the non-par internally, does it disadvantage us in any way such as FRA hedging where our peers may be able to offer better IRRs than us? These are the two questions on non-par.

Niraj Shah — Chief Financial Officer

So Nidhesh, as far as demand is concerned, we’ve seen interest rates only increase in this year, right, both at the shorter end as well as the longer end. While that has happened, the business demand continues. Even as we speak, the demand far exceeds what we are writing as a company as far as this product line is concerned. So the key really is not absolute rates, it’s a relative proposition to what other instruments are available. And I mean, if you were to compare it to shorter term instrument, typically, the returns on that are very, very different from what we are able to offer because the last part of the product is in the — at the longer end. Even in Sanchay Fixed Maturity Plan, the term is 10 years. So that is very different from a typical short-term fixed income instruments that people buy. So relative to what is available in the market, it continues to be attractive, whichever way they’re interested. That is one. And second, also the tax advantage on top of that is something that definitely is helpful.

As far as hedging is concerned, we are fairly — we monitor this fairly closely and it is fairly dynamic. We are fortunate to have this internal capacity which we use depending on how the external environment is as well. We don’t want to be overly dependent on any one instrument whether it’s an external or internal capacity. So that’s the reason why it’s a multi-pronged hedging strategy at the back end.

As far as FRAs are concerned and relative disadvantage to anybody else, I don’t believe so, because so far there is only a yield pickup that we get on account of forward rate agreements because of the way the term structure is in terms of the interest rates. If that changes, that will again be clearly applicable to everybody. So it’s not that the terms that we get are any different from anyone else. And if there is any advantage to be had out of writing more or hedging more through FRAs, we would take that call without being excessively dependent on that category.

Nidhesh Jain — Investec India — Analyst

Sure, understood. Thank you.

Operator

Thank you. The next question is from the line of Mayank Gulgulia from SUD Life. Please go ahead.

Mayank Gulgulia — Star Union Dai-ichi Life Insurance Company — Analyst

Yeah, hi. I have question related to sensitivity analysis.

Vibha Padalkar — Managing Director & Chief Executive Officer

Sorry, can’t hear you very well.

Mayank Gulgulia — Star Union Dai-ichi Life Insurance Company — Analyst

Is it better now?

Vibha Padalkar — Managing Director & Chief Executive Officer

Yeah, it is.

Mayank Gulgulia — Star Union Dai-ichi Life Insurance Company — Analyst

Okay. So I have question related to sensitivity analysis, so basically impact of equity market return on EV. So equity market downward movement of 10% would have 1.4% negative impact on EV. So this 10% is overall return on equity or this 10% is over and above like we might have assumed some return from equity, so it is over and above that?

Niraj Shah — Chief Financial Officer

It’s basically — it’s a difference between what is expected and what is actually — so for example, if you take any of the sensitivities, you have a base, which is the expectation. So in persistency, mortality or equity earn, you’ll have a base. Anything over and above that is what is captured in the sensitivity. So if your expected return is say 10% and the 10% delta from that means 11% or 9% return and the impact of that is what is captured in the sensitivities.

Mayank Gulgulia — Star Union Dai-ichi Life Insurance Company — Analyst

Okay. So it is 10 percentage of return expected. So now 10% plus or minus 10%. This is 10% of 10%?

Vibha Padalkar — Managing Director & Chief Executive Officer

You want to take that [Indecipherable]

Unidentified Speaker —

Yeah. Just to clarify, the equity sensitivity implies at the equity values fall on the date of the catalyst of the EV. If the equity values fall by 10%, what would be the impact on EV, what is captured in the sensitivity.

Mayank Gulgulia — Star Union Dai-ichi Life Insurance Company — Analyst

Okay. Let’s say, like just to clarify further, the assumption is 10%. So if equity market rise by 15% next year, so can you say like 5% extra is on delta of 1.4% we can divide it by 2 and broadly ballpark number 0.7% positive impact on EV? Is that the right way to look at?

Srinivasan Parthasarathy — Chief Actuary

So this is instantaneous resolved. So whatever the evaluation take or whatever the assets were, if they were to fall instantaneously by 10% on that very date, [Indecipherable]

Mayank Gulgulia — Star Union Dai-ichi Life Insurance Company — Analyst

Okay. Got it. And the next question is what is the impact of like a lower reinsurance on our protection business? What kind of margin impact is there on retail protection?

Niraj Shah — Chief Financial Officer

Sorry, I didn’t follow your question clearly.

Mayank Gulgulia — Star Union Dai-ichi Life Insurance Company — Analyst

Yeah. Like of lower reinsurance on retail protection, so how it is impacting our margins on a standalone retail protection business?

Niraj Shah — Chief Financial Officer

There is no impact really. As you know, reinsurance cost is basically one of the components of the overall cost and service charges. And we would — if we retain on our books, we will obviously need to capture that is charged ourselves in addition to everything else, and at the same would hold for the reinsurers. And there isn’t much of a gap between what the reinsurers are charging today versus what our assessment of the risk charge would be. That would have been — the delta between that would have been higher before the reinsurers increase their prices.

Vibha Padalkar — Managing Director & Chief Executive Officer

And we also increased it, thereby nullifying some of the impact.

Niraj Shah — Chief Financial Officer

Yeah.

Mayank Gulgulia — Star Union Dai-ichi Life Insurance Company — Analyst

Okay. Got it. Thank you. Thanks a lot.

Vibha Padalkar — Managing Director & Chief Executive Officer

Thank you.

Operator

Thank you. The next question is from the line of Rishi Jhunjhunwala from IIFL. Please go ahead.

Rishi Jhunjhunwala — IIFL — Analyst

Yeah. Thanks for the opportunity. Just quickly on the agency [Indecipherable] so with Exide Life getting integrated, can you give some sense in terms of what are our target in terms of total agency churn that we want to maintain? What kind of increase we are looking at? And also, just a sense in terms of what are — what is the proportion of active agents and what kind of retention rates are we looking ourselves throughout the integration?

Srinivasan Parthasarathy — Chief Actuary

Sorry, I couldn’t catch your second question. I’ll ask you to repeat it. But on your first question in terms of the agency business and what kind of growth we are looking at Exide Life, very clearly they have had update on growth. It just has been a little different earlier, had a fairly decent growth in line and slightly higher than the industry. We do believe that given the brand that they will now benefit of HDFC Life along with the product as well as our ability to invest in branches, infrastructure and many other resources which will be available, we should be able to get a much higher throughput in terms of actually recruiting financial consultants in terms of activating more consultants as well as [Indecipherable] in that exercise of kind of products that will to sell through HDFC Life.

In our initial interaction with a lot of the financial consultants and advisors at Exide Life, we have found that they are eagerly looking forward to the kind of products as HDFC Life [Indecipherable]. So we are highly optimistic in terms of growth that they will be able to continue in terms of what we have been able to. They have a very strong franchise. They have a fair amount of [Indecipherable] who have been there for them for a fairly long period of time. We do believe that if our agency business were to grow at a certain pace, the combined entity of the agency business or what Exide financial consultants comes it, should be able to do that and maybe a little bit higher. So that should not be really problem.

There is actually if you ask me, does the synergy that we see only in the agency business, I think we are enthusiastic about the growth in all the channels of Exide Life. We do believe that the Cooperative Bank as well as some of the broking relationships that they have got are fairly incremental and complementary to our business growth. So we do believe that we should be able to grow that. Also a fairly large customer base on which they have cross-sell and upsell on their direct business.

We believe that we will be able to with our analytic skills, with our FMPs along with what they bring in terms of their campaigns, it will be incremental for us to be able to grow that line of business also. So actually across the direct business, broking business, bancassurance, those much smaller than us on bancassurance and on the agency business. We shouldn’t see any slowdown and which is one of the primary reasons why we said we will work — we’ll look at Exide in terms of the company which will come in and are complementary to us.

Sorry, on the second question, the sound was not very clear. So I couldn’t…

Rishi Jhunjhunwala — IIFL — Analyst

Yeah. I’ll repeat sir. Thank you. So basically the question was, how many active agents they already had? And kind of retention rates that we see?

Srinivasan Parthasarathy — Chief Actuary

At Exide Life? So they have around 40,000 FCUs which are there right now. And which is something that — and they have a fairly active businesses there. So we do believe that we will be able to go — actually further activate. Their activated is in line with actually the industry activation. So it is not that they’re off in terms of the number of agents which are active. We haven’t lost any major. In fact, if you have looked at their quarter four numbers, they have been absolutely on target in terms of what the agency team has been delivering. So even there, we believe that if we are able to look at the number of new financial consultants and agents that they will be able to recruit, that will be in line. And in fact, they have been constrained on their growth because of their capital and many other sectors that they’ve not been able to invest in that business. I think a lot of those hindrances will go away once they become part of the HDFC Group.

Rishi Jhunjhunwala — IIFL — Analyst

All right. Thank you.

Srinivasan Parthasarathy — Chief Actuary

And they have actually shown almost 22% growth last year, if you were to look at them at overall as Exide.

Rishi Jhunjhunwala — IIFL — Analyst

Thank you.

Operator

Thank you. Ladies and gentlemen, we will take last two questions. The next question is from the line of Roshan Chutkey from ICICI Prudential Mutual Fund. Please go ahead.

Roshan Chutkey — ICICI Prudential Mutual Fund — Analyst

Thanks. My questions have been answered.

Operator

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

Sanketh Godha — Spark Capital Advisors Private Limited — Analyst

Sorry, last one from my side. Just wanted to understand our FRA exposure, which was INR137 at the end of FY ’21. What is the current exposure we have at the end of FY ’22? And given the current solvency calculation regime, if yield curve becomes steeper — sorry, fatter, compared to what it was then most of the derivative contracts might go out of money, notional loss. So likely impact of it on it on the solvency if it plays out?

Niraj Shah — Chief Financial Officer

Yeah. The FRA exposure is close to about 18,000, 19,000 I think it will be there in the annual report in any case. But to your second point in terms of the impact of the flattening curve, there are two things here. One is, as of now, the whole flattening thing is something which is a little maybe overplayed. I think if you look at the way the interest rates have moved, they’ve not moved only at the shorter end, they’ve moved longer end as well. So the curve continues to be fairly steep even today.

Having said that, if there is further flattening that happens, what will happen to start with is that the spreads that are there currently available will probably shrink further as they have since the inception of FRAs. And when the yield curve starts getting inverted, that’s when you’re talking about the situation that you just spoke about. Now if that were to happen, we would do a couple of things. One, as of now, at any point in time if you have a fairly significant equity portfolio, there are equity FEC gains that are sitting in our books for which you don’t take solvency credit because of the regulations. A lot of that is used to actually offset any sort of impact of interest rates movement in the wrong direction from an FRA perspective.

So that usually covers for most scenarios as far as impact on solvency is concerned. And beyond FRAs, I mean, we kept reiterating, we don’t want to be only dependent on forwarded agreements either given you know our risk management strategy. So that is also something that allows us to mitigate the impact of any of these situations that could happen. Over a period of time, we are expecting more liberalization in the regulatory framework, both in terms of the way solvency is calculated, which currently penalizes you for being economically hedged. But on the accounting side, you end up creating that solvency impact. Over time, we expect that to kind of go away with RBC coming in for sure. And also in terms of if you’re allowed to borrow directly, then you get rid of this problem altogether. So if you take a two to three year view than a lot of these developments will happen, which will actually help us tide over of any these situations that we’re talking about.

Sanketh Godha — Spark Capital Advisors Private Limited — Analyst

Got it. Sir, equivalent RBC solvency for 176 currently calculated would be how much? If you have internally done that math.

Niraj Shah — Chief Financial Officer

So we have, Sanketh. It will be fairly significant I mean not really sharing numbers, but I mean, yeah, it will be fairly significant, Sanketh.

Sanketh Godha — Spark Capital Advisors Private Limited — Analyst

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

Operator

Thank you. The next question is from the line of Anand Bhavnani from White Oak Capital. Please go ahead.

Anand Bhavnani — White Oak Capital — Analyst

Thank you for the opportunity. Just a quick clarification on Exide Life. You made a comment that due to the solvency [Indecipherable] had some growth constraints. In the PPT there, I’ve seen that the solvency is 217 which is higher than us. So why would that be a reason for any growth challenges in Exide?

Srinivasan Parthasarathy — Chief Actuary

Yeah. I think, look, the constraints on their end have been more in terms of the expense of management, because of which, they — which goes away once they come in with us. So once we merged with us in terms of their ability to be able to invest further in agency on growth that is where they have been struggling. So I think that is one part, which we’ll be able to solve with this merger and their agency business that we able to grow and not on solvency.

Anand Bhavnani — White Oak Capital — Analyst

Okay, okay. And sir out of solvency, our current preferred route of Tier 2 raising debt, which helped by 6%. Do we anticipate that to be the primary source rather than any equity raise?

Vibha Padalkar — Managing Director & Chief Executive Officer

No, it’s a combination of both. Like I mentioned in my earlier comments, it will be both. Right now we are raising Tier 2. But over a period of time, we’ll assess the need for capital and we will — it is always possible that we might be raise a small amount of equity [indecipherable] at point in time.

Anand Bhavnani — White Oak Capital — Analyst

Okay. Any particular variable to kind of use to decide which tool to you use, which method to use for addressing solvency?

Vibha Padalkar — Managing Director & Chief Executive Officer

See, with solvency, there is an overall cap based on regulatory formula. So what we’re doing right now, we raised 600 earlier, we are raising further now. As our backbook increases, we will be able to raise more. We will look at overall the weighted average cost of capital to see what works for us. And then the WACC as well as how much to we need, how soon do we need. So few factors likely take a call down the line.

Anand Bhavnani — White Oak Capital — Analyst

Thank you, and all the best.

Vibha Padalkar — Managing Director & Chief Executive Officer

Thank you.

Operator

Thank you. As there are no further questions, I would now like to hand the conference over to Ms. Vibha Padalkar for closing comments.

Vibha Padalkar — Managing Director & Chief Executive Officer

Thank you, Faizan. We would like to thank all of you for participating in our results call. Further details can be found in our investor presentation on both our book as well as that of the exchanges. Thank you, and have a good day.

Operator

[Operator Closing Remarks]