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Bajaj Finserv Ltd
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Ladies and gentlemen, good day, and welcome to the Bajaj Finserv Q3 FY '20 Earnings Conference Call hosted by JM Financial Institution Securities Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Ms. Bunny Babjee from JM Financial. Thank you, and over to you.
Thank you. Good morning, everybody, and welcome to Bajaj Finserv's earnings call to discuss the third quarter FY '20 results. To discuss the same, we have on the call, Mr. S. Sreenivasan, CFO, Bajaj Finserv Limited; Mr. Tapan Singhel, CEO, Bajaj Allianz General Insurance; Mr. Milind Choudhari, CFO, Bajaj Allianz General Insurance; Mr. Tarun Chugh, CEO, Bajaj Allianz Life Insurance; and Mr. Ramandeep Singh Sahni, CFO, Bajaj Allianz Life Insurance. May I may request Mr. Sreenivasan to take us through the financial highlights, post which we can open the floor for Q&A session. Over to you, sir.
Good morning, everybody. It's again our pleasure to welcome you all to the conference call to discuss the results of Bajaj Finserv Limited for Q3 and 9 months ended of FY '19/'20. In this call, we're largely concentrating on the consolidated results as well as the results of our insurance operations through Bajaj Allianz General Insurance and Bajaj Allianz Life Insurance Companies. Bajaj Finance, which is another major subsidiary of ours, which is listed, 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 companies. The status has remained the same as at the end of the previous quarter, and there is no change. Any statement that may look like forward-looking statements are just estimates and do not constitute an assurance or indication of any future performance result. As required by regulation, BFS has adopted Indian Accounting Standards from FY '19, that is the last year. The insurance companies, however, are not covered under Ind AS. They have prepared Ind AS financials only for the purpose of consolidation. Accordingly, for BAGIC and BALIC, the stand-alone numbers reported below are based on non-Ind AS accounting standards as applicable to insurance companies. The stand-alone numbers of BAGIC and BALIC are given in the investor presentation, which was uploaded in our website yesterday. It's also on the Indian GAAP basis. However, the consolidated results of BFS will reflect the Ind AS adjusted numbers of BAGIC and BALIC. Let me now take you through to the key highlights of the quarter. All the 3 companies, BFL, BAGIC and BALIC have recorded strong growth in premiums. BFL has continued its stellar performance. It has recorded highest ever quarterly consolidated profit again, boosted by strong growth and solid operating performance. BFL's growth was also aided by the lower corporate tax rate. Both BFL and BAGIC have already opted for the lower tax rate of 25.17% including surcharge for this financial year. BFL recorded year-on-year growth of 35% in consolidated AUM, 41% in consolidated total income and 52% in consolidated profit after tax. Given the general slowdown in the economy, we believe this growth is quite exceptional. And it's once again a testimony to the strong momentum that BFL is keeping, not only in top line but in bottom line as well. The GNPA and NNPA as for the expected credit loss method to stand under Ind AS was 1.71% and 0.70%, respectively. Excluding the provisions for IL&FS made in the previous quarters, the GNPA and NNPA would have been 1.45% and 0.59%, respectively. Bajaj Housing Finance Limited, BHFL, closed the quarter with an AUM of INR 35,035 crores with 115% Y-o-Y growth and the profit after tax of INR 131 crores, which for the last year was INR 37 crores. BHFL recorded an annualized growth of 2.1% for Q3 FY '20, which is an encouraging sign for us. Higher claim ratios, including losses in crop business from Maharashtra and Madhya Pradesh, affected the underwriting results for the quarter of BAGIC. BAGIC combined ratio for Q3 was 103.6%, which increased as a result of higher claim ratios in the -- primarily in the -- higher claim ratio of 72.6% for the quarter as against 64.3% in the Q3 of FY '19. The claim ratio increases were largely losses in motor OD and crop insurance segments. BAGIC's profit after tax decreased due to the higher underwriting losses and they were partly offset by higher capital gains of INR 58 crores and the lower tax rate as well. BALIC recorded excellent growth in new related individual premium, renewal premium and gross premium. BALIC also recorded growth in profit after tax, which was also helped by a higher profit on sale of the investments and a lower tax expense. BALIC AUM crossed INR 60,000 crores during the quarter. Before we open up for Q&A, I'd like to inform you that from February 1, 2020, Mr. Bharat Kalsi, who has been with us for the last few months, will be taking over as the CFO of BALIC; Ramandeep, the CFO of BALIC will be moving to BAGIC. From there, he will take over from Milind Choudhari, who will retire in April. This is part of a planned succession -- as part of our group succession planning. Before I pass it on for Q&A, I would like to highlight one more point. Over the last few quarters, we have found that in the -- I mean, we have explained in great detail our approach to crop insurance business and various segments of business. So we would very much appreciate as we focus on the results for the quarter. We have the team Tapan, the team from BAGIC and BALIC led by Tapan and Tarun with us in the call, and they would be assisting us in giving us appropriate replies to your questions. Finally, to come down to the consolidated results, the consolidated total income was up 31% at INR 14,561 crores, the consolidated profit after tax was up 32% at INR 1,126 crores. Bajaj Finance consolidated profit after tax was up 52% at INR 1,614 crores. General Insurance profit after tax was INR 191 crores for the quarter and Life Insurance shareholders profit after tax was INR 143 crores, which is an increase of 28%. For the 9 months, the total income is up 39% at INR 41,057 crores, the consolidated profit after tax was INR 3,175 crores, which is 33% higher than last year. Bajaj Finance consolidated profit after tax was higher by 53% at INR 4,316 crores and the General Insurance profit after tax of INR 695 crores, which is flat compared to the previous year of INR 697 crores and the Life Insurance shareholders profit after tax is at INR 412 crores is higher by 6% over the previous year. I now open the floor for questions and answers.
[Operator Instructions] The first question is from the line of Hitesh Gulati from Haitong Securities.
Sir, I just wanted to know the advanced premium number from long-term motor third-party policies in our General Insurance business.
Okay. Milind? Raman?
Yes that is INR 683 crores.
And then just also wanted to understand, sir, that in motor own damage, the claim ratios are moving slightly upwards because of competition. But motor third-party, we are able to, like, maintain claim ratios. So are we, like, pretty confident that this is the trend in motor third-party that claim ratios are going to be stable? Or do we see any impact coming here as well?
Let me put this, see the General Insurance business, as you know, our third-party claim ratios have always been fairly good. And last year, we did give out our reserving triangles as well for the benefit of the investing community. Motor -- General Insurance as far as claim ratios go, we cannot take any quarter as a trend, and we have to look at a long-term trend. And we have been having a fairly reasonably good performance for motor third-party over the last 2 to 3 years. Going forward, we will have to wait and see how things evolve. Yes, in the past, we had been getting price increases. But each year, the rate of increase has been lower than the previous year. Of course, the overall industry performance will also determine how rate increases will happen going forward. The new Motor Vehicles Act has come into force, it is too early to say what the impact of the new Motor Vehicles Act will be. There is an expectation that the time for reporting claims will shorten. So in the initial stage, the part of the floor, which remains with us from the time of loss till the time of reporting, may reduce. At the same time, the settlement of the cases still has to go through the MACT and other courts. So therefore, the settlement periods, the court period, as of now, there's no indication that they are going to come down. Faster reporting will also -- could also mean that there will be fewer frauds and instigated claims, which normally happen after the first year. And therefore, these are trends that we will be watching carefully, and we will be evaluating. Tapan, would you like to add anything to that?
No, Sreeni, I think you summed it up very well.
The next question is from the line of [ H. R. Gala ] from Finvest Advisors.
Congratulations for really good set of numbers. Bajaj Finance really, pleasantly surprised us yesterday. Talking about, sir, our Life and General, you said that the taxation has been lower. So we have adopted this 25.17% in insurance company loans?
Well, as far as BAGIC is concerned, it is applicable because BAGIC has adopted 25.17%, and this was announced last quarter itself. As far as Life is concerned, they're not covered by the new tax change because they are under a different tax regime where the effective tax rate is much -- is at 14.42%.
Okay. So BAGIC, they already adopted?
BAGIC has adopted, yes.
Okay. And sir, as far as the crop is concerned, which has been mainly the reason for underwriting loss, how do you see fourth quarter panning out?
See crop is a business loop. It is a short-term business. There is a kharif season and the rabi season. Each year, depending on the reinsurance terms, depending on the way we assess the market and the performance of the past years and the general feel of the market, we will decide whether to quote or not, and which clusters to quote. That has already happened. Obviously, in this business, as we have always been saying that once in 3, 4 years, you will have a really bad year. This year has been exceptionally bad because we had rains even in October, November. Even after the harvest, there were losses. So therefore, this is the kind of loss this business will take. However, if we look at the last 3, 4 years, this has been a reasonably good business for us. And that is where we stand. Going forward, we will continue to do the business, but we cannot say how much we will do. That depends on our assessment of the market. We may or may not participate. Last year, we did not participate in kharif, we participated in rabi. This year, we have done in kharif, we will be participating in the modest rain rabi. But next year is a different story altogether. So there are multiple factors we have determined whether you participate or not. This is not a recurring retail business. Does that answer your question?
Yes.
A request for the coordinator, Tapan, sir, got dropped. So if you could reconnect him?
Sure, sir. Connecting him.
Yes. He is traveling. So he would -- he said it may get dropped in between.
Okay. I understand. Also, third question is regarding the impairment of the -- some of the troubled bonds, et cetera, which we had. We still have INR 115 crores in BALIC?
Of?
Of the nonperforming...
The impairment now, if we take a company by company, we first had last year, the IF&LS, which we provided 100% in both companies. So there is nothing to be provided for in those cases because we are holding the unsecured paper there. As far as BHFL is concerned, we provided 60% of our holding in Q1. We believe that we are waiting for further information. It has been referred to the IBC, and we will see what further action comes out of that. As of now, we are comfortable with this provision.
Okay. So these were the only 2 accounts?
These are the only 2 ones, which are not performing. All the others are performing assets. And only -- what we have shown as stressed assets are only those assets where we have enough public disclosures, we have over the last -- since last July, July of 2019, we have indicated that we have been downgraded since we bought it. It doesn't mean that they are nonperforming, they are all performing assets. As of now, they're paying interest, and we have no reason to believe they will not pay in future as of now.
Yes, yes. Sir, the last question on BALIC. We don't report the VNB margin, but last year, we had 6.9%. So what is your expectation? Will it remain in that range? Or because of the Axis Bank that we have added, there could be some of upfront cost?
Now we will level the margins. And next year, we will review with the company whether we need to disclose it at least half year. That's the call we will take early next year. As of now, I can only say that the trend is positive. We are very hopeful because in the Life business, what happens is, the last quarter is very critical in terms of top line. And therefore, a substantial proportion of your expense overruns actually come down in Q4 because the expenses don't go up in the last quarter. So that is the big swing, which is why we have chosen to have report it only once a year. Tarun, would you like to add anything to it?
I think broadly you've addressed. Let me just add 1 more point to that, is that we are actively monitoring our product mix and channel mix. That too contributes to NBV. And our intention is to keep only just growing our NBV margins. And more important to me, actually, is the absolute NBV.
Okay. Sir, as far as the product mix, as you rightly said, is very important. Now we see from the trend that now ULIP is contributing relatively lesser percentage. So our focus will be more on the nonpar, par protection, how are things going to move from here on?
See, it's a balanced approach. From higher ULIP, we're now down to way lower ULIP's. As the company last quarter 3, we had 61% ULIP, we're down to 52% ULIP. We still believe ULIP as a product is particularly for the affluent and the HNI in larger cities has good acceptance. Again, there is a significant move to nonpar, par, and we were not in the term business. We've now launched our term plan as well. Last time in my call, we're starting launching that. Now the risk products are also coming on board.
Okay. So as a result of change in product mix, you see the positive trend in VNB margin should happen because their profit margin are probably relatively better as compared to in ULIP. Is that correct?
Yes. See I'll always be careful talking about the future, yes, but the focus is to try to get it up.
On a sustained basis, you're right, it should be, but like we discussed earlier, we have made some investments in terms of manpower for Axis. So like Tarun rightly said, we'll have to wait and watch how Q4 plays out for us and then give some guidance.
Okay. Okay. And how is the Axis progressing?
So as Raman said, we are -- see the system integration -- starting up with a new partner usually takes some time. And that is quite progressive in the way we are working. So there are system integrations we're trying to do, frictionless processes. And of course, there's hiring that is underway. That is currently going on.
Just a request, Tapan needs to be reconnected.
Yes, sir. He's connected back. The next question is from the line of Nidhesh Jain from Investec.
Sir, firstly, in General Insurance, especially in the motor OD segment, we have been seeing consistent increase in loss ratio. That is true for peers as well as industry also, I believe. So do you expect that trend to reverse next year? Or we should expect sustained higher loss ratio in motor OD?
Tapan? Is Tapan connected?
Yes. I'll answer this. Yes. I'm connected. I'll answer this.
Yes. Yes. And you think that it is about motor OD and what is your expectation next year with the discounting and the loss ratio trend increase?
It's a fair question. So there are 2 components to the increase in motor OD loss issued this year. One component is, if you see there has been a series of floods [indiscernible]. So our flood also has an impact in the motor OD ratio because a lot of losses happen when car goes into water more than what is supposed to be going into. The second is the discounting in motor has increased when [indiscernible] was implemented. [Foreign Language] discount increases, then obviously the premium that you realized per a vehicle goes down. When the premium goes up, the ratio goes higher. Now, we're confident of it. Now if I look at it, the ratio may change if floods next year is lower than what is today. Discounting, I think, more or less reached the peak. I don't see it going forward any more in the next year. So if a reduction happens next year, it will predominantly be because if the floods are less than what it was this year. Does that answer your question?
Sure. So on pricing, you are not seeing any positive relief? Pricing continues to remain?
Yes. If you look at it, overall, also the motor combined ratio for the industry also, there has been a couple of percentage points, which has happened. [ GIC ] increase may happen if the TP price increase does not come the way industry expected. Then there would be a price increase happening in the motor part of it. But predominantly, there will not be a very significant price increase in the lowering of discount, if I say so, next year compared to what it is, is my personal feeling.
Sure, sir. Sure. Secondly, in the General Insurance business, we have seen expense ratio also going up despite decent growth coming from crop insurance where the operating expenses should not be material. So what is the reason for that?
Yes. So if you look at the expense ratio moving up predominantly, if I look at, let's say, our company, we're doing a massive transformation on the IT space. We are not investing a lot in that. And we also have gotten new relationships. We invested in [indiscernible] relationships. Those obviously taper down as the year progresses and the coming year comes to, which is this. Now from an industry perspective, if you look at the growth for the industry, is now coming down. Now if you look at for the month of December, the growth of the industry was a low single-digit number. The general industry normally follows the economic growth of the country. So that's about 8 to 9 months to the economic growth of the country. So as the slowdown is there, it starts reflecting into the insurance growth also, which is where the reflection is coming through right now. So when the industry growth starts coming down, obviously, the industry expense ratio will start moving up. Because the ratio again of premium to the expense ratio. Does that answer your question?
Yes, yes. And on Life Insurance, in this quarter specifically, we have seen strong growth in institutional channel, new business, institutional business. Does it include Axis Bank or...
No, not yet. Not yet.
The next question is from the line of Avinash Singh from SBICAP Securities.
2 questions on BAGIC. First one, looking at, I mean, the health line. I mean, that claims ratio has been somewhere in the range of 85% to 90%. Now given the sort of a low float and all those things and adding the OpEx and commissions, probably the -- of course, the overall underwriting losses will be meaningful. So I mean, do you -- are you comfortable with this kind of one? Do you see this to be this range bound? Or do you expect or taking certain initiative to improve this? And what would be sort of your comfort zone as far as the claims ratio in the health segment is concerned? That's the question number one. And second question is more from that sort of a industry dynamics perspective. Given the recent that decisions that the regulator has taken in the context of how distribution is being done by the large OEM-related driven brokers, I mean, do you see that can bring meaningful change to the industry distribution dynamics? Or it is just going to be, I mean, very slow and not very, very impactful decisions?
Avinash, can I take the second question first, and then I'll transfer to Tapan. See, there has been a regulatory order against some motor insurance service providers who are in the -- who are organized as brokers. However, this is a legal matter. Those companies, we believe, will go to the Securities Appellate Tribunal. And we'll have to wait and see what the order is like. Because many multiple issues, which are raised in that order, and it is for appropriate legal forum to comment on the appellations of that. So till such time, we are not taking any call on that. We will wait and see what happens. These things take time. In fact, today only, I was reading about a very old order on a Life company where it has been referred back to the regulator to review the amount of disgorgement that company was asked to do. So these things will take time. On the second question, the health fees.[Technical Difficulty]Tapan, would you like to...
Yes, sorry, I missed the question, Sreeni. Could you just repeat the question once again?
The question was that the health -- the loss ratios are about 84%, 85%. He wants to know whether we are comfortable with that loss ratio? Do we see that going -- which way going forward?
Okay. So if you look at the health loss ratio, predominantly, we had an extended monsoon this time. Now if you predominantly look at the entire industry health loss ratios of retail, you will find the major 2 reasons are fevers of unknown reasons, dengue and the chikungunya, which actually picks up on the past 3, 4 months. And this year, it was extended. So the pace in which the loss ratio moved up was higher compared to what it was last year. So if you again see the [Technical Difficulty].
I think the line is dropped.
Mr. Tapan got disconnected. Calling him back.
Yes. See if you can connect him again or we'll move forward and then take this question later.
Sir, Mr. Tapan is connected.
Yes. Sorry, I think the telecom is in very bad shape. It keeps on dropping. Yes. Coming to point. So if you look at the health loss ratio movement has happened, it is because of this reason. Now going forward, on the retail health basis, the loss ratio, I believe, would be constantly around 73% to 75%, is where it would be and that is how it would stabilize. The movement up is because of the excellent monsoon, which has been there. And I think that still it will come down from where it is today.
Yes. So I mean, given your mix of, I mean, the retail and group, so expenses would be different, what would be sort of your comfort zone? I mean, where do you think that, okay, your ROEs on that -- your capital backing that will be respectable? So I mean, is it like on a portfolio versus 80%? Where is the comfort zone?
No, I'll just say between 73% to 75%.
On an overall portfolio or just for retail?
No, no, overall also. If you back it up -- if you just are talking a pure group, group should also be -- the group will always be a 95% plus. If you see, this year, we have reduced our group exposure and we're pushing retail higher. So overall, if you have a health loss ratio between 73% and 75%, then you get the required [ RAC ].
See, Avinash, just to add to what Tapan said. While we reduce group, we have already contracts in place. So the claims will continue to come. That is the nature of the business. It normally takes about 9 months to 12 months before we see the result of any action that you take. Having said that, we started this initiative on group health, I think by the Tapan and his team have started this almost a year ago. And now we will start seeing hopefully better results. And the mix between group and individual is a very complex state, which keeps changing every time the way the market behaves. Sometimes this is profitable, sometimes that is profitable. So we'll have to wait and see how it comes out as we go along.
And just a quick follow-up. Your Health Insurance business sold on Banca platform that -- does that come under group umbrella or individual? I mean, in classification, we have -- it will be retail. But how do you classify if you are selling a certain health product offered on a Banca platform?
Sreeni, sir has dropped for a while. So can I take the call, please?
Sir, you may go ahead.
Milind are you there?
Yes, yes. I'm there.
Yes. Can you just repeat your question?
No, no. I think just to clarify that, these products, which are sold through banks, they come in the group platform or a group classification.
Okay, okay. Yes, but behaviorally, it will be more of a retail product. Okay, very clear.
Yes.
The next question is from the line of [ Ajox Henry ] from B&K Securities. Mr. Henry, if you have muted yourself from the handset, kindly unmute yourself please. As there is no reply from the current participant, we move to the next question from the line of Vinod Rajamani from HSBC.
I have 2 questions. One is, what is the mix in terms of 2-wheeler, passenger cars and CVs for your motor portfolio? And the second one is that now reinsurers are signaling that there's going to be some price hike in fire. So how do you see the fire portfolio sort of developing?
Yes. In terms of the business mix as such, overall, around for the 9 months, 2-wheeler is around 15%, 4-wheeler is 46% and commercial vehicles is 38%, and I think remaining 2% comes from some miscellaneous classes, which is more rather extended warranties. Hello?
Mr. Rajamani?
Did I answer the first question?
Mr. Rajamani, if you can hear us, please do reply.
The second question was on fire. So reinsurers are signaling that there's going to be some kind of price hike in the fire portfolio. So how do you kind of visualize how that portfolio is going to develop for you specifically?
This is Tapan here. Let me answer this -- take this question. Now if you look at the fire and the statement that you made of reinsurers. It's not reinsurers are signaling anything on this. What GIC has said, which is the Indian National Reinsurer, that based on the loss ratio of the industry, their minimum price what they would expect in the TP would be fixed. Now the loss ratios are being taken from IIB, which is a central depository of the data of insurance companies in terms of [ address ports ]. So let us say one occupancy has a high loss ratio, the loss of that occupancy is the minimum with [ GIHL except with GT ]. The occupancy which has lower loss ratio, their prices will go down. And the occupancy, which has higher loss ratio, their prices will move up. So the statement that overall there's a price increase is not the right way to put it, the price increase and decrease will happen on the portfolio performance, which is -- since most of our underwriting consideration that GIC has taken. It's not something which every reinsurer is taking on that basis. But obviously, they would look for how the portfolios are developing. So some lines of businesses the movement will happen. For some, it will go down. So the ones which have performed well, there, premium will decrease. So this is why -- so the average there would be some increase in what we see, but it's not something which you would see a huge significant increase happening on that basis. They are just pegging the underwriting compared to the loss ratios. That's what they're doing.
The next question is from the line of Ravi Mehta from Deep Financial.
I have a broad question on BAGIC strategy. So are we operating growth over underwriting profits or this year is an aberration?
Okay. So if you look at our [indiscernible] which has not increased over time, we keep on looking at options to grow and we also remain an underwriting company. That has been a clear strategy and that's what it is. If you see this year, the things which hit us pretty bad was the series of floods which happened. And since the BAGIC, even the fire portfolio, we are predominantly a retail player, and we've also have some promotion, which is there. But because we have a big retail book in the fire portfolio also and since we also have a big book in the private car and health also. Because of those rain monsoon also have an effect. So you'll see a loss ratio movement, which has happened in all the 3 lines of business because of extended floods and series of floods, which happened. Now when you are a player, which has a good intention because you want to be an underwriting company and when you have series of losses happening, it hits you more compared to the market, which is there and that is why you'll see an increase in our combined ratio. But our strategy is very clear, we want to be able to remain a good underwriting company because our belief is good underwriting company will be able to serve customers better. Does that answer your question?
Sure. So just to ask you further that. But any thoughts on bringing down underwriting profits for growth? Is there a thought going around?
No, why should we change our thoughts. We have sustained for so many years. We'll continue the way it is.
Okay. So probably in that 95%...
Sorry?
Probably your 95%, 96% kind of a combined ratio is something that you've already targeted...
See those are forward-looking statements that you've been asking me. All I'm saying is that we had believed in strong underwriting. We don't change the philosophy there. We had series of floods, which has happened, which obviously affected our results. But in the building renovation business, you see the volatility all across. So unlike other businesses, GI business has high volatility in terms of events. So if you look at this year, let's say, the Australian fire or the cyclone in Japan. So you have these cycles in the GI business. So it's a normal cycle. I don't think that these cycles will start to evolve how the philosophy of our [indiscernible].
The next question is from the line of Rishi Jhunjhunwala from IIFL.
Just one thing on the provisioning made on the investments in BAGIC, that number seems to have gone down? Has there been any reversal?
No, nothing, no reversal.
So actually, 2Q PPT, we had said impairment provided for was INR 1,231 million whereas now we have said INR 742 million?
So I think the INR 123 crores is the total portfolio, on which 60% provision is made.
Okay. And because the disclosure last time you did said impairment provided for INR 1,231 million. So that's you're mentioning about the portfolio?
Yes, yes, right.
Okay. So what would be the -- okay, so you're saying 60% has been provided now?
Yes, we are maintaining the same.
Understood. Sir, second is, just wanted to get some understanding on the crop in terms of split of the loss ratio? How much is attributed to the excess loss cover versus actual experience on losses?
Hello?
Yes.
Can you repeat your question?
Yes. So our year-to-date crop loss ratio is 110%. I just wanted to understand the split between the loss provided for and the excess loss cover cost?
See, basically, whatever the losses are there, they are currently within the threshold only because our accessible treaty will trigger only after 130%.
Okay. But there would be cost associated with taking that treaty? I'm just trying to understand, is it like 10%, 15% of the...
See, that parts keeps varying because it has different variables. So I will not be able to tell you exactly what is the cost effect because it keeps changing based on the impact of other catastrophes also. So whatever cover we would have taken is covered over and above the overall crop also, which is our entity level catastrophe cover.
Understood. And in motor, basically, you mentioned 2-wheeler breakdown is about 15%. Just wanted to understand from a slightly longer-term perspective, where do we want to take it to considering that, clearly, if you really look at the regulatory changes that have happened, there is more focus around 2-wheeler compliance or at least from a long-term TP perspective and all that. So what percentage of OEMs are we already tied? And is there a restriction in terms of how much more will be there?
Let me take this question. Tapan here. So if you looked at it, I mean, the way we plan the business is, wherever we have a good opportunity in terms of a good portfolio and our service network is good, we do that business. So 2-wheeler, as you are aware, there was [indiscernible] in the road are still uninsured. And the impact of the changes was renewed for a couple of months. And then again, it's going back to the normal. So if because of the new act and the people awareness goes up and people insurance goes up, obviously, we will take our reasonable share of market in that business. In the OEM types, so we keep on looking at a good portfolio and then keep on trying that. That's our regular business model, which is there. Does that answer your question?
Yes. Just if you can give some sense in terms of how many of the OEMS we are tied up in terms of percentage?
We have 3 or 4 OEMs tied up right now.
Fair enough. And 1 last thing. Any update you can provide on the [ Axis Banca ] in terms of how the ramp-up has happened? Have we started getting business? And what's the plan from a 12- to 24-month perspective?
See...
I'll let Tarun, to take this question.
Yes. So I think the deal with Axis, I don't think we can get into too much details about their own plans and what we tend to do in detail. But what I would broadly do say is that it's a step-wise process, structured methodology. We've started hiring people. And as you would have seen since December, we've been up on that task. There are some segments, which are opening up. Pilots are already on the month of January. Some business will maybe start coming in Q4. Will it be very significant? Not really, but it will be there. And then I think the effect will start really showing up in Q1 or Q2 next year.
Great. And sorry, I'm going back to the first question. In your disclosures, you have mentioned BAGIC, the total nonperforming assets are INR 123 crores. Out of it, INR 74 crores have been provided, which I guess is 60%. This number last time in 2Q was INR 172 crores and INR 123 crores. Am I reading wrongly?
Milind?
There would be some error. In terms of -- I think we are continuing with the same provision. Because IL&FS has been provided last year itself. So including IL&FS, it will be INR 123 crores..
The next question is from the line of Madhukar Ladha from HDFC Securities.
Just following up on the previous question, that was -- I had the similar question. And in addition to that, in quarter 3, there is an increase in downgraded investments from INR 560 crores to INR 713 crores Q-o-Q. What is this on account of? What exposure is this?
Have we added anything? Raman, Milind?
Hello.
Hello.
Milind, Raman, has there anything added to the downgraded list in this quarter?
No, I don't think we've added anything. That's not in BALIC, it's in BAGIC actually, so...
Is it?
Yes.
Maybe we added YES Bank. We'll have to check that. I think it will be in the public disclosures anyway.
Okay. And in BALIC, correspondingly, there's been a decline in the total stressed exposures on a quarter-over-quarter basis.
We have been -- some of them we have sold during the quarter.
Okay, okay. I also noticed that our -- on a quarter-over-quarter basis, our commission and expense ratios are going up. So what is this primarily on account of?
Sorry, this is for BAGIC or BALIC?
BAGIC. BAGIC. I'm sorry, BAGIC.
Yes. See commission expenses are directly in proportion to what kind of premium we are procuring and the kind of competition, which is going in the market. So commission rates actually will keep fluctuating depending on the market situations. And I think the expenses part, Tapan has already mentioned earlier that the kind of investments we have been making at the beginning of the year and some of the expenses, which are -- the investments which are getting tapered, I think you will see an improvement towards the end of the year in terms of the overall expense ratio.
I understand the expenses because we are obviously widening our distribution reach with the additional partners. But is there anything specifically happening in the market which suggests that you're paying higher commissions for certain segments or businesses?
That I will not be able to indicate on the call. These segments we are paying higher commissions.
Okay. But there are certain places where competitive intensity is...
Of course, I think our strength lies in terms of segmentation and underwriting. In order to attract the right segments, we need to pay higher in some places and lower in some places.
All right, sir. On BALIC, have -- can you disclose what would be the sort of strategy with Axis Bank is? And how much can we scale up with them? Are there any targets that? I'm sure you'll have some targets. Can you talk a little bit about that over the next 1, 2 years? What the sort of numbers can we achieve from there?
See probably, before I pass it on to Tarun, I'll take that question. If you roughly look at the total business of Axis that is about the total individual related premium of BALIC from all channels and by 1 individual retail business. We already do a lot of group business with Axis anyways, which is a group protection business. So therefore, even if we get a reasonable share of that, I don't want to put a number there, which Tarun will explain, it is still a significant growth for us. And as we build the relationship, it will continue to grow. As of now, we have not put any numbers, we are still discussing with Axis, and we are integrating the systems and putting together the whole platform. Tarun?
Yes, I think, Sreeni has directionally said what is correct. I know there's a lot of excitement around Axis externally and internally from our side as well. But I mean, it's a long-term relationship that we are getting into. We do want to take a lot of that share as well. But then there is a process towards improving the share. And I can assure you it will be a significant part of our peak business. But then when the discussions do move, then at appropriate time, we will keep giving you the guidance. And there is still some more time before the momentum builds up there.
On the -- at least on the journey, which we started in the group side, a lot of momentum has indeed picked up. And for 9 months, we ended up doing about INR 170 crores of business. So at least that side, it's picked up. Like Tarun said, on retail, we will come back maybe after a quarter or 2.
The next question is from the line of [ H.R. Gala ] from Finvest Advisors.
I just wanted to know this Chinese virus. Can it become a big problem for the insurance companies in India?
See good question. I think in the past, we have had scares like these, we had SARs, we had H1N1, we had bird flu and things like. But so far, we have not seen a pandemic in India, which resulted in a lot of claims. It largely depends on the cost of treatment, how long they'll get treatment and whether, in fact, it breaks out in India in a big way or not. The positive side of that is, today, people seem to be better equipped. We have started screening from day 1 in all the airports and thousands of people have already been screened, which is a positive sign. The negative sign is because it is from China, nobody really knows what it is.
Yes, exactly.
And therefore, we'll have to wait and see. The market penetrations are a lot higher in terms of what was, say, 5, 6 years ago when we had H1N1. Therefore, the chance is that more people will claim, if it happens, is also there. But these are things that we'll have to wait and see how it turns out.
The next question is from the line of Sanketh Godha from Spark Capital.
Just wanted to understand what would our combined ratio would look if you exclude the flood-related losses? So the -- or the losses how it would look? Because INR 103 crores combined ratio is including the flood events. Excluding it and what would the -- like your number would be for us? Or is it comparable to last year?
INR 103 crores. So I would presume it will be closer to between INR 101 crores and INR 102 crores.
Okay, okay. Perfect. And just 2 questions on Life. When I go and check Policy Bazaar, the protection pricing what we are offering is now the lowest among the industry. And just wanted to understand because most of the life insurers in the call have said that the reinsurance rates are hardening in the individual protection business. So whether this pricing what we are offering in the protection business is sustainable? Or we will revisit if the rates harden in future?
Yes, I think it's a very good question. And I really appreciate that you've been watching the sector very closely. Yes, the prices will harden. And yes, we will increase prices at the appropriate time. And we will -- it will be a pass-through the way we are looking at it. But there is no change from our side in the quarter. This is a strategy that we follow because to bring the clutter. It's a profitable business at this pricing itself. What we've done is we've taken a lot of mitigants in place. So none of our policies incidentally can be issued on a nonmedical basis. So with 100% medical, we are getting very good quality Lifes. The percentage of impact from Policy Bazaar, we have good data of Life, which are upwards of INR 10 lakhs of income -- annual income is a significant proportion of this quality. It's very good quality that's coming in. And because they're all medically appraised, so the underwriting is also so much more comfortable. The reinsurers are really have taken this call because of the not so good experience that they had from a lot of other people who had lot of nonmedicals, which is why we took that call. So strategically, I think it's really worked well for us. We're seeing a good amount of momentum in our agency business and now Policy Bazaar is -- also now that the systems already are moving on with this. And this will remain a key product in our portfolio. You should expect a price increase from us also, but this quarter, there's not going to be any.
And internally, do we have any target of individual protection to be contributing to our individual rated premium in, say, next 2 or 3-year -- 3 years down the line? What the appropriate mix we are looking at, so -- and which channel will drive the growth?
Yes. Yes. So what happens is that, currently, we've been -- because of this pricing, we've been restricted in terms of how many cities we can sell it in. So we are currently only selling it in 150 locations. So as a result, as a proportion is going to be not very high, it is only going to go up slowly. We -- I think in the last -- or the call prior to that, I had explained that we were getting our claim process payouts -- processes right and they're now looking very strong and good, quite satisfied with the way we've moved on our claim handling capabilities. You'll see that claim settlement ratio, it's already moved to upwards of 98.5 or around. So that's very good. First, that had to improve and then we had to move on. This is going to be a constant feature in our portfolio and will go up gradually because it's a strategic call. I'd rather have good quality than have any kind of [indiscernible].
And on the distribution, will it be more Policy Bazaar driven business model for us? Or we will be focusing, say, on the agency and/or also on the incremental Axis Bank tie-up what we are getting into?
So every channel will sell. Agents at this point is incidentally selling much more than Policy Bazaar. And that's been a good movement for us. Of course, then what it does, it hits our average premium in agency because the average premium is a good premium, but it's under INR 30,000. So while our average premium was well above INR 55,000, INR 60,000 for agency. But it's a good quality customer. Bottom line is pretty good. Policy Bazaar is just about started selling in the last 2 weeks because it takes a little bit more time. The other channels are also going to be selling. Axis, of course, will also sell.
Will you mind to quantify the monthly run rate of the business how you have seen for the last 2, 2.5 months since we have started doing it?
No, I don't think I will be able to give you that.
Okay. And lastly, on the group protection business, I just wanted to know INR 1,250 crores of business what we did it for 9 months, can we get that breakdown into channels like BAF, Bandhan Bank and others? And also within the products, consumer durables, MFIs and mortgages?
Raman will answer that?
So I have it partner-wise. We don't have it at the consumer segment level. I'll just give you the partner-wise. Like we've discussed in the past, out of INR 1,250 crores, it's largely divided in 2 parts. One is the MFI piece and then there is the other which is the other credit protection. So of INR 1,250 crores, about INR 700 crores is credit protection through MFI and the balance is through banks and NBFCs. Of which, like I mentioned earlier, Axis is about INR 170 crores.
And Bajaj Finance would be?
Bajaj Finance is another INR 250 crores.
The next question is from the line of Adarsh Parasrampuria from Nomura.
Just before, I wanted to reconfirm what Sreeni mentioned about downgrade of investments in BAGIC, it is on account of YES Bank only, INR 75 crores exposure, which is there.
Okay. Sir, I just had a repeat question on the protection rates, the reinsurers are expecting to hike. You did mention about the experience on wherever policies don't have medical. So can you just confirm whether it's mostly related to that? Or there are more factors? Because when we discussed with a few insurers, it seems that in general as the penetration is expanding, including, say, online platforms, the profile of customers that is in general coming is because the penetration expense you are having different experiences. So a different set of profiles are entering the protection space. So if you can just kind of talk through what is -- apart from what you mentioned medical, what is leading to them to hike the reinsurance rates?
Yes. No, very good question. See it's early days for us to be able to claim the right to knowledge on this. So let me not for a minute even imagine that I can give you a perfect answer. But let me just take it up based on my experience, otherwise. See, the moment you see the customer face-to-face and the moment you are doing the proper due diligence, which is through medical usually, then at least you're able to get the anti-selection out of the entire portfolio. Why did I answer the earlier question from Spark that we want to do this gradually is exactly the reason. Some people, for whatever reasons, are going for numbers, and it's a strategy that works for them, to see what, let's say, 200,000, 300,000, or even 100,000 flights, then maybe from an insurer perspective because we reinsure most of the risk, you can start relaxing lots of these issues. But like BALIC is starting slow, and we've -- our number of lives covered will, of course, is increasing quite nicely. We're quite happy with this. But having said that, there will still be in a few thousands, maybe under 10,000 by the end of -- or near about that number by the end of this quarter. So there is a long way to go for anybody to relax. So you have to basically tailor-make from an insurer perspective, how do you want to approach this entire segment. From a reinsurer perspective, life is very different. Because it all depends on -- it's all a case of whether they've been able to price, did they pay on large volumes, whether they've been able to price correctly partner-wise based on the experiences they see. And then they get tied on to that price and that's where the problem emerges. So yes, lately, given the fact that term is getting to be the flavor of the month, there is an issue. And I think reinsurers correctly, therefore, are increasing the pricing. Nobody wants to lose business here. So they're very clearly doing it in a calibrated form and doing it correctly. And I think this only, happening. If you do realize and just go back in history, we have reduced pricing and term rates started selling in the -- in some significant numbers online and otherwise only around 2009, '10. So in the last 10 years, prices have come off crazily almost by 60%, 70%, the prices have come off. So we are -- we did go one way. Now we are -- there has to be some recalibration that's required. Overall pricing scale will be quite handsome, we will be quite comfortable with the customer. But this is a process of experiential learning and then we'll be correcting because the data wasn't there earlier, only LIC would possibly have that data. They don't share that data. So as long as we stick to medicals, as long as we stick to proper due diligence, which is the process that we are using, pricing can be controlled, but the moment it starts growing volumes, then, of course, there's going to be a balancing act that people will have to play. You've already heard a few other CEOs talk about pricing increasing. And I think it's imminent. We, too, will be doing that, just to be safe, and I think reinsurers are doing the right things there.
And I know it's too early, but do you sense that some of these hikes in cost on reinsurance may not be fully passed? So -- because everybody wants to do protection, people may be willing to lower the threshold on margins that one operates that in the protection space?
God bless, who are all will be wanting to do that. We are not going to do that. We are very clear. We will be -- we will pass on the price hike. Because see, here you are taking up life on for not a year, which is like in the case of credit life that you're taking on the life for 10s and 20s of years. So -- and there are various people are trying to outdo each other in terms of regression or product structures. So one has to be very careful in the way one handles this. So I would only recommend that it should be appropriately be passed on to the customer. Because, like I said, it's already down by 70-odd percent the time it started 10 years back. And having said that, life insurance companies will have to, of course, take their own calls. Margins on these products are good. And if it becomes a dog-eat-dog market doesn't help, but what I've seen is that if you go for margins with volume, in any case, even the reinsurance rates for some companies will go against their wishes worse than what we even -- insurance will price for other companies. So it is a balancing act we'll have to play.
Actually, if I can add to what Tarun said, see when you look at our product mix, and within that, the guaranteed ones and the term are the 2 major risks where you end up -- you could end up taking a significant amount of risk. And it's not something like a nonlife that comes for renewal every year, so we can decide that, okay, I tried something, it did not work, so I can move on. In Life, you're stuck for a long period, and it will see the experience of countries in the west, largely, these 2 are the ones which have really been the significant risk for Life companies. We don't see that kind of issues maybe with the unit-linked product or even the par products, although there is a guarantee. I think the way the par product is structured with a 90-10 structure, I think, it is not that significant. But on the nonpar guarantees and the nonpar risk, we need to be a lot more -- we've want -- what we want to create is what to add what Tarun said is sustainability. We don't want to do something this year because that's a flavor of the year. And then next year, we find that something has gone wrong and so we've rolled back, which is not good to build a very long-term business like a Life business.
The next question is from the line of Vinod Rajamani from HSBC.
Sorry to, kind of berate on this, but on this term plan, how much of it is medical underwriting? How much of it -- is there no medical underwriting? And also, what is the combined ratio that -- some indication of the combined ratio on term that you're currently are facing?
See we don't work on the combined ratio. I'll answer that one first. There's a different approach that we have. Because typically, it's not a 1-year product. The 1-year product, you can do work with combined ratios.
No, no, that's right. But just an indication because if you think of it, it's almost like a nonlife product. It's a long-term product, but just in terms of, just comparing it, just on a stand-alone -- annual basis, what would be the combined if you were to do it?
So it's still -- let me say it again, it is not comparable. There's nothing like combined ratio possible on this. If I was writing a single premium for a 1 year, you can do that because the risk is carried forward for 20, 30 years. So you can't. I mean, it will be based on some assumptions.
Probably 30 years will become 50 years by then.
Yes. Also, I mean, assumptions basically will result in an NBV and the NBV on these products is very good, is the best.
Correct.
In all our portfolio, the other is, of course, it is on first year, if you want a blunt answer, it's a higher strain product because you are -- so the PAT takes a hit. Before we grow the -- and of course, also if the underwriting is not right, then more will be the strain and therefore it will hit on PAT. It's that something we'll have to be careful because we'll have a lot of growth engines including Axis and we'll have term. So that could -- that does typically hit on PAT. But of course, the NBV is very good and that results impact in subsequent years.
Let me add to what Tarun said. See, the focus of BALIC now is -- the most important metric for us is in NBV, not even the NBM. Because we have multiple products, some products are inherently having higher margins, some have lower margins. And there is always a gray area of how to reach single premium in this therefore, as per your NBV reflects both your volume and your margin and the breadth of business that you have in terms of the profit maximizers, the scale builders, the ones which are like in between, and we try to balance that in a manner such that we get a desired amount of NBV growth. We have been growing our gross NBV quite strongly over the last 2, 3 years, obviously, over a smaller base. We are very hopeful that over the next 3 to 4 years, we will continue to see good traction on NBV combined with the higher volume leading to lower overruns and better cost control. Within our net of overrun margin, we should see a fairly significant move. Of course, this is forward looking, and there are so many assumptions or expectations built into this. But I'm just giving you a directional move, what the company is seeking to achieve over the next 3 years is a significant improvement in the NBV.
Your first question on medicals and nonmedicals. So just to kind of give you comfort, we are currently not writing any business less than INR 50 lakhs cover. It is mutually -- if you look at statistics the -- more of number of debts come in INR 25 lakhs and around and below and sometimes, the pricing becomes too tight to be able to handle this in the portfolio. The other piece is we are 100% medical today. If we have to offer this kind of a price, we are 100% financial underwritten and medical underwriting. And like I'd answered earlier, we -- this is a long-term sustainable business we want. And the more better our experience to start with, the better will be the belief from the reinsurer to give us good rates and that we can give the benefit to the customer. The other way around, very high volumes, means bad experiences, and therefore, lower rates -- higher rates from the reinsurer, and that is something we don't want to do and that becomes in too many tactical calls in the entire process. So we are going around in a very cautious way. And I'm happy to say that at this point in time, and when asked, even like, I'd say that among all the insurers, I think we'll possibly have the best quality lives coming to us despite the low rate.
The next question is from the line of Nidhesh Jain from Investec.
Sir, can you explain how the reinsurance work in protection? Do we -- when we get the reinsurance coverage that is covered for the entire life of the policy? Or it is just a 1-year cover?
No, it's entire life. That's why the reinsurers are getting worried and increasing price. So that's for the product. So the longer the -- it's basically, you tie up for the length of the product.
So on the policies, which are already underwritten, there should not be any significant risk in terms of profitability, but by any forward policies that we will write if there is a reinsurance price increase and if someone is not able to pass it on, there will be an impact on profitability?
Yes, yes. So yes, it's only that way. The only thing is, of course, of the experience is that there are mortality, this is a direct hit. So that is where the due diligence comes. So -- and it -- there is some retention on our books, and then the rest, of course, is ceded to the reinsurer. So whatever is on our books, that, of course, hits us. But as you can see in the case of other life insurance companies, the reinsurers are facing pressure, and therefore, problem and therefore, they are increasing price because maybe the ceding that's happened to them is not good so reinsurers losing money. Life Insurance, we have the money loss on even bad mortality usually is restricted because the retention is lower on books.
And is there any pressure to retain more also from the reinsurers or...
No, no. So it all depends, actually. See reinsurers, if you ask me, if you look at 3,000 feet, reinsurers hardly underwrite anything significant on Life, is that business in general. So the portfolio from a reinsurer perspective, they're just about getting started in getting some of the books created. So they would, if I mean they would rather increase the price, but -- and keep same retention. And that's how the actual model usually works. So there is no pressure as such. Pressure is only to increase pricing, not retention.
See to -- just to add to that. I think the key here is the selection, the type of customer segmentation you do, the kind of data you use. Unfortunately, Life being a product where the higher tickets normally go to the more affluent segments and they tend to be of the older age. So the choice becomes a little bit more complex. However, once we are starting this product with full medicals, we will learn that quite well. That's why we said gradually. And as we gain more experience, our long-term goal maybe to retain more and reduce the dependence on reinsurer except where we feel the risk is too high for us to take on any individual case and that is a direction over 3, 4 years, we may seek to do. As of now, we've not decided, but it's just directionally, this way we are looking at the business.
I think that's...
We may cut rates and get business today for something which is 20 years term.
Yes, yes. I think that is very good point Sreeni has raised. The moment we get to a number of 100,000 -- 1 lakh lives or more lives, [Foreign Language] maybe I don't need to see too much as well. So rather -- and we do have a large capital. So we could use a little bit of that. But currently, we are -- it's...
Again, these are parallel with BAGIC where over the last 15, 16 years, you see how our retentions have moved up over time as we gain the underwriting knowledge on segments. Some segments are very new to start with liability, for example. Today, we retain a lot more on liability than we used to do before. So this is the process of learning, and it's a very long-term business. So we have to build it carefully and sustainably, and that's what our companies are doing.
Ladies and gentlemen, due to time constraint, that was the last question. I now hand the conference over to Ms. Bunny Babjee for closing comments.
On behalf of JM Financial, I would like to thank Mr. Sreenivasan, the senior management team of the insurance businesses and all participants for joining us on the call today. Thank you so much.
Thank you.
Ladies and gentlemen, on behalf of JM Financial, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.