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This is the sole and exclusive property of HDFC Life
HDFC Standard Life Insurance Company Limited
Quarter ending June 2015
HDFC Life’s Strategy and Performance Snapshot Financial Overview Awards and Accolades
Agenda
A
Agile multi-distribution
platform
Innovation in product selling and grow niches
Economies of Scale
Digital Leadership
Core strategic elements – ready for the next cycle
3
3
Long term orientation
1
Owning customer segments
2
Fortify and diversify distribution
3
Achieve cost leadership
4
Unique customer experience
5
Tech
no
log
y e
nab
lem
en
t
Skill development & retention
Ris
k m
itig
ati
on
& m
an
ag
em
en
t
Customer experience
Delivering Value
Way ahead
Key enablers
Strategy
31.1 23.6
29.3
68.9 80.2
93.4
11.4 14.8
21.8
1.8
2.0
3.8
FY13 FY14 FY15
120.6 113.2
148.3
11%
-13%
9%
20%
16%
7%
10%
17%
30%
-24%
23%
93%
16%
47%
24%
4.5 4.8
16.1 17.0
3.0
5.2 0.6
0.9
Q1 FY15 Q1 FY16
24.2
28.0
26%
152%
20%
23%
43%
15%
43%
6%
73%
7%
Revenue trends
4
Healthy trajectory across all premium categories vs last year
Group premium continues to grow robustly with enhanced focus on protection portfolio
First Year Regular Premium (Individual)
Total Premium Single Premium (Individual)
Renewal Premium (Individual)
Group Premium
` Bn Orientation 1 12M Performance Q1 Performance
14.3%
15.3%
Q1 FY15 Q1 FY16
New Business Received Premium
15.6%14.8%
Q1 FY15 Q1 FY16
Individual WRP
12.6%
15.6%
Q1 FY15 Q1 FY16
Group Received Premium
14.4%
13.7%
15.8%
FY13 FY14 FY15
New Business Received Premium
Consistently ranked amongst the top 3 private players
Market ranking
5 Source: Life Insurance Council
Rank
Rank
Rank
Orientation 1
2
3 3
1
2
2
10.9%
14.4%
17.8%
FY13 FY14 FY15
Group Received Premium
17.5%
13.8% 14.8%
FY13 FY14 FY15
Individual WRP
2 3
4 3 1
3 2
2
3
12M Performance Q1 Performance
79%
97%
83%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Q1 FY14 Q1 FY15 Q1 FY16
79% 79%90%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
FY13 FY14 FY15
Conservation ratio
6
Industry leading conservation ratio2 through a raft of customer retention initiatives
Collection efforts complemented by effective technology usage
86% of service transactions through online mode
54% of renewal payments received through online and direct debit modes
Initiatives launched in FY14 for revival of lapsed and paid-up customers, led to a spike in FY15
conservation ratio - current sustainable levels reflect the strong renewal base
Notes: 1. Conservation ratio are for individual business 2. Based on FY15 numbers
Orientation 1 12M Performance Q1 Performance
1
70%
88%82%
89%
64%74%
89% 91% 94%
67%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
13th month 25th month 37th month 49th month 61st month
Jun-14 Jun-15
Persistency ratio
7
Improving persistency trends seen across cohorts
Quality measures introduced at customer on-boarding phase in FY15 starting to yield benefits in
13th month persistency
Note: Persistency ratios are calculated with a 1 month lag for the period of Jun-May for respective years based on individual business
Orientation 1
Basis Original premium
70% 74% 69% 65% 66% 65% 55% 66% 23% 37%
24.2
28.0
15.1 15.7
1.8 3.3
7.3 9.0
(25.0)
(20.0)
(15.0)
(10.0)
(5.0)
-
5.0
10.0
15.0
-
5.0
10.0
15.0
20.0
25.0
30.0
35.0
40.0
45.0
50.0
Q1 FY15 Q1 FY16
113.2 120.6
148.3
35.7 40.6
70.0
3.6 6.4 12.6
74.0 73.6 65.8
(100.0)
(80.0)
(60.0)
(40.0)
(20.0)
-
20.0
40.0
60.0
80.0
100.0
-
50.0
100.0
150.0
200.0
FY13 FY14 FY15
Total Premium Surrenders & Withdrawals
Claims by Death, Maturity & Others Net Cash flow
Premium less benefit payouts
8
Notes: 1. Gross of reinsurance 2. Based on FY15 results
Highest Premium less Benefit Payouts amongst the private players2
Claims saw a rising trend in line with the expectations, primarily due to increased number of
polices attaining maturity
17.7 19.3
24.2
5.2
9.3
15.1
0.6 1.1 1.8
11.9
8.9 7.3
(10.0)
(5.0)
-
5.0
10.0
-
5.0
10.0
15.0
20.0
25.0
30.0
35.0
40.0
Q1 FY13 Q1 FY14 Q1 FY15
Total Premium Surrenders & Withdrawals Claims by Death, Maturity & Others Premium less policyholder payouts
` Bn Orientation 1
1
12M Performance Q1 Performance
1
Product portfolio
9
Offering for every customer need… Recognised by experts
Children
Women
Protection
Health
Retirement &
pension
Savings &
investment
Segments 2
Golden Peacock Innovative Product/Service Award – 2015
Click 2 Invest
Indian Insurance Awards 2014- Best Product Innovation
Super Income Plan
Product of the Year 2013 under Life Insurance category
Smart Woman Plan
Winners of the Indian Insurance award for Best Product Innovation 2012
Sampoorn Samriddhi
Awarded at Indian Insurance Award 2012
Sampoorn Samriddhi
Winner at Indian Insurance Awards 2011
Crest
Consistently awarded ‘Best Product of the Year’ over last five years
Comprehensive product suite catering across life-cycle
Thank You
Employment
benefit solutions
48%
66%
30%
17%
22%17%
Q1 FY15 Q1 FY16
Unit Linked Participating
61%49%
62%
37%
36%21%
2%15% 17%
FY13 FY14 FY15
Unit Linked Participating Non Participating
Product mix
10
Continue to refine the product strategy to balance customer needs and channel profitability
‘Cancer Care’, a unique health product enabling customers to fight against cancer launched in
the quarter - witnessed great response with 29,668 policies sold since May 2015
Continue to market niche and innovative products such as ‘Click2’ series, including
Click2Protect Plus and Click2Invest
Note: The percentages are with reference to APE for individual business
61%49%
62%
37%
36%21%
2%15% 17%
FY13 FY14 FY15
Unit Linked Participating Non Participating
Segments 2
12M Performance Q1 Performance
675
993
1300
280
190
212
0
200
400
600
800
1000
1200
1400
1600
1800
2000
FY13 FY14 FY15
Pure Protection Others
1,183
955
1,513
New business sum assured
New business sum assured continues to grow with increased focus on protection segment
Increased mix of pension products resulted in reduction of new business sum assured for
Others
` Bn
Segments 2
11
12M Performance Q1 Performance
675
993
1300
280
190
212
0
200
400
600
800
1000
1200
1400
1600
1800
2000
FY13 FY14 FY15
Pure Protection Others
1,183
955
1,513
274
364
32
39
0
100
200
300
400
500
600
Q1 FY15 Q1 FY16
Pure Protection Others
306
404
Note: The above numbers are based on Individual and Group business
52
34
31
49
38
39
53
Non-par Pension
Non-par protection
Non-par savings
Par Pension
Par Savings
UL Life
UL Pension
11
32
16
14
14
13
12
Non-par Pension
Non-par protection
Non-par savings
Par Pension
Par Savings
UL Life
UL Pension
Segment wise average term and age
Average Policy Term (Yrs) Average Customer Age (Yrs)
Orientation towards long term insurance solutions reflected in higher policy term
Protection and Saving contracts have a younger customer profile and offer long term
opportunities to cross-sell and up-sell across customer life-cycle
Note: The segment wise average term and age of the individual new business policies sold in Q1 FY16
Segments 2
12
15.9 (Q1 FY15: 14.7) 38.1 (Q1 FY15: 37.7) Overall
16% 14%
6%4%
70%72%
8% 10%
Q1 FY15 Q1 FY16
Agency Broker Bancassurance Direct
16% 16% 14%
7% 7%5%
72% 70% 73%
5% 7% 8%
FY13 FY14 FY15
Agency Broker Bancassurance Direct
16% 16% 14%
7% 7%5%
72% 70% 73%
5% 7% 8%
FY13 FY14 FY15
Agency Broker Bancassurance Direct
Distribution mix
13
All India presence through 414 HDFC Life offices and 8,300+ partner branches
Continue to nurture relationships across various banks, NBFCs2 and MFIs2
Maintained leadership in Online segment, with 4% contribution to new business (Q1 FY15: 2%)
Distinctive program in association with Manipal Global Education, to train and create a
professional entry level specialised sales force
Notes: 1. The percentages are with reference to APE for individual business 2. NBFC - Non-Banking Financial Corporation, MFI - Micro-finance Institutions
Distribution 3
12M Performance Q1 Performance
1
11.7 12.2 12.9
11.5% 10.8% 10.7%
-50.0%
-40.0%
-30.0%
-20.0%
-10.0%
0.0%
10.0%
20.0%
30.0%
-
2.0
4.0
6.0
8.0
10.0
12.0
14.0
16.0
18.0
20.0
FY12 FY13 FY14
Operating Expenses Operating Expense/Total premium Ratio
2.8 3.2
11.7% 11.6%
-50.0%
-40.0%
-30.0%
-20.0%
-10.0%
0.0%
10.0%
20.0%
30.0%
-
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
5.0
Q1 FY15 Q1 FY16
12.2 12.9 15.1
10.8% 10.7% 10.2%
-50.0%
-40.0%
-30.0%
-20.0%
-10.0%
0.0%
10.0%
20.0%
30.0%
-
5.0
10.0
15.0
20.0
FY13 FY14 FY15
Cost trends
14 Note: Commission ratio is calculated as a factor of Total Commission paid and Total premium
Maintained healthy Opex / Total Premium Ratio, despite increased investments in distribution
channels, training, technology and product innovation
Commission ratio movement reflecting change in product mix (Higher UL products sold in Q1 FY16)
` Bn
Cost 4
12M Performance Q1 Performance
Commission ratio
5.7% 4.3% 4.2% 4.2% 3.4%
Customer touch points
15
96% death claims settled within 10 working days (excluding investigative cases)
Tied up with Common Service Centres to utilise their network to expand reach to rural areas
Use of technology to improve service efficiency and enhance overall customer experience
1st private life insurer to have a responsive website, launched a comprehensive online app.
Large bouquet of products available online
Leading presence across social media and digital platforms
81% of new business applications initiated using Point of Sale (POS) platform
HDFC Life branch network
414 own branches and over 8,300 partner branches
New business Call Centre
Pre-conversion calling at new business stage
Mobility
SMS on the move with policy details, branch details, etc.
Customer portal (My account)
Online portal providing fund value, renewal premium receipt, etc.
Email interaction
Dedicated agents to handle email requests
Service call centre
Dedicated agents to handle customer calls
Customer touch points
Customer 5
HDFC Life’s Strategy and Performance Snapshot Financial Overview Awards and Accolades
Agenda
B
55% 54% 52%
45% 46% 48%
31st Mar 2013 31st Mar 2014 31st Mar 2015
Debt Equity
405
506
670
25% 25%33%
-120%
-100%
-80%
-60%
-40%
-20%
0%
20%
40%
150
250
350
450
550
650
750
31st Mar 2013 31st Mar 2014 31st Mar 2015
AUM in Rs bn Growth in AUM vs LY
569 680
37%
20%
-120%
-100%
-80%
-60%
-40%
-20%
0%
20%
40%
150
250
350
450
550
650
750
30th Jun 2014 30th Jun 2015
AUM in Rs bn
55% 54% 52%
45% 46% 48%
31st Mar 2013 31st Mar 2014 31st Mar 2015
Debt Equity
405
506
670
25% 25%33%
-120%
-100%
-80%
-60%
-40%
-20%
0%
20%
40%
150
250
350
450
550
650
750
31st Mar 2013 31st Mar 2014 31st Mar 2015
AUM in Rs bn Growth in AUM vs LY
55% 54% 52%
45% 46% 48%
31st Mar 2013 31st Mar 2014 31st Mar 2015
Debt Equity
Assets under management
17
Continue to rank amongst top 3 private players
Note: Ranking based on Assets under Management as on March 31, 2015
405
506
670
25% 25%33%
-120%
-100%
-80%
-60%
-40%
-20%
0%
20%
40%
150
250
350
450
550
650
750
31st Mar 2013 31st Mar 2014 31st Mar 2015
AUM in Rs bn Growth in AUM vs LY
12M Performance Q1 Performance
51% 54%
49% 46%
30th Jun 2014 30th Jun 2015
Debt Equity
11.6 14.8
5.8
7.4 4.9
8.6
192%
208%
50%
70%
90%
110%
130%
150%
170%
190%
210%
230%
-
5.0
10.0
15.0
20.0
25.0
30.0
35.0
40.0
45.0
June 30th 2014 June 30th 2015
RSM @100%
Incremental RSM @150%
Surplus Capital
22.2
30.7
8.2 10.8
14.3
4.1
5.4
7.1
5.5
4.7
6.6
217%
194% 196%
50%
70%
90%
110%
130%
150%
170%
190%
210%
230%
-
5.0
10.0
15.0
20.0
25.0
30.0
35.0
40.0
45.0
31st Mar 2013 31st Mar 2014 31st Mar 2015
RSM @100% Incremental RSM @150%
Surplus Capital Solvency margin
17.7
20.9
28.0
Capital position
18
Stable solvency ratio, despite consistent growth in underlying business
208% vs regulatory requirement of 150% as on 30th June 2015
No fresh capital infusion since FY12
Note: RSM represents Required solvency margin
` Bn 12M Performance Q1 Performance
11.6 14.8
5.8
7.4 4.9
8.6
192%
208%
50%
70%
90%
110%
130%
150%
170%
190%
210%
230%
-
5.0
10.0
15.0
20.0
25.0
30.0
35.0
40.0
45.0
June 30th 2014 June 30th 2015
RSM @100% Incremental RSM @150% Surplus Capital Solvency margin
22.2
30.7
Available Solvency Margin (ASM)
2.5 1.9
0.4
0.4
-
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
5.0
Q1 FY15 Q1 FY16
Underwriting profits
2.8 2.3
3.9
5.5 6.2
0.6
1.8
1.6
-
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
9.0
10.0
FY13 FY14 FY15
Underwriting profits Shareholders' income
4.5
7.3 7.9
3.9
5.5 6.2
0.6
1.8
1.6
(0.5)
1.5
3.5
5.5
7.5
9.5
FY13 FY14 FY15
Underwriting profits Shareholders' income
4.5
7.3 7.9
Profitability trends
19
Continue to deliver long term stable ROE along with increasing RoIC
Accumulated profits of ` 6.1 Bn as on 30th June 2015
Notes: 1. Return on equity calculated as a factor of profit after tax and average net worth (Net worth comprises of Share capital, Share premium and Accumulated profits/(losses)) is annualised for the quarter 2. Return on invested capital calculated as a factor of profit after tax and share capital including share premium is annualised for the quarter 3. The shareholders’ income for FY14 includes surplus of ` 0.8 Bn due to one time tax adjustment
` Bn
RoE1 41.4% 44.7% 35.1% 59.2% 36.7%
RoIC2 20.9% 33.6% 36.4% 52.0% 42.2%
12M Performance Q1 Performance
3
-1.5 -2.0
3.8 3.8
0.2 0.0
-5.6
-3.6
-1.6
0.4
2.4
4.4
6.4
8.4
Q1 FY15 Q1 FY16
New Business Strain
Existing Business Surplus
2.51.9
Underwriting profits breakup
Lower profits in Q1 FY16 due to increase in new business strain in line with growth and
shift in product mix
` Bn
-5.9 -5.8
-9.6
9.5 9.1
15.5
0.32.2
0.4
-10.0
-5.0
0.0
5.0
10.0
15.0
FY13 FY14 FY15
New Business Strain Existing Business Surplus UL FFA
5.53.9
6.2
20
12M Performance Q1 Performance
-5.9 -5.8
-9.6
9.5 9.1
15.5
0.32.2
0.4
-10.0
-5.0
0.0
5.0
10.0
15.0
FY13 FY14 FY15
New Business Strain Existing Business Surplus UL FFA
5.53.9
6.2
32.8
25.4 29.5
17.8%
26.2%
22.5%
13.2%16.1%
17.5%
-25.0%
-15.0%
-5.0%
5.0%
15.0%
25.0%
-
10.0
20.0
30.0
40.0
50.0
FY13 FY14 FY15
New business APE NBM (pre overrun) NBM (post overrun)
Individual new business margins
21
Improvement in individual pre overrun margin aided by higher share of protection business
Entity level (Individual + Group) pre-overrun margins at 24.3% for Q1 FY16
Note: New business profits are computed on MCEV basis
32.8
25.4 29.5
17.8%
26.2%
22.5%
13.2%16.1%
17.5%
-25.0%
-15.0%
-5.0%
5.0%
15.0%
25.0%
-
10.0
20.0
30.0
40.0
50.0
FY13 FY14 FY15
New business APE NBM (pre overrun) NBM (post overrun)
` Bn
4.5 5.0
22.1% 22.9%
-10.0%
-5.0%
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
-
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
9.0
10.0
Q1 FY15 Q1 FY16
New business APE NBM (pre overrun)
12M Performance Q1 Performance
Performance summary
22
Notes: 1. Based on Individual Weighted Received Premium amongst private sector 2. For individual business 3. On individual new business 4. Basis APE 5. Calculated as annualised profit after tax and share capital including share premium 6. As on 31st March 2014 and 31st March 2015
Orie
nta
tio
n Total premium (` Bn)
Market share / Rank 1
Conservation ratio2
Premium less Benefit Payouts (` Bn)
24.2
15.6% / 2
97%
7.3
28.0
14.8% / 2
83%
9.0
Q1 FY15 Q1 FY16
Seg
men
ts
Linked : Traditional mix4
Protection mix4
Avg. policy term (years)3
Avg. sum assured (Million)3
48:52
6%
14.7
1.4
66:34
8%
15.9
1.5
Q1 FY15 Q1 FY16
Dis
trib
uti
on
# of branches
# of agents (‘000)
# of employees
Online business (%)
428
79
13,982
2%
414
94
14,537
4%
Profit after tax (` Bn)
RoIC5
2.8
52.0%
2.3
42.2%
Individual NBM on loaded expenses
MCEV (` Bn)6
22.1%
69.9
22.9%
88.1
Cu
sto
mer
Renewal premium by Online / Direct debit
Other complaints (Per 10,000 NOP)3
Sales related complaints (Per 10,000 NOP)3
43%
187
668
54%
36
195
NB policies via POS 81% 81%
AUM (` Bn) 569 680 Individual NBAP on loaded expenses (` Bn)
1.0 1.1
Building blocks of future
Digital leadership
Innovation in product selling
and grow niches
Economies of Scale
Agile multi-distribution
platform
Build a self-sustainable e-commerce platform with holistic sales and service capabilities
Grow the digital insurance category and establish leadership
Sales process improvisation to drive need-based selling
Grow niches while ensuring a well diversified product portfolio
Achieve economies of scale
Increase operational efficiency
Profitability and cost leaderships
Grow, fortify and diversify distribution mix
Be a platform of choice for distribution partners across categories
23
Online segment grew by 177%2
Launch of consumer mobile app for various services including to locate nearest branches, track NAVs and claims login
Products Launched - Cancer Care, Uday and Sampoorn Nivesh
Cancer care sales enabled via Mobile POS
Continued thrust on lowering expense ratios & improving margins
New business workflow 'LifeLine' successfully implemented; driving straight through processing
Grew by 12% and 73% in individual and group segments respectively1
Tied up with over 15 partners in last 18 months – four new arrangements during the quarter
Performance Update
Notes: 1. Based on total new business premium in respective categories 2. Based on APE
HDFC Life’s Strategy and Performance Snapshot Financial Overview Awards and Accolades
Agenda
C
HDFC Life won the prestigious Golden Peacock Award 2015 for the
most Innovative Product for Click2Invest
HDFC Life won the CIO 100 Award 2015 for the sales
enabler software application MyMix
HDFC Life won the silver Indian Digital Media Awards (IDMA) 2015 award for the "Best PPC
campaign - Performance Marketing“.
HDFC Life won in 5 categories at the Indian Insurance
Awards 2015 - Life Insurance Company of the Year, Agency
Efficiency (LI), Marketing Initiative (LI), E-business
Leader (LI) and Innovative Social Media Campaign (LI)
38th in ‘Top 100 Best Places to Work for’ 2015. Ranked
No. 1 in the Insurance industry sector
Awards and accolades
Actuarial Update, Appendix & Glossary
4.09
5.86
0.65
1.16 -0.04
FY14 VNB Impact of Higher
EPI
Change in
Product Mix
Change in
Assumptions
FY15 VNB
Value of new business (VNB) walkthrough – FY15
VNB increased due to growth in new business and higher non-participating business
` Bn
NBM - 3.4% -0.1% 18.5% 15.2%
Note: The above numbers are based on Overall (individual + Group) business 27
Market consistent embedded value (MCEV) – FY15
TVFOG includes cost of guarantees for conventional non participating and participating
products
Notes:
1. The above is based on unaudited figures 2. PVFP pertains to Overall (Individual + Group) business 3. PVFP – Present Value of Future Profits; TVFOG - Time Value of Financial Options and Guarantees; FC – Frictional Cost; CNHR –
Cost of Non Hedgeable Risk; VIF – Value of InForce business 4. Detailed explanation of components provided in the Appendix to the corporate presentation
` Bn
-
10
20
30
40
50
60
70
80
90
PVFP TVFOG FC CNHR VIF Networth EV
VIF
65.160.2
88.1
-1.3 -0.4-3.2
27.9
28
49.8
3.5 7.4
-1.56.1
-0.3 4.6
-1.7
60.2
MCEV at 31st Mar 14
Methodology and assumption changes
New business profits (before expense over-run)*
Acquisition expense overrun
Expected return on inforce
Operating Variances
Investment variances and change in economic assumptions
MCEV at 31st Mar 15
Dividendpayout
20.127.9
88.1
69.9
Analysis of change in MCEV – FY15
29
15.2
Embedded value operating profit (EVOP)
22% of Opening MCEV (FY14: 19%)
18.2
EV profit
26% growth in MCEV over last year
Investment variance reflects buoyant performance of equity markets in FY15
Shareholder’s Adjusted Networth Value of in-force business
` Bn
Note: 1. New business profits pertain to Overall (Individual + Group) business 2. The above is based on unaudited figures
1
Sensitivity analysis – FY15
Scenario VNB % Change
in VNB % Change
in NBM EV
% Change in EV
Change in Base 5.92 18.5% 88.1
Interest rate Increase by 1% 6.4 8% 1.5% 87.5 (0.6%)
Decrease by 1%3 5.8 (0.8%) (0.2%) 88.8 0.9%
Equity values Increase by 10% 5.9 negligible negligible 89.6 1.7%
Decrease by 10% 5.9 negligible negligible 86.5 -1.7%
Persistency Increase by 10% 6.4 8% 1.5% 90.1 2.3%
Decrease by 10% 5.4 (8%) (1.4%) 86.1 (2.2%)
Maintenance expenses
Increase by 10% 5.6 (5%) (0.9%) 87.2 (1.0%)
Decrease by 10% 6.2 5% 0.9% 88.9 1.0%
Mortality Increase by 10% 5.6 (5%) (0.9%) 87.1 (1.1%)
Decrease by 10% 6.2 5% 0.9% 89.0 1.1%
` Bn
Additional Info VNB % Change
in VNB % Change
in NBM EV
% Change in EV
Impact of no TVFOG for non-participating savings products
6.7 14% 2.6% 89.1 1.2%
Impact of zero tax on Par fund 6.0 2% 0.3% 90.3 1.6%
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Note: 1. Based on unaudited figures 2. Post overrun total VNB for Individual and Group business 3. The NBM impact in interest rate fall scenario is low as the TVFOG charged is sufficient to absorb the impact of such decrease in interest rate
1
0.10.20.30.40.50.60.70.80.9#
Shareholders’ EV IRR – FY15
The shareholder IRR measured on EV generated is showing a steady growth on back of growth
in business
` Bn
Note: The IRR has been calculated based on MCEV and not on appraisal value
17.8
25.6
33.8
42.1
48.2
58.7
69.9
88.1
12.718.0 19.7 21.6 21.6 21.6 21.6 21.6
13.2% 13.0%
15.6%16.2% 15.9%
16.7%17.2%
18.3%
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
20%
-10
10
30
50
70
90
110
FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15
MCEV Share capital Shareholders'-IRR
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Appendix 1 : MCEV methodology and approach
MCEV methodology
The calculations of embedded value and new business profits have been performed using a market consistent embedded value (“MCEV”) approach. This approach differs from a traditional EV approach primarily in respect of the way in which allowance for risk is made.
Within the traditional EV approach allowance is made for risk through an increase in the risk discount rate used to value future shareholder cash flows, whilst within the MCEV calculation explicit separate allowances are made for risk.
Components of MCEV
There are two components to the MCEV:
1. Adjusted net worth –It represents the market value of assets attributable to shareholders. This amount is derived from the Indian GAAP balance sheet and adjusted to allow for assets on a market value basis.
2. Value of in-force –It is derived as
Present value of future profits (“PVFP”) less
Time Value of Financial Options and Guarantees ("TVFOG") less
Frictional Costs of Required Capital (“FCRC”) less
Cost of non hedgeable risk (“CNHR”)
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Appendix 2 : Components of value of in force (“VIF”)
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Present value of future profits (“PVFP”)
This component is the present value of the projected future after tax shareholder profits expected to arise on the business existing at the valuation date.
The projection is carried out on a deterministic basis using market-consistent economic assumptions and best estimate non-economic assumptions (such as persistency, mortality, morbidity, expenses, inflation). The economic assumptions (future investment returns and risk discount rate) are based on the risk free (government bond) yield curve at the valuation date.
Time Value of Financial Options and Guarantees ("TVFOG")
This component represents the cost that may arise due to embedded financial options and guarantees.
Different economic scenarios are derived on the basis of a stochastic simulation process using suitable statistical distributions for interest rates and equity returns calibrated to Indian market conditions.
The cost of the options and guarantees is calculated using these economic scenarios with methodology and non-economic assumptions consistent with the underlying PVFP.
Frictional Costs of Required Capital (“FCRC”)
This represents the frictional costs of holding required capital (“FCRC”). Required capital is set equal to the amount of shareholder attributable assets required to back local regulatory solvency requirements. The frictional costs represent the investment costs and taxes associated with holding the required capital.
Cost of non hedgeable risk (“CNHR”)
This represents the deduction to allow for non hedgeable risks. The CNHR has been derived using a cost of capital approach and is calculated as the discounted value of the annual charge applied to projected risk bearing capital.
The initial risk capital has been calculated based on stress events for non economic assumptions. These events are based on the Solvency II, QIS5 framework.
Appropriate risk drivers are used in projecting the risk capital at future time points.
The annual charge applied to the projected risk capital is 4% p.a.
Appendix 3 : Key assumptions underlying MCEV and NBP
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Economic assumptions
The closing MCEV is calculated by basing the projected earned and risk discount rates on the risk free (government bond) yield curve at the closing balance sheet date.
The new business profitability is calculated with similar assumptions, except that the yield curve at the start of the quarter in which the new business has been written is taken.
For detailed assumptions, refer Appendix 5
Non economic assumptions
Expenses
Maintenance expenses have been based on the latest expense analysis carried out in March 2015 with appropriate allowance for future inflation. These assumptions do not incorporate any allowance for future productivity improvements.
Based on an analysis carried out by the Company, the projected long-term acquisition expense assumptions have been revised and these are higher than those used earlier and have been incorporated into the calculation of pre-overrun margins for FY15.
Mortality and morbidity
Mortality and morbidity assumptions are set for different products based on past experience.
Persistency
Persistency assumptions are set for different product lines, payment mode and duration in-force, based on past experience and expectations of future experience. Separate decrements are modeled for lapses, surrenders, paid-ups and partial withdrawals.
Tax
Tax assumptions are based on our interpretation of existing tax legislation, where appropriate supported by legal opinion.
Profits attributable to shareholders are assumed to be taxed at 14.42% for Life business and 0% for Pensions business.
Allowance is made within the tax computation for dividend offsets permitted under Section 2A of the Income Tax Act.
Appendix 4 : Key components underlying MCEV movements
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Analysis of change in MCEV
Opening modeling, assumptions and methodology changes: The models, assumptions and methodology are continuously refined and improved and the impact of these refinements is reflected in the opening changes.
Expected return on inforce: It reflects expected investment income on shareholder assets during the period and unwind of the discount rate on the opening PVFP.
Operating Variances: The Operating Variances capture the impact of the difference between the actual expenses, mortality and persistency experience from those expected in the opening MCEV calculation.
Investment variances and change in economic assumptions: This reflects the impact due to the actual investment return being different from expected and the impact due to the change in economic assumptions (represented by change in yield curve during the period).
Appendix 5 : Economic assumptions
Years Forward rates Spot rates
FY14 FY15 FY14 FY15
1 8.74% 7.91% 8.38% 7.61%
2 8.73% 7.91% 8.38% 7.61%
3 9.05% 7.96% 8.47% 7.63%
4 9.31% 7.97% 8.58% 7.64%
5 9.45% 7.98% 8.67% 7.65%
10 9.58% 7.98% 8.90% 7.66%
15 9.59% 7.98% 8.99% 7.66%
20 9.59% 7.98% 9.03% 7.66%
25 9.59% 7.98% 9.05% 7.66%
30+ 9.59% 7.98% 9.07% 7.66%
The forward rates derived from the spot-rates of risk-free government bonds are used in
projecting future investment returns and discounting of future profits in VNB and MCEV
calculation
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Glossary
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APE (Annualized Premium Equivalent) – The sum of annualized first year regular premiums and 10% weighted single premiums and single premium top-ups. Conservation ratio – Ratio of current year renewal premiums to previous year’s renewal premium and first year premium. First year premiums – Regular premiums received during the year for all modes of payments chosen by the customer which are still in the first year. For example, for a monthly mode policy sold in March 2015, the first installment would fall into first year premiums for 2014-15 and the remaining 11 installments in the first year would be first year premiums in 2015-16. New business received premium – The sum of first year premium and single premium. Operating expense – All expenses of management excluding service tax. It does not include commission. Operating expense ratio – Ratio of operating expenses (excluding service tax) to total premiums. Renewal premiums – Regular recurring premiums received after the first year. Solvency ratio – Ratio of available solvency margin to required solvency margins. Total premiums – Total received premiums during the year including first year, single and renewal premiums for individual and group business. Weighted received premium (WRP) – The sum of first year premium and 10% weighted single premiums and single premium top-ups. 13th month persistency – Percentage of contracts, measured by premium, still in force 13 months after they have been issued.
Disclaimer
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This release is a compilation of published financial results, other information and is not a statutory release. This may also contain statements that are forward looking. These statements are based on current expectations and assumptions that are subject to risks and uncertainties. Actual results could differ from our expectations and assumptions. We do not undertake any responsibility to update any forward looking statements nor should this be constituted as a guidance of future performance. This release is a privilege copy intended for reference of selected group. These disclosures are subject to the prevailing regulatory and policy framework as on June 30, 2015 and do not reflect any subsequent changes.
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