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Bajaj Finserv Ltd
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[Audio Gap] and welcome to Bajaj Finserv's earnings call to discuss the first quarter FY '19 results.To discuss the results, we have on the call Mr. S. Sreenivasan, CFO, Bajaj Finserv; Mr. Ramandeep Singh Sahni, CFO, Bajaj Allianz Life; and Mr. Milind Choudhari, CFO, Bajaj Allianz General.May I request the management to take us through the financial highlights. [Operator Instructions]Over to you, sir.
Good morning, everybody. As usual, it's our pleasure to host this conference call. And thank you, JM, for arranging it.We will be discussing the consolidated results of Bajaj Finserv for the quarter ended 30th June 2018, the first quarter of FY '19 as we call it. In this call, we will largely be concentrating on the consolidated results; as well as the results of our insurance operations through Bajaj Allianz General Insurance, BAGIC, and Bajaj Allianz Life Insurance Company, BALIC. Bajaj Finance, which is another major subsidiary of ours, has already had its conference call. However, if there are any high-level questions, we'll be glad to take that as well. We will not be taking any questions on the status of Allianz' stake in our insurance company, except to state that Allianz' stake remains the same as at the end of the previous quarter. Nevertheless, Allianz has reiterated its commitment to remain in India and with Bajaj Allianz, and we look forward to a further continuation of this great partnership.Any statements that may look like forward-looking statements are just estimates and do not constitute an assurance or indication of any future performance result.Just to highlight. One of the major changes in this quarter has been the adoption of Indian Accounting Standards, with effect from 1st April 2018. For the Q1 results that we have announced on the consolidated basis are Indian -- as per Ind AS. The insurance companies are not required to adopt Ind AS. However, for the purpose of consolidation, their results are also on Ind AS basis. And the corresponding figures for the previous year have also been restated on Ind AS basis. Therefore, the quarter results for the current quarter and the corresponding quarter of the previous year are comparable.Just to highlight. Strong growth in revenue, 16% growth; 41% growth in consolidated profit after tax. The growth has been driven by all our 3 subsidiaries Bajaj Finance, Bajaj Allianz General and Life Insurance.And Bajaj Finance total income increased by 39%. The AUM increased by 35% Y-o-Y. The profit after tax on Ind AS basis has grown by 81% from INR 461 crores to INR 836 crores. The net NPA continues to be under control, one of the lowest in the market at 0.44%. Because of Ind AS, we have adopted the expected credit loss method, which means you not only recognize the losses that you know might happen but also the losses that you expect would happen as the book runs out. The capital adequacy is very strong.The general insurance company recorded a 23% growth in gross written premium. This quarter, we did not have any significant amount of crop insurance. The crop season actually begins in Q2. The earned premium grew at 21%, but I think the real highlight was a combined ratio at 90.2%, which is a further improvement of already low combined ratio we reported last year. As a result, our underwriting profit is INR 128 crores, as against the INR 12 crores in the Q1 of FY '18. Lastly, the combined ratio has declined because of, a, growth in earned premium; and b, the claim ratio improving by about 3%. Our solvency in GI continues to be strong at 288%.In the life business, the key highlight was the renewal premium. A lot of the efforts we put in over the last 2, 3 years in building up a quality book with growth has resulted in the renewal premium starting to grow. We are at 56% Y-o-Y growth in renewal premium. Last year also, we had about 15% growth, but the years before that, we were actually having de-growth in renewal premium. In terms of the business mix, the unit-linked portion was 61%, as against 78% in Q1 of the previous year. We have, consciously, about 1.5 years ago, I think I have mentioned this in the con call before, that we wanted a sustainable product mix. And we have been driving a balanced product mix where no one product contributes more than 55% or 60% of our top line. So overall a good result from the life company.Obviously, the profit after tax has not grown for 2 reasons. A, as we are growing our new business and our GWP, we do see the new business strain accounting for about INR 26 crores of de-growth in profit. Secondly, last year, in the first quarter, we did have a onetime gain of INR 50 crores from sale of bonds. This year, because of the rise in interest rates, that could not -- we do not have the same opportunity. However, we do not think it's a recurring issue, and over cycles, it will get corrected over the next few quarters.So overall I will say we are very satisfied with the quarter performance on the performance of all our 3 companies and particularly so on the consolidated numbers.I would now open the floor for questions and answers.
[Operator Instructions] We have the first question from the line of Dhaval Gada from Sundaram Mutual Fund.
Just 2 or 3 questions. First, on BAGIC, could you give some color as to what's the reason for lower loss ratios? I mean, how much is contributed by product mix? How much is because of improvement in experience? And any benefit that you've seen from GST coming through? The second question, on expense ratio in BAGIC. What's the benefit from MISP that we have seen, so far? And then I have questions on BALIC as well, yes.
Yes. Just I will just give a brief overview, then I'll hand it over to Milind. We have seen loss ratio reductions in property, in motor, in retail health, which pretty much account for a significant proportion of our portfolio. This has come across both by frequencies and severity of the claims and the claim management which we have undertaken over the last couple of years. As we said, we are very disciplined in the way we approach our business. We are not -- our general company is not hesitant to say no to business where we do not see visibility of profit. So that restructuring of the entire distribution channel has helped in controlling the loss ratio. Nevertheless, being just 1 quarter, I would still wait and see how the next 2 quarters pan out before we can make a commitment. Milind, would you like to add to that? There was -- there is some benefit of GST definitely on OD the side, but we have also seen reduction in motor third-party and health insurance by about 1.5%. So that by itself is not a big reason, but it's a real reason. Milind, any other attribute we can give for higher profits, better combined ratio?
Yes. I -- what I would like to mention here is that, as you rightly mentioned, the motor loss ratios are getting better; also because the overall loss ratios have come down, as compared to last year, almost by around 6 percentage points. Last year, we were total around 72%, which has dropped to around 66.8% now. So definitely motor, which is the biggest portfolio for us -- then the health portfolio also has shown improvement, particularly retail health. And our property portfolio is also growing through our banca business, which has also shown good results, I think, also thanks to our last year treaty results which also gave us some additional reinsurance commission benefit. So that's why, fire, motor as well as health, so all 3 lines or major lines of businesses, they have demonstrated reduction in loss ratios. And that is how the overall, let's say, good result which is for this quarter is coming off. As far as MISP is concerned, I think that is clearly there. The MISP impact is now being demonstrated in a full manner because what has happened is that, because of the reduction in commission across really motor dealer sector, I think the overall discounting has started increasing, so which is affecting in a way in terms of the overall OD growth. But it is also there. So overall the commission ratios have improved. The GST impact is also playing because, last year, it was only around 7 months -- or 9 months from 1st of July. So the full impact of GST is also being felt now in terms of passing on the overall input credit. And particularly there is also an increase which is there in terms of the overall motor OD discounting also. So more or less, the -- it is kind of offsetting, but as we go through a full year cycle, the full impact of GST will be known. Of course, we'll also be guided by the anti-profiteering guidelines. And accordingly, all the benefits which are there under MISP, I think, is directly through discounts. And also it is showing some reflection.
Practically I think there has been -- pricing has got corrected because a lot of these benefits are passed on in the form of higher discounts to customers because of MISP, especially where they are manufacturer driven. And GST, anyway, gets passed on.
Correct.
So that's where we stand. So it's all a business of selection only, I think, strong selection, but a claims administration is what we could say is the result.
Correct, correct...
Good, good. Sreeni, just one follow-up on this. Broadly, as we go through the year, what is the kind of, I mean, the price correction on motor OD do you anticipate because of MISP and GST? I mean, broadly, what could be the impact just on this...
It is difficult to say that because it is not a linear function, one goes up, the other goes down because this is a business with almost all the companies competing intensely. And where we stand ahead is with our distribution network is very large. We -- while as many motor dealers and others do provide us with business, they also get a large amount in claims from us because we are a very large player in the market. In terms of discounts, always it has been a discounted market. And our approach has been to be selective in choosing what we want to do in that, a, we expect this year we will be more aggressive in 2-wheelers. We want to improve our commercial vehicle portfolio in certain profitable segments of commercial vehicles. And we will also continue to drive private cars. We expect relatively commercial vehicles and 2-wheelers ought to do better than private cars this year because of the dedicated focus. Now we have 3 separate vertical heads for each of these businesses. So going forward, I would think -- I cannot say this quarter is representative because we are still -- started the monsoon season, so we will wait until December at least to know where we stand.
Sure. Just one last thing on BAGIC. What's the -- I mean we've seen some chunkiness in group health business this quarter. Just I mean -- and we, I remember, last time, you highlighted that the experience was slightly bad in the group health business. The loss ratios were slightly higher. Just if you could explain which state have you picked up. And what's the rationale of going on this front? Yes.
Yes. Milind?
I think, Dhaval, you are speaking about group health business, no?
Yes, yes, yes. That's right.
You -- the first quarter of the year is dominated by all the corporate renewals. So -- and that is why generally this group health business will be quite high in the first quarter. Last year, what we saw is that in Q4 the results were getting a little better. Towards -- normally towards the end of the year, all the claims which need to be reported and all these reserve adjustments which need to be made, all those things get completed. So we are seeing better results in terms of group health. Also, to some extent, this can be ascribed to some correction in the market in terms of group health pricing, where due to listing of some companies; as well as the restrictions which have come on the PSUs, particularly the discussion of our merger of 3 PSUs and other things. I think there is a little improvement in terms of overall group health pricing also. So we have good growth in group health insurance in this quarter.
So which is the state we picked up? And what's the kind of pricing improvement we saw in the segment?
Dhaval, this is not about a particular state because these are all corporate...
Okay, corporate group and -- okay, okay, got it. And broadly, pricing would have improved by 5% to 15% for us.
Yes, 3 -- 5% to 7%, that's right.
5% to 7%, okay. Sir, just last question, on BAGIC -- sorry, BALIC, here. Could you just break down the group premiums into group credit life; the protection business; and the corporate health -- corporate protection business; and the nonpar business that we would have done, any group nonpar business that we would have done?
Raman?
Yes. So I take -- so we did about INR 425 crores of group business, of which about INR 261 crores was the group credit protection. So the group risk is about INR 261 crores, and the balance is all group funds business.
Okay. And here we -- I think 30%, 35% would have been the growth in group protection.
Yes, about 34%.
Okay. And are we -- sir, are we seeing some improvement in the share from Bajaj Finance for us? I mean, in their pool are we seeing improvement in the share? Or broadly it remains stable.
Yes.
No, there is a significant improvement.
Okay, fine. And sir, do you expect this business to see this momentum, like 35% kind of growth being sustainable for the full year?
See, this year actually there have been multiple changes. One is the share of our business in the partner shop has gone up in some of the partners, especially Bajaj Finance like you rightly highlighted. So that is one reason it's going up. So whether this momentum continues is a difficult question to answer, but it could have -- a good double-digit growth is likely.
Sure. And because of strong renewal premiums, the margins would have seen some improvement intuitively.
The year-end only. It's too early.
The next question is from Nidhesh Jain from Investec.
Sir, on life insurance the growth in this quarter is a bit slower on new business streamside, so I just wanted to get your sense what is happening on the ground level. Are we seeing -- is it just a just quarterly phenomena, or do you think that this financial year will be slower for life insurance? Secondly, on life insurance, the product mix that we are driving, do you think further increase in traditional products? And what would be the implication for our full year VNB margin because of this product mix?
Okay, I'll take this question first. I think, as far as the market is concerned, if I am correct, the private sector individual rated premium growth has not been very strong. It has been in single digits. For us, I think it was a conscious decision taken early last year or even before that, that we wanted to drive towards a balanced product mix because we have seen in the past that any market correction will affect ULIP sales. And they could affect even renewal premium and people who pay premiums even after the lock-in period. So we want to create that. And we are still investing in creating a traditional distribution channel because the type of agents, that customer segment itself is different. So growth, to that extent because the traditional ticket sizes are significantly lower than ULIP, for us it is around 40,000 as compared to about 75,000 for ULIP. Clearly, in terms of the new business numbers that we report, there will be a correction because of that. We think 60-40 is a sustainable model. It could be plus, minus 5% or 10%, depending on the market conditions, but we will be very happy with a 60-40 for the time being. We think overall we don't know yet because we will announce our margins at the end of the year, but we think this balance should help us cover our overruns. And our margins after overruns, we expect they should take growth off that. Raman?
Yes. So I think what's also important to see is that, as you know, while we are shifting the product mix, we would have actually expected, like Sreeni rightly highlighted, that the average ticket size would have fallen. But for us, what we're seeing is it's actually gone up a little compared to the same period last year. So it's actually up by about 17% to 48,000 from 41,000 last year. I think where this is coming from is because of a focus on the affluent category of customers. We've traditionally been a mass market company. And like we had highlighted in the last few quarters, that we are shifting our focus also to penetrate into the affluent category of customers. So I think this is where the growth in the average ticket size is coming from.
Yes. So just one just on ULIP or the slowdown that we have seen. Is it a conscious strategy? Or you are seeing ULIP getting difficult to being -- to be able to sold at the ground level.
So I think what's important is that we have -- with other companies also, we have seen that when there is a lot of concentration on one product and if things go out of control like a market falling, the company really takes a hit. We've seen our company getting impacted by that in 2009. So we -- what we want to be highlighting is that we want to maintain a balance and a sustainable mix. So it's not that we are finding a challenge to sell a particular product category and hence we are trying to balance it, but it's on the whole as a diversification strategy which we are trying to drive.
And on the nonlife insurance. The crop insurance seasonality that is visible for us and especially in Q1 actually is not the case with the other peers. There we have seen broadly similar sort of premiums across quarters. So is it a function of some strategy or geographical concentration or product strategy that we have?
Let me put it in 2 aspects. One is that first quarter, even last year, we had only INR 36 crores of premium. What happens is the type of stage that you write and the flow of information. Because the rabi season ends in 31st March, not all the information is available on 31st March. So it is possible that some companies may have a spillover which goes into Q1. Otherwise, the actual kharif season starts from 1st of July. That is the first part of the question. So for us, year-on-year, from INR 36 crores to INR 10 crores did not move the needle last year, nor does it move the needle this year in Q1. Coming to kharif season this year, we ourselves are expecting that we may not do as much business as last year. Last year, we did a little over INR 1,800 crores of business. And this year, we think, the kharif season at least, we are seeing that it may be lower. We are seeing 2 factors, a substantial reduction in reinsurance commission across the market. More importantly, I think many treaties, we do not have that for crop insurance, so we've got these loss corridors. So some companies, reinsurers were insisting that, if the loss ratio exceeds 80% up to, say, 110% or 120%, 100% of that loss should be borne by the company. And this is the kind of business where one should expect 80% to 90%, anyway, at the minimum to operate in this business. Secondly, commissions have come down. So overall, this -- tactically, this year, we may not be as strong as last year in the crop insurance business. And we have always maintained that this is a business we look at year-on-year. Milind?
Yes. I think, crop insurance, I just wanted to add one more dimension. In fact, as far as accounting of crop insurance is concerned, some companies are following little divergent practices. Because I think, as we go to in-force and the standard international accounting practices, as far as how to account for it, basically crop insurance accounting, the -- technically the rabi season gets over by 15th of April. So by that time, actually all the accounting is supposed to be over, but some companies are getting some technical shelter that, because of nonavailability of underwriting information, they are holding some booking and putting it into the next quarter. So I think accounting -- principles wise, that is not right. As soon as you receive farmer share, you are on risk. And you are supposed to actually account for the entire risk, but I think there -- some companies are postponing the risk on account of nonavailability of underwriting information. But I think that's not the right practice.
And last question, on sustainably of loss ratios. Given that we have seen correction in motor OD share of corporate health going up and dynamics in crop insurance, does it -- is it reasonable to expect some increase in loss ratios from the current level that the company has reported?
In crop insurance?
On an overall basis.
Overall basis there are multiple factors. Because of so many lines of business, it's difficult to say. And there is also the benignness of god which plays in general insurance business quite a lot. But having said that, I think the way to look at -- we look at BAGIC, at least from a BFS perspective, you can see they have signed up a number of bancassurance tie-ups in the last 1.5 years. Some of them have started last year. Some of them are starting this year. And bancassurance is clearly for the next 3 years going to be an engine of growth and profitability for us. It is an engine of growth because we are starting from 0 in many relationships, and we will get good traction in many of them. We have Canara Bank, PNB, Union Bank, Vijaya Bank, HDFC Bank. They're all new banks we have tied up with, apart from our traditional partners like J&K, Karur Vysya and others. Secondly, bancassurance largely gives us access to property business, health business, some personal lines which are nonmotor. So pretty much 75%, 80% of banca business is not motor business. So that should give us diversification of the portfolio, better risk management. And thirdly, by and large, it is profitable because it does not come at a very high acquisition cost, most of these relationships. So putting all these together, I mean, you see bancassurance channel growth has been about 100% Y-o-Y this quarter. It has grown from about a little over 7% of our total business to 11% in this quarter. And over the next few years, we expect bancassurance share of the total business should grow. So the management of combined ratio involves managing the product mix, the channel mix; getting into profitable channels, profitable segments. It's always such a complicated exercise. And one cannot predict what will happen, but by and large, if we do the right things, we think we'll be there. And that's what's been our experience over the last 15 years.
The next question is from the line of [ H R Gala from Finvest Advisers ].
Yes, sir, just wanted to -- one clarification, that we have always been counting a lot on this health insurance. Now recently some news item has come that -- I don't know whether this will be a focus, that NHPS, but many states are getting into the trust mode rather than giving premium to the insurance companies. Do you think that can impact that? Or our focus area is not that at all.
See, I -- we think, at least in the foreseeable future, that NHPS, given the budget allocation, I think about half the population would not be a target market today for private companies because of they are not meeting socioeconomic criteria. Health insurance is a basic need. So clearly, that segment, the RSBY, the earlier scheme, was quite tight on the criteria that maybe even only the bottom 25% of the population was getting covered. We have had in the past experience of other companies. Like, for example, in Andhra Pradesh, before it broke into Telangana, they had this Aarogyasri scheme, which later became a trust model. But if you see the growth rate of insurance companies where there was a government scheme which was successful and there was a trust model, I think Andhra was -- and Telangana put together were one of the fastest growing in the country in the top 3, 4 states. So we don't think that NHPS would seriously affect the middle class or the affluent class. It is not a scheme meant for them. It will probably go to people who need basic access to health insurance in the initial stages. So we are not -- as of now, we are still waiting and seeing and are pleased with the prices which they're going. We've even read in the newspaper you are referring to that one of the states has given for INR 400 per family. Clearly that's the kind of business we would not be -- we cannot afford to do that kind of business, but as it evolves, we will see. It is unlikely that's a large proportion of -- as of now, we do not see salaried people and affluent people and HNIs getting covered under an NHPS kind of scheme.
Second question pertaining to BAGIC will be that product committee recommend us then to treat life insurance at par with general in health. So is there any movement on that? Or how will it impact the structure of the policies that we write?
There is no impact on the structure of the policies that we have, but there were -- as far as I remember, there were recommendations of product committee and representatives from the industry, from IRDAI and others. They made recommendations to make more flexibility in variable products, in pensions, in doing ease of business; and to speed up the approval process so that companies can come out with the products at a faster rate. Now IRDAI has not adopted that report because there was a change of Chairman in IRDAI. The previous Chairman had retired. So now I read recently that IRDAI is going to set up another committee to decide which of those they can implement with what kind of timetable. So we think it will expand the ability to launch products faster. There will be more flexibility in certain products in the nonpar category and -- but it will not change the structure of the existing products. That's my point. Raman?
Yes, that's actually. And the only point I would want to add is -- at least the positive part is that the committee report has been accepted by IRDAI and now it's gone into execution mode. So now they have set up a committee to draft the regulations to address whatever were the recommendations of the committee report. Our appointed actuary is also part of that committee.
We -- will we be able to offer the health policies on a continuing basis rather than on 1-year mediclaim type?
That is GI companies do that on a 1 -- they can do up to 3 years, but traditionally GI companies tend to do 1 year because medical inflation is high and they are geared to doing annual pricing. But life companies can do longer-term products. The only hitch now is that life companies have not been allowed to do indemnity products. They can only give cash benefit products like critical illness, hospital cash and things like that. There is not like any cash-less arrangement and hospitalization and treatment. I don't know if it is covered in the new product regulation or not, but we have the option of both BAGIC and BALIC addressing all these segments. Raman?
Yes, I think Sreeni addressed the question.
Sir, you explained one of the reasons why our accounting profit dropped by 25%. What was the INR 50 crore you referred in Q1 FY '18?
That was the profit on sale of bonds. Last year, in the first quarter, we had a higher share of capital gains on the shareholder investments. Because when interest rates went up, we are holding onto the bonds. We're not selling.
That is not...
Yes. It's a nonrecurring thing.
The next question is from the line of Avinash Singh from SBI Capital Securities.
Yes. One question regarding that Ind AS for the life insurance that you have explained on Slide 5. So I mean, if I do that math, it appears as if, general insurance, your GAAP profit or Ind AS profit numbers look similar, but for life insurance the Ind AS profit looks higher, slightly higher. So can you just explain what is actually changing in that Ind AS with regard to...
Major thing is the equity we hold under the shareholder funds. That's -- now under Ind AS will be under trading, so the mark-to-market gains which previously were routed through fair value change reserve now will be mark to market on the P&L. Because the trading volume of life companies typically is high, that is unjustified that it is not held for trading. So typically that is what it is, and we expect other companies will follow suit and -- as and when they adopt Ind AS. So that is a major reason, and then there are minor reasons also. Raman?
Yes. I think the -- Sreeni, the biggest one on the positive side is this. So just to explain: For equity, you have option to follow FVTPL or FVOCI, but the challenge with FVOCI is that, if you follow FVOCI, even if the profits are realized, the profits never go to P&L. And it will always be a treatment through OCI. So most of the companies hence will end up treating equity portfolio as FVTPL, and that might bring about some volatility in the P&L going forward. And this is as far as equity investments are concerned.
Equity investment on the shareholders' part, not -- the policy part will be separate, anyway.
Given -- so unit linked, anyways, doesn't impact us, but even in nonpar, if there is any, it could bring some volatility in the P&L.
Okay, okay. So yes, so for like -- I mean, like, Q1 this year and previous year, it's positive. I mean, if markets are bad, it can be a negative effect, [ I guess ].
Slightly.
Next question is from Kunal Shah from Edelweiss Securities.
Yes. Sir, this is Prakhar. A couple of questions on life and then on general. First is on -- when I look at your ticket size, that has increased by 17%, as Raman said. That -- in Q1. That essentially means that there has been a decline in number of policies that we have sold. Am I right in that sense?
That's right.
And in terms of agents' productivity or in terms of agents' individual ARP, that -- that growth has also come down. Any reason for the same?
So I think what Sreeni highlighted earlier was that last year, quarter 1, we had some new products being launched. And we were really riding on the ULIP drive last year, obviously getting the tailwinds from the growth in the equity market. And with that new product launch we had got some fire sale. And that's obviously not continuing in this year, this quarter; and that's why you see a little slowdown in growth.
But we are quite confident and optimistic about the next 3 quarters. I think that one-off effect or the base effect, as Raman put it, is behind us now, so Q2 onwards, we are hoping to see with the balanced mix a reasonable growth.
Okay. And in terms of protection business, can I have a breakup in terms of group and retail?
So retail is currently very, very small for us. On the group side, however, we have done about -- like I mentioned earlier, about INR 260 crores of credit protection business. Retail is a single-digit number in terms of percentage of our retail mix, so there's nothing to talk about as of now.
Okay. And on general insurance, as you highlighted that in terms of group health insurance we have seen some sort of price improvement happening through, can I have some sense on other segments as well wherein you are seeing some sort of pricing pressure or in general the pricing pressure is easing across the board.
Milind?
Yes. I think we are still feeling the pricing pressure, as far as the motor segment is concerned, because I think as big companies continue to actually keep their stance tight, as far as the new MISP regulations are concerned. I think there are some smaller companies which have started breaching it, so -- which is pushing the actually discounts and other things to a higher limit. But we are facing pressure in the motor segment. What we have also seen is that good growth coming in our liability lines of business, where our new cover for cyber liability product is picking up very well. And the growth is also being driven through fire and property premium which is through the banca side. I think, other than that, we don't see any pressure. Of course, as Sreeni has mentioned, we also experienced pressure in terms of the crop insurance pricing. So some of the tenders, we actually let go because we did not want to go into that kind of a loss corridor situation. Wherein the pricing is below a certain threshold, reinsurers might enforce some kind of a loss participation. So that's much on the pricing side.
And last question, in terms of reinsurance commissions. There has been significant tightening. Or it has been stagnating now, so in terms of overall, have you seen that commission the rates being dropped and that is why we are refraining from doing crop insurance? Or there is something else attached to it.
No. I think -- as far as the reinsurance commission rates are concerned, I think pretty much it has reached the kind of low which it would be because until last -- actually it started with 15% commission, then actually we had 9% commissions last year, which has dropped to around 6% for us, but -- and that is because our portfolio is better. But many other companies are getting only a commission of around 3% to 4% only. So as far as the reinsurance commission is concerned, that is -- that had already reached the kind of a level it should be from the viability point of reinsurance as such. But what we are seeing in terms of crop insurance is only about -- is what kind of price to be quoted in the tender which is sustainable considering the loss ratios.
And see, if I can add here, I think it's a tender-driven business. And we have always maintained in the tender-driven business you don't know what is going to happen next year. So this is why crop insurance will remain for us a tactical play. We see the market every year; see the terms that we get, the type of sales that we want to operate in that year given the predictions of monsoon and the data that we get from the states. Because it is not a business that you can keep. You can only acquire. And for us, the true market share is business that we can acquire and keep, which is the retail business, health business, extended warranty, where we can cross-sell. We can upsell. There are so many other opportunities. This is why, if you see our relative share compared to some other competition on earned premium, it's is actually much more superior than the gross premium.
Okay. So sir, in terms of crop -- just lastly, in terms of crop, are you seeing still -- pricing still competitive in there because then it doesn't make -- or you've got...
It is more competitive than last year.
Yes, correct.
Yes. And despite the fact that some -- as I said, there are loss corridor conditions we hear in the market for some companies where some of the losses have to be absorbed beyond a certain level by the companies themselves, which can be very tricky. So those kind of deals, we have avoided so we don't have that in our treaties. But yes, it is, this year, we will be a bit more cautious on crop insurance than last year.
Our next question is from the line of Virendra Verma from Intesa Royal.
Sir, just on the general insurance business. Like there's a 23% growth. Is it possible to get the breakup between the various verticals within the general insurance?
Broadly, I can tell you. Motor business overall has been single digit. And I think in the market generally you see the top companies have grown a bit. So about 8% to 10% is the market growth. We will be at about a little under 8%. We have grown strongly on retail health at 18%. Our generally banca-driven businesses have grown. This year, because we lost 1 or 2 deals in property, that is a bit muted for Q1, but I think it will pick up in the second quarter. Marine business is in double digits. So it is a sort of mixed bag, I should say. I think...
How about for motor?
Motor is about -- a little under 8%, 7.7% growth.
The next question is from Ashish Sharma from ENAM Asset Management.
First question, on BAGIC. I mean, this quarter, you've done phenomenally well on both the growth of all net -- in net earned premium and in the profitability. We have in our conversation mentioned that maybe in the long term we might have to do a tradeoff between the growth and [ hitting such a ] strong combined ratio. So do we still maintain that in the long term the growth would be higher, but the sustainability of, I mean, this combined ratio will depend upon, I mean, how the other players in the market sort of behave? One will be this one. Second will be on the group -- I'll, we'll take the second question later. Just...
Yes. So I think, let me put it in perspective. General insurance is a business of selection. It is a business of creating portfolios of risk and return. And while broadly we report motor, fire and all that, there are so many cuts under that which we look at. So the -- I think that combating of pricing -- pricing is not something new. Over the last 10 years now, since 2007, we have seen prices come down from the old tariff regime quite systematically. And as and when new competitors come, the first thing they will attack is price on motor insurance.
Particularly.
So in that sense, it is not anything new for us. We continue to seek newer and better ways of selecting customers. Number two, with greater customer experience and better analytics, you hope to keep customers because ultimately price difference eventually doesn't translate into more than INR 500 or so for the customer. So the more discerning customers continue to deal with us. Our renewal rates are pretty decent. They are growing year-on-year. So we are not really concerned that price alone is the market-determined factor. We do command a slight premium over the market, but we will continue to improve sharper ways of selecting business over the next 3 to 5 years. That is the journey we are undertaking. Secondly, we are innovative in a number of products. We have launched the first cybercrime retail product a couple of months ago. We have extended warranty, which is a growing business. So more on the personal lines, we will be coming out with more products. And we are expanding our distribution through banca, through -- we are launching up a point of sales for some channel, which we think will help us penetrate. Our virtual points of presence now is almost 5% of our business -- retail business. It will grow to -- continue to grow. So we have been able to manage this by geographical expansion, diversification across products, diversification across channels. This strategy will continue, and we will continue to push for that.
So the current trends of a very strong combined ratio and a strong growth of 20% to 25%, we -- well, we should take it as a sort of a -- sustainable in the long term also. So should we assume it is to be...
That depends on what you define as a reasonable combined ratio. The market, which is so competitive, and I think globally also if you see, the number of companies that operate below 100% are not that many. So from 100%, we are at 90%. Is 90% sustainable? I am not sure, but our target is -- as long as we can get reasonable growth; continue to grow our market share at about 95%, 96% combined, I think we'll go for it. It depends on segment to segment. For example, in group health, it doesn't require too much manpower to handle the sales because it's large, chunky business. So even if we do business at about 80% to 85% loss ratio, we should still make a good combined ratio there. Because we do a lot of business directly, so there are hardly any acquisition costs on many clients of group health. So it's a very complex question, but I have tried to simplify the answer. I hope it does answer your question.
Yes, sir. Sir, second question will be on the group [ franchisee ]. I mean I think in one of the roadshow presentations you have highlighted about the overall customer [ franchisee ] for Bajaj group, which was closer to 15 million, 16 million, I'm assuming, I think it was December data, with annual velocity of closer to 2 million, 2.2 million. In terms of cross-selling, I mean, how we are approaching this -- I mean because I'm assuming there are customers in different entities. So just some color on that, sir.
Yes. Actually, the only thing that has happened, which is data based, is that we have enriched the data from multiple sources like credit bureau and others and given it back to the companies. Clearly -- intermediary-driven business, like insurance where there are already established intermediaries, clearly that part of the data, we encourage intermediaries to do cross-sell more by giving them support, by tele calling and things like that. Apart from that, the business which is not aligned to any intermediaries, that is something the company has a clear focus. They have a separate cross-sell team. And now we want to build an analytics team because cross-sell always works with deep analytics. So that investment has started. It is 3- to 5-year work for our analytics. We want to take it to a level because we already have significant positive experience from Bajaj Finance, and we want to translate those learnings more into the insurance side. And this, I think, will be a big differentiator for us if we get it right.
The next question is from Atul Mehra from Motilal Oswal Securities.
Sir, just a couple of questions on BAGIC once again. In terms of the MISP now that it is pretty much in force. So incrementally how do we see sustainability of profitability in this channel of motor dealer? Because the knee-jerk has been very, very encouraging for all of us, but as we look at it maybe 1 year, 2 year down the line and as we speak -- so how are things in terms of sustainability or profitability for this channel?
See, as the acquisition cost comes down, we would see that prices will have to correct. So by and large, if you see the motor insurance OD business, we have been between, say, 63% to 68% loss ratio. So our approach has been to deal with discipline in this matter. We are continuously monitoring which intermediaries, which locations, which PIN codes. We can give a lot of granular detail on that as to identify the sources of losses. And we continuously cull out those relationships which are doing adverse selection on us. So this is a process. As long as we -- my feeling is, as long as we continue to adhere to this process which has held us in good stead even when, last 10 years, prices have crashed -- we will continue to do that. It is difficult to say because of MISP -- MISP has been a gain, but there has been a loss on the premium side. Average tickets are falling, but at the same time, the number of cars, the number of accidents is increasing every year. And because of that, we give more business to the dealers also. So an incumbent company like us does have an advantage there. Clearly, some small companies might be very aggressive in pricing and commissions, but we're not overly bothered with that. Secondly, with banca growing, as I said, as an engine of growth, we will get better balance to our portfolio. This year, for example, although motor overall growth has been 7%, our 2-wheeler business has grown 21%. So we are focusing more on diversifying our motor portfolio also away from private cars because a lot of this MISP is on the private cars. So we will be growing segments of commercial vehicles, 2-wheelers, where we think there is opportunity for profit. And since the prices have changed for a lot of things, it is something we evaluate every year. Milind?
Right, yes.
Yes.
And sir, just one more thing on motor. So one of the presumptions, as we went into MISP, was that, given that now we have a level playing field with all the competitors and with a capped commission kind of environment, the larger players would largely see some level of market share gains. So is that something which is playing out on the ground?
See, individual dealers, there are always movements. A lot of the car sales are also driven by manufacturers. Some of the larger manufacturers have wanting us to pass on some of the benefits to the customers, which has already happened. In the last 2 quarters, we have seen that. Milind?
Actually the -- what we have seen is that there is some kind of restraint in terms of the overall discounting and pricing, what we've seen in the market. And that's why our OD growth is really muted. So definitely the MISP part has played in terms of the overall market share. We have not seen any big increase or significant benefits coming out of it as a part of the market share as such, but I think eventually once -- because it is just -- it was just 5 months until the month of March. And in the new financial year, again we have seen some discounts increasing. So I think, unless it completes a year, you will not be able to really gauge the kind of impact it has. But I think slowly it is showing the results with in -- with the terms of increased access because one of the, I will say, features of MISP is also that it -- earlier, there used to be a kind of a panel of manufacturers. So those insurance companies which are part of the panel, they only used to get the business, but now the MISP actually states that there cannot be any such panel maintained by the manufacturers and kind of all insurers have to be treated at par, so all the insurers should get an opportunity to participate in the business. So I think those panels are getting dismantled, although the process is slow. And as the process completes, I think we'll be able to see some uplift.
See, overall when I look at the business, for -- the first quarter has been very muted for motor. Overall growth for the market has been about 8.6%. We grew at 7.7%. Within that, we have grown faster in 2-wheelers and commercial vehicles. So it's not really a trend. We'll have to wait and see. Times have not been that great for motor business in this quarter, the industry as a whole.
And secondly, sir, now that we are perhaps a month away from this health insurance launch, Ayushman Bharat. So how are the trends like in terms of as you see it? And is this an opportunity...
I already answered that question earlier.
Yes.
As of now, it looks to be the lower end of the mass market that will be covered by the Ayushman Bharat scheme given the budgets and the type of prices they are quoting. We are not expecting that -- in the near future that the middle class, affluent and mass affluent people will get covered under this scheme. And I don't think that's the intention of the scheme either. The previous scheme obviously was so tight on socioeconomic criteria that many states had their own schemes, like Kerala, Andhra. They had their own schemes. So schemes like those and on trust model have been running for some time, and in those -- all those markets the retail health insurance growth has been very strong. Secondly, the cost of health insurance is going up every day. And most of our customers are people who want private health care because quality of government health care -- many people still want private health care. And the relative difference between the cost of health care, premiums will continue to grow. So while they announced the Ayushman Bharat scheme, they also increased 80D deduction last year, so clearly, the government has its views there. We would think that the talk -- about 35%, 40% of the population, which is about INR 8 crore to INR 9 crore families, will be the target market for insurance companies. As of now, we do not -- we would not have penetrated more than, say, 10%, 12% of that market.
Yes, all right. So just one connected question here. So something like that, would we be interested in this kind of business that...
Once the scheme rolls out, we will see if there's terms about tendering, like, crop insurance. We'll evaluate, see the pricing. The -- if it is at a low price, there has to be a lower cost of treatment which is upfront, like some states like Kerala have where the cost of treatment, which normally a private hospital would charge, the rates there are maybe 60% to 70% lower for the same treatment. With that kind of thing, we will reevaluate the pricing and see if it makes sense. Clearly because of our solvency position, our brand, our size, if it comes to that and we bid, we should be in a good position.
The next question is from Hitesh Gulati from Haitong Securities.
My first question is what is the current mix of 4-wheeler, 2-wheeler and CVs in motor?
Milind? Yes.
Yes. So if you look at it as overall percentage of the business as such, the 2-wheelers does not -- has been growing around 21%, 22% in this quarter. And in terms of the overall line of business mix-wise, the 2-wheeler will be around 5%. And motor CV are -- which is comprehensive and this together, I think that is contributing to almost around 16% of the total business.
So CV is 16% and 2-wheeler is 5%. Is that correct?
Yes, yes.
Yes. 2-wheelers volumes are high. Ticket sizes are very low.
Yes.
But -- okay. And sir, on the second question, on this group health business that we have around 23% in Q1 FY '19, can I get some more color on this? Is this business that is a stand-alone business? Or is this business that we acquired as a book here when we sold, like, the fire, liability lines to a corporate? And is this mainly being done through the banca channel? So some more color on that.
Yes. As far as this group health business is concerned, this is completely corporate business. And I think, long back, this kind of accommodation or subsidization in terms of different lines of business has already stopped. So whatever pricing happens is on a stand-alone business for the health portfolio alone. Because earlier, what used to happen is that the fire business used to be a tariff business and health was a nontariff business. That's why health used to actually subsidize for a good portfolio of fire insurance, but that has stopped now after de-tariffing and each portfolio is being evaluated on a stand-alone basis. So that is one thing. The second part, what you asked about group health is about the overall deals, right? So...
Yes. So like what -- is this business being done mainly by banks? Or is this large corporates, mid-corporates...
Corporate. This is a completely corporate business -- corporate and SME.
So is this being distributed by banks, the bancassurance channel?
No. There are a few leads which we get -- do get through banks, but most of the business is being done by our corporate team.
Next question is from [ Ravi Mehta ] from [ D Financial ].
One small clarification on the persistency ratio in Q1 '19 is 73%. When I look at the whole of FY '18, it was 77%, so is there some one-off of this rate coming down sequentially?
See, the persistency rates actually go up quarter-on-quarter. So normally the quarter 1 is the lowest, and it scales up by quarter 4. So what's important to see is how we stand versus the same period last year. So last year it was 68%, which has moved up to 73%.
Yes, okay...
So the trend is important to see because, if you compare the full year number with the quarterly number, that will not be a right comparison.
Okay, okay...
Just to put it back, a couple of years ago -- we have been having this con call last 2, 3 years on this business. We said our focus is, a, to reduce our dependence on group, which at one time was almost 70%, by growing individual rated premium. I think we have been delivering on that. Along with that, we wanted to improve our persistency, and last year, we ended up at 78% with a 9% improvement. And three, because of persistency improvement, we should eventually see a renewal premium growth. And four is a sustainable product mix. I think, one by one, these levers are falling in place. Our focus continues to be strong on all these levers. And we think, when you put all these together, you can draw the picture of where we are trying to get it. And it is playing out well so far. And we hope, as long as we continue to grow and we continue to maintain our persistency high given the quality of business, I think we should be able to see a good traction on the life business, both on the top line and bottom line.
Okay, okay. Sir, this 73% will -- on a run rate basis will keep improving in the next few quarters and end the year at a better rate...
Yes. So see, if you'll see the last year number, 68% actually ended at 77%, yes. So what's important to see is the delta now. 68% has moved to 73%, and then that scales up every quarter.
Even this 73% itself will improve because some people pay late. Instead of 13th month, they may pay up 15th, 16th, 17th month also.
Next question is from Dhaval Gada, Sundaram Mutual Funds.
Yes. Sir, just one follow-up on Slide 5, where we report on Ind AS, just if you could explain. So while the impact on the general insurance business looks low, if you could just explain what is on the positive side and what is on the negative side under Ind AS? And similarly, if you could just dissect for the life insurance business as well just to understand it better.
I think in the general insurance largely it is the equity portion; and this marked to market and routed through P&L, FVTPL as we call it. Because if we put it in FVOCI as and when you realize the profit, it does not get back to the P&L. So that is a major difference. Otherwise, most of the other differences are very small. I mean there is something on actuarial gains and losses on gratuity which has to go to OCI. There's an expected credit loss, but insurance companies hold pretty much most of their bonds in government securities and AAA-rated securities. So impact of these are not expected to be major. On the OCI side, yes, because the bonds which you -- are held to maturity, we used to report the market value as a note under our investment schedule. Now it goes as a fair value change and through the OCI into the reserves. So there will be some more volatility in net worth because of that. Previously, only equity was treated like that. Now equity goes into P&L and bonds go into the OCI. These are the major changes. On the life side, some part of the premium will get knocked off because, to the extent, you are doing some group superannuation gratuity which has no insurance component, under Ind AS that has to be knocked off from your top line. It has no impact on profitability. It's only a reclassification. Secondly, we have this same issue as general that all equity will go under FVTPL, which means volatility on your P&L will increase, depending on how equity markets behave and more -- once equity is considered. This is for shareholder funds and the nonpar category which is 100% shareholder. On the bonds, again it will be FVOCI, so that can cause volatility on your net worth as the bond rates move, but typically what happens is, when bonds are losing money, nobody sells bonds. We hold it to maturity, so eventually, that will get routed back to P&L as and when they get mature. Otherwise, in terms of actuarial, you can't keep general provisions around that, but that is pretty much standard for everybody. They're not going to rock the boat either way. What is most critical for Ind AS perspective for insurance is Ind AS 117, which will come from 2021. I mean, still, companies are evaluating the impact. And globally also IFRS 17 is just being evaluated. It will, again, come into effect only 2 years from now, so we will wait and see. That will substantially change the way life insurance companies present their accounts because a lot of the discounted value concepts will come into your P&L.
Sir, just one follow-up on BALIC. So what is the impact of amortizing those expenses? Wouldn't that also have a favorable impact?
No, we have not chosen that -- I don't -- I am not sure it is allowed, under Ind AS, for insurance contracts, maybe for investment contracts, but all expenses are written off. There is no impact on amortization of expenses indeed. Raman?
Yes. So on the insurance side there is a bit of ambiguity on amortization, but given that IRDAI very clearly mentioned in their draft regulation that they will not allow amortization, we have not taken that route. But on the investment contracts where it is allowed and even IRDAI allowed it, the quantum of impact is very, very negligible for us.
Thank you very much. We will take that as the last question. I would now like to hand the conference back to Mr. Karan Singh from JM Financial for closing comments.
On behalf of JM Financial, I would like to thank Mr. S. Sreenivasan and the senior management team of Bajaj Finserv and all the participants for joining us on the call today. Thank you, and goodbye.
Thank you.
Thank you.
[ Thank you ], everybody.
Thank you.
Thank you...