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Bajaj Finserv Ltd
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Ladies and gentlemen, good day, and welcome to the Bajaj Finserv Q4 FY '20 Results Conference Call hosted by JM Financial Services. [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 ma'am.
Thank you. Good morning, everybody, and welcome to Bajaj Finserv's earnings call to discuss the fourth quarter and full year FY '20 results. To discuss the same, we have on the call Mr. S. Sreenivasan, CFO, Bajaj Finserv; Mr. Tapan Singhel, CEO, Bajaj Allianz General Insurance; Mr. Ramandeep Singh, CFO, Bajaj Allianz General Insurance; Mr. Tarun Chugh, CEO, Bajaj Allianz Life Insurance; and Mr. Bharat Kalsi, CFO, Bajaj Allianz Life Insurance. May I 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.
Thank you, Bunny. Good morning, everybody. In these difficult times, I would like to welcome everyone to our next edition of our conference call, where we will be discussing the results of Bajaj Finserv Limited for Q4 and FY 2019/'20. We have already put up our investor presentation on the website yesterday. And we have also issued the press release after our Board meeting yesterday. I would also like to welcome my colleagues, Tapan, Tarun, Raman and Bharat. For your information, Ramandeep used to be the CFO of Bajaj Allianz Life till the last call, but now as part of our internal succession planning, he has moved into the general insurance company as the CFO in place of Milind Choudhari who is retiring at the end of this month. Bharat Kalsi is joining us for the first time as CFO of Bajaj Allianz Life. 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 and Bajaj Allianz Life Insurance companies. Bajaj Finance, which is another major subsidiary of ours, has already had its conference call. However, if there are any high-level questions, we would 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 statements that may look like forward-looking statements are just estimates and do not constitute an assurance or indication of any future performance result. A few remarks on Ind AS. As required by regulation, BFS has adopted Indian accounting standards from FY '19. The insurance companies, however, are not covered under Ind AS. We 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 the non-Ind AS accounting standards or Indian GAAP, as we may call, as applicable to the insurance companies. These are compliant with the IRDA's financial statement regulations. Now to give you an update on the performance. Even without the terrible effects of COVID-19 pandemic, India's GDP growth has shown clear signs of slowing down. Besides COVID-19 impact, RBI has unveiled significant measures of repo rate reduction, and today -- even today, they have just reduced the repo rate to 4%. The CRR has also been reduced and targeted long-term repo operations, TLTRO, was offered in March 2020. Even as economic conditions remain difficult, all our 3 businesses have performed well till February 2020. However, as you may be aware, the nationwide lockdown enforced on March 25, 2020, and the moratorium on loan installments for customers of banks and NBFCs announced by RBI impacted the performance for the month of March 2020. The lockdown has since continued, it was first extended up to May 3, and now at least in Maharashtra and many parts of the country, it will continue to -- it is still continuing in different forms. As new car sales came to a standstill and since IRDA had provided customers time till May 15, 2020, to pay the renewal premiums for policies expiring after March 24, 2020, the growth of general insurance industry was affected in March and subsequently, in April as well. The life insurance industry also recorded a steep fall in new business in the month of March as a substantial amount of business seasonally for the life industry is written in the last few days of March. Despite these challenges, the company has been able to record its highest ever annual consolidated total income and profit after tax. Before I cover the highlights for this quarter, I would like to discuss about Bajaj Finserv's response to COVID-19 on the Q4 and FY '20 results and the probable future impacts for our insurance subsidiaries. As I mentioned earlier, Bajaj Finance has already had its call, and we have had an extensive preview of the management on the various actions they have been taking from their side. Face with COVID-19 and the lockdown, the company and its subsidiaries took immediate steps to handle this force majeure situation. Some of the initiatives were activating business continuity plans, ensuring employee safety, operating work from home, setting up virtual private networks and IT infrastructure, continuing business digitally and reaching out to customers to meet their servicing requirements. In fact, BAGIC, BALIC and BFS business continuity plans were tested by this lockdown, and I must say that all 3 companies came out very well, bringing in changes as required at the rapid phase. Every employee was contacted to ensure his or her safety and well-being during these tough times. A health support hotline was created for employees with a doctor on-call. In addition, various end-to-end digital sales trainings were provided virtually even before the lockdown through our e-modules and video-based learning solutions, such as SkillSity for BAGIC. While ensuring the safety and upskilling of our employees, we have made sure we support our customers and partners in every possible way. We continuously engaged with partners and provided virtual product training. We had mapped each of our distribution partners' capabilities and supported the partners who needed extra support. We integrated new processes on priority to ensure smooth transition. At the customer end, we already had the digital assets in place to digitally service their needs. We reached out to customers to reduce their panic and engaged with them to help them understand how to meet their servicing needs. To give you a bit more flavor onto this, BAGIC issued over 1.4 million policies, settled over 700,000 claims and serviced over 270,000 customer footprints between March 24, 2020, and April 30, 2020, when there was a complete lockdown. BAGIC onboarded 10,000-plus agents digitally through the [ Sathi ] app and even launched 2 innovative products in this period, Pay As You Consume Motor product and BAGIC GOQii Copay Health product.BALIC issued approximately 24,000 policies between March 24, 2020, and April 30, 2020. Of the 24,000 policies, around 15,000 policies were issued in April '20 with term policies contributing to 21% of the total policies. In addition, BALIC digitally onboarded around 8,000 points of sales person through the iRecruit app from April 1, 2020, till May 20, 2020, with about 3,500 of them being onboarded in April 2020. In addition, BALIC has been agile and introduced new functionality, both on the customer and partner end, such as signature on customer declaration form replaced with OTP, co-browsing enablement for online buying journey, et cetera. The situation is still evolving. And difficult to hazard a guess on how this pandemic will evolve. The company and its subsidiaries will be focusing on profitability over growth, seeking to convert cash -- conserve cash, borrowing long term, strengthening collections, reducing overheads and preserving capital adequacy. The spread of COVID-19 pandemic resulted in a sudden and steep fall in the value of shares traded in the stock exchanges. In Q4 FY '20, the Nifty 50 Index and the BSE 200 Index both lost 29%. Under Ind AS, the insurance subsidiaries have chosen to hold equity securities at fair value through profit and loss account. And therefore, the insurance companies had an unrealized mark-to-market pretax loss of INR 768 crores in the consolidated financials. Additionally, BFL had made a contingency pretax provision of INR 900 crores in the form of provision on account of the impact of COVID-19. The MTM adjustment and contingency provision, together considered as COVID-19 impact, after adjusting for tax and the company's interest in those subsidiaries have impacted consolidated profit after tax for Q4 and FY '20 by INR 807 crores. Now coming to the outlook for our insurance subsidiaries. I must again quantify this by saying that these are just estimates based on facts available at this time. As this pan out, it may turn out a bit different from what I'm telling you now. However, these are the broad trends that we are observing, and I would like to share with you some insights. Given the uncertainty, it's tough to gauge the extent of the impact COVID will have on the industry. Still this is what we think it will be. The outlook for our general insurance business in the coming year is likely to be mixed. Based on new motor vehicles and investment in assets, the key drivers of general insurance are likely to be subdued. Motor insurance, travel insurance and credit insurance are likely to be impacted in terms of growth. Demand for health insurance should pick up as the need for protection heightens. Property business is expected to benefit from the price hike. Post the PSU bank mergers, I must complement the BAGIC team for this, BAGIC has retained all the large bancassurance relationships and gained access to over 10,000 bank branches through the already large distribution network. On the claims front, we expect the amount of claims will be on the lower side while the restrictions are in place. However, post the lockdown, we expect some impact to be felt due to diesel cars lying unused, higher repair cost with dealers increasing rates. On health claims, as of now, we are not expecting COVID-related health claims to be exceptionally high in relation to BAGIC size given the low level of penetration of health insurance and BAGIC's own market share, which is below its overall market share. As you may recall, we had deliberately slowed down our exposure to group health over the last 12 months. So our overall exposure to this is actually lower than what it was maybe more than a year ago. This will evolve over the next few months. Similarly, we expect lower non-COVID claims during the lockdown as people postpone corrective surgeries and avoid hospital visits for smaller illnesses. However, post the lockdown, there could be a rise in claims due to postponed operations taking place and the hospitals seeking to cover their losses. Commercial lines expect lower claims during the long term. Given the uncertainty with respect to COVID-19, BAGIC will continue to drive its expense reduction initiatives and focus on digitization of operational processes, both on the customer and partner end and endeavor to transform to the new generation BAGIC in the no-touch and contactless environment. Overall, BAGIC's robust solvency, large AUM in relation to its premium, prudent underwriting, stable management team and strong brand positions it quite strongly among the peers and should help it withstand the crisis and take advantage of opportunities once the crisis has passed. Coming to BALIC. During the period of national and state lockdowns, where businesses are not functioning, coupled with volatile capital markets, retail customers are cautious, right? And they are seeking to conserve cash. They don't seem to be comfortable making long-term commitments. This will initially have an impact on new business, subject to containment of the pandemic. In addition, retail term sales, though doing well, could have done more, but for the compulsory medicals for our flagship new product, Smart Protect Goal. We have been conservative in our approach to underwriting in the Smart Protect Goal because it is, by far, the most competitive in the market. We will soon be launching a revised SPG product with a higher non-medical limit, more number of locations and smart underwriting new value. There has been an increase in demand for guaranteed savings and protection products, and it is hoped that this demand will continue even after the pandemic. BALIC's move towards the balanced product mix, which started a couple of years ago, is expected to help it stand in good stead. In fact, if you recall, we have been saying in the previous conference calls, that one of the reasons we wanted to diversify product mix was to derisk our exposure to the market, which comes in the form of unit-linked business. BALIC will be focusing on renewal premiums, channelizing new type of partnerships, controlling costs, reaching out to prospective customers digitally and enhancing digitization of operational process. Overall, an excellent solvency margin, a well-balanced product mix, a robust multichannel distribution, covering proprietary and partnership business models with extensive geographical reach and strong brands should help BALIC overcome the effects of the pandemic and emerge as a strong player. Coming to the performance. For FY '20, Bajaj Finserv has recorded its sixth successive highest annual profit after tax on a consolidated basis. Bajaj Finance Limited continues its outstanding growth story and has again recorded its highest annual total income and profit after tax. BAGIC recorded growth well above the market growth and recorded highest annual profit after tax. BALIC recorded growth well above the market growth in individual rated business and strong growth in new business value, further moving ahead in its transformation that started a few years ago. Consolidated total income INR 13,294 crores versus INR 12,995 crores. Consolidated profit after tax INR 194 crores versus INR 839 crores. However, if we exclude the COVID-19 impact, which I mentioned earlier, the consolidated profit after tax would have been INR 1,001 crores as against INR 839 crores last year, which is a reasonable growth. Bajaj Finance consolidated profit after tax for the quarter, INR 948 crores versus INR 1,176 crores. This is after absorbing the special contingency provision for INR 900 crores for COVID, we have made special accelerated provision in respect of 2 large accounts of INR 390 crores and further strengthened the expected credit loss provisions, which is required under Ind AS. As you are aware, the Ind AS rules do not apply to banks, but they apply to NBFCs. General insurance profit after tax, INR 304 crores versus INR 83 crores, which is more than 3.5x the last year. It has been a very good quarter for BAGIC. Life insurance shareholders' profit after tax, INR 38 crores versus INR 112 crores. However, I must mention here that life insurance is usually measured in terms of new business value.Consolidated total income, INR 54,351 crores versus INR 42,606 crores for the whole year. Profit after tax, INR 3,369 crores versus INR 3,219 crores the previous year. And the consolidated profit after tax, excluding COVID impact, would have been INR 4,176 crores versus INR 3,219 crores last year. Similarly, Bajaj Finance consolidated profit after tax, INR 5,264 crores versus INR 3,995 crores. General insurance profit after tax INR 999 crores versus INR 780 crores, and life insurance profit after tax INR 450 crores versus INR 502 crores. Bajaj Finance Limited, total income increased by 36%, and after considering the contingency provision of COVID, the PAT was INR 948 crores. Excluding this contingency provision, the profit would have increased by 38%. AUM as of March 31, 2020, was INR 147,153 crores versus INR 115,888 crores as of March 31, 2019, which is an increase of 27%. This includes INR 32,705 crores of its housing finance subsidiary, Bajaj Housing Finance Limited, which recorded a growth of 86% over the AUM as at March 31, 2019. Gross NPA, net NPA, ECL Stage 3 recognized as per extant RBI prudential norms and provisioned as per the ECL method prescribed in Ind AS as on March 31, 2020, stood at 1.61% and 0.65%, respectively. This excludes standard assets provisioning ECL Stage 1 and 2 and contingency provision for COVID. After the equity capital raising of INR 8,500 crores in November 2019, the capital adequacy ratio of BFL stand-alone as at March 31, '20, including Tier 2 capital stood at 25%. The Tier 1 capital is 21.27%. Therefore, BFL is very well capitalized to meet the contingency as we look forward to the next year. BAGIC had an exceptionally good quarter. Gross premium stood at INR 2,655 crores versus INR 3,402 crores. BAGIC wrote crop insurance of INR 241 crores only in this quarter as opposed to INR 851 crores in Q4 FY '19. As we have mentioned before, crop insurance is seasonal, and we take different calls in kharif and rabi. In FY '19, we wrote more of kharif -- less of kharif, more of rabi; this time, more of kharif and less of rabi. Gross premium from core business, excluding crops, for Q4 FY '20 was INR 2,414 crores versus INR 2,551 crores. The combined ratio improved to 93.8% in Q4 FY '20 versus 103.9% in Q4 FY '19. This is a remarkable achievement given the current circumstances. Underwriting profit, which is a very rare term in the general insurance industry in India, was INR 159 crores for Q4 FY '20 versus a loss of INR 146 crores in Q4 FY '19. The higher underwriting profit was mainly due to lower claim ratios. During Q4 FY '20, BAGIC has recognized provision for impairment in respect of some corporate bonds for a further INR 53 crores. The total provision for impairment for FY '20 was INR 129 crores, including provisions made in the previous quarters. At this stage, we do not believe there will be a very significant residual impact of impairment going forward. Profit after tax for Q4 FY '20 increased significantly to INR 304 crores, as I mentioned earlier. Solvency ratio is very strong, 254% as against 150% required under regulation, and the AUM represented by cash and investments stood at INR 18,746 crores versus INR 17,237 crores as at March 31, 2019, an increase of 9%. Coming to BALIC. After recording almost 25% individual-rated new business premium growth till February, BALIC ended the year with a growth of 10.6% as against the private sector growth of 4.8%. Group protection business grew by 20% in Q4 FY '20 and 29% in FY '20. NB premium for Q4 FY '20 was INR 1,519 crores versus INR 1,818 crores in Q4 FY '19. Rated individual new business premium was INR 606 crores in Q4 FY '20 versus INR 689 crores in Q4 FY '19. Renewal premium further increased by 9% in the quarter and we have now several quarters where our renewal premiums are continuing to show strong growth. Shareholders' profit after tax was at INR 38 crores versus INR 112 crores in Q4 FY '19. During Q4, the company has recognized provision for impairment in respect of some corporate bond by a further INR 224 crores, out of which only INR 47 crores impacted the shareholders' profit after tax. The provision for impairment for FY '20 was INR 390 crores, of which INR 135 crores impacted the shareholders' profit after tax. As in the case of BAGIC, we believe much of the impairment is behind us as we look forward to the coming years. New business value, which is what we disclose once a year, and which measures the true profitability of life insurance business, increased by 47% to INR 227 crores (sic) [ 48% to INR 228 crores ] versus INR 154 crores in FY '19. I must mention here, this new business value is after absorbing all the overruns. New business margin on A&P for FY '20 after covering expense overruns was 9.9% as against 6.9% in FY '19. As you may recall, BALIC was having negative margins still a couple of years ago, and now we have almost reached a double-digit positive margin. These are 2 -- there are 2 annual disclosures that you'll find in our investor presentation that was uploaded on our website yesterday, the new business value and embedded value of BALIC along with the waterfall of the movement in embedded value and also the reserving triangles for BAGIC. You may note from that, that the reserving of BAGIC continues to be reasonably conservative. Overall, all 3 companies are well capitalized, sufficiently liquid and have the diverse product and channel offerings that are critical at this stage. All 3 companies have very strong rural presence, and most of them -- most of the green and orange zones -- where most of the green and orange zones are. BALIC has traditionally been strong in lower-tiered towns, while BAGIC has expanded its footprint in rural areas through its virtual offices over the last few years. BFL's rural vertical remains one of its fastest growing segments. I'll comment on the April 2020 preliminary premium numbers, which was already published by the Life and GI Councils earlier this month. BAGIC has reported a 10 -- minus 10% April -- growth for April as compared to minus 9.7% for the industry, if you exclude the crop and government business. Our core business is in line with the market. Strong growth was recorded in property, liability, engineering, marine and retail health lines, while motor, travel, as expected, were in the negative territories. Group health degrowth was planned due to high loss ratios.Given COVID-19 circumstances, BALIC April performance was better than expected. BALIC's individual-rated new business premium actually did not degrow in the month of April as compared to minus 40% for private players and minus 48% for LIC. Agency, 54% share was the main contributor in April business for our individual-rated new business as bank cart was affected due to the bank's focus on their core operations and because the number of the bank branches were not operational. However, we are slowly witnessing momentum in bancassurance business in the month of May. Total policies issued by BALIC in April increased by 4% as compared to a degrowth of 31% for private players. Finally, the mix for BALIC has a high proportion of non-par business, 36% versus 15%, in April last year. With these comments, I now open the floor for question and answers. Thank you.
[Operator Instructions] The first question is from the line of [ Alok Sanghai from VT Capital ].
So sir, I had 2 questions on the life insurance part of the business. My first question would be, if you could explain the EV walk-through that you have given, as to why there is so much of negative operating variance and operating assumption changes, even though we have seen increased persistency across the cohorts? And my second question on life insurance business would be that recently, we have come -- there have been some articles, which are saying that reinsurers are tightening the rules as to people who have been exposed to COVID or maybe are going to travel abroad, they won't be given life insurance contracts so easily. So any comment around that? Is there a negative impact that you see due to that?
Before I hand it over to Bharat to take you on the embedded value and the second question will be handled by Bharat and Tarun, I think as of now, nobody is traveling abroad. So I think the second comment, which was reported through the press, I don't think it's really that important at this stage. Bharat, would you like to take the EV walk question on the financials.
Yes. Thank you, Sreeni. Thank you for the question. So if you look at the overall investment variance, there are 2, 3 subsections to that, though there is a number of INR 515 crores, but there are 3 subsections to that. One, there is a one-off cases in this year. So we have provided some -- as it is mentioned in the deck also, we have tightened our impairment on few of our corporate bonds. So that is one number which is coming in as more like a one-off of around INR 122 crores. That is one number. The second is, the bigger -- so there is obviously some bit of an impact of equity market, which is given the volatility of the equity mark-to-market gain, but we have some gains coming from the debt portfolio given yield has come down. So those are also sitting in the investment variance. But the biggest change, which is happening in this case is that because of the yield curve movement, if you look at our forward yield curve now the yield has come down from, say -- 1 year yield has come down from 6.5% to 5.5%. When you look at a 1-year forward risk curve, that has given us almost an impact of 265. But this is like a timing as of now because the yield curve is there, and hence, it is what we have to account for. If tomorrow yield curve comes back to a level of earlier, then this will reverse. So these are all variance which you will see consistent across everywhere given the market volatility and the yield curve movements. So those are the 3 broader variance.
On the second point, if I might comment. See there is -- for us, term is anyways a new segment that we've got into in this financial year. We did do -- we did kind of wet our feet a little bit in the last quarter. But we did launch only term in the last quarter last year. So for us, anything is an upside. And that's the good part. Yes, the reinsurers have gotten vary of people who are travelers abroad or NRI segment as well. For us, that is a very small segment, the NRI segment, anyways today. And what we've done as a precaution that the reinsurers also asked us to do is basically get a COVID questionnaire filled if there is an existing exposure to COVID. So we are covering ourselves at least from that part of the cover. Does that answer your question?
Just 1 clarification in the EV walk-through part. So I wanted to know why there's some -- that kind of operating variance negative. I got the investment bit part, but I did not understand the operating negative variance.
So I'll cover that also. Again, there are, I would say, 3 subsections to the number, which we have shown as INR 94 crore. The first section is, as part of our usual exercise, we always update our best estimate experience both on the mortality and the persistency and obviously, mortality means morbidity and all. So this time also, we have updated based on our actual experience. So within that, we have got some benefit in terms of our mortality experience, which is around like INR 31 crores. And then we have also updated our lapse assumptions, which is a negative of around INR 13 crores. These are small number changes, which happens in the usual as a year-end exercise, and that has given us a positive of around INR 18 crore in terms of mortality and persistency. But what has happened is that within our MFI business, we have registered an extra claim on the group side of the business. And that has what really has impacted this operational variance of around INR 113 crores and the net impact of INR 94 crore.
All right, sir. Sir, just one final question on the general insurance part. So you all mentioned that you'll see -- you all forecast, some kind of growth coming from the health business. So apart from health business, is there any other area where you might want to venture into and you might see some green shoots coming in the coming year due to habit changes?
I think Tapan will take that question?
Okay. So it's an interesting question. But let's look at the April data to understand. So -- and this is actually a funny part of our business. If you look in April, the industry, the GI industry has a negative growth in retail health. We have a 9% to 10% growth as the story. So though a lot of queries getting raised, if I look at sales, and I felt April, that's why I was very keen to look at the sales for April, we should really be going up through the roof, which has not happened. But obviously, queries are happening. People are raising concern about how this is going to move and how this is moving up. So there would be an uptick in health, but to think that an uptick in health for the industry would be really huge, I don't think that would be happening. That is my personal prediction, looking at how April has moved. Having said that, again, we are trying to create awareness because if you look at the Indian market, health insurance still has COVID cover. And you had just about the life question where international market is very, very, very -- I was actually telling my people that why our servers are not crashing because people should be buying a health insurance, but unfortunately, I don't see that happening as far as the trend is concerned. There is an uptick. There is a movement, but not to a huge extent right now. It may move up. If it moves up, we are fine because we have a presence all across the different channels and geographies. And that is reflected in the month of April also, if you look at the industries, minus 3% retail health growth, and we are plus 9%. So if it happens, we'll obviously be benefiting from that. That is one point.The second point, if you look at the growth in business, property, like Sreeni mentioned, because of some rate correction in some segments, it has some positive upside there. The motor has had a sharp decline at nearly half of what it normally would be given. But going forward, looking at the Chinese experience of Wuhan, we expect at least smaller segment and 2-wheelers to start moving up in terms of sales. So that would come in later during the year because I think whatever circumstances may be, people will start resuming their normal lifestyle. So those things will start happening. The other -- if you personally ask me what should go up, but let's see if it does or does not, the cyber insurance should go up because that's a huge risk. You see cyber attacks have moved by about 1000%, 2000% across, if you look at statistics of happening, that should go up. So that -- the liabilities should go up. If you look at liability cases in U.S., which is happening because of COVID and the way directors and officers are reacting to it is also moving up. So that should move up. But these are assumptions that we feel should move up, but let's see how the market reacts and how does it behave. I hope I was able to answer your question.
The next question is from the line of Nidhesh Jain from Investec.
Firstly, on the BAGIC, if I look at the claims triangle. There is a small strengthening in the earlier years, and there is a significant release of reserves in the near years. And I think there's almost INR 500 crores of reserve releases in this particular financial year. So how do you see this sharp increase -- sharp release in the near-term years? Whether it is sustainable? Because that has an influence on our -- this year's profitability? And how do you see this INR 500 crores of reserve release for this particular financial year profitability?
See, let me take that first before I hand it over to Raman. When I look at the overall reserving in terms of what it was last year and what it is now, we are actually better off. Even the near years, if you see, we have 10%, 12% and 8% surplus reserves as of now. And when we look at the past trends, this seems to indicate that we are in a fairly good situation there. Regarding the specific questions on the INR 500 crores, Raman, would you like to take it?
So Sreeni, nothing is specific, which has changed this year. But if you -- like you rightly said, if you look at the trend every year, there have been a release of 5% to 8%. And I presume that, that is expected to continue. There's no reason why there should be a deviation.
Let me add to it, Sreeni.
Let me give you an example, what we do in BAGIC, is that as soon as a claim is reported, we have a very robust, what we call auto reserving system. Because we would not have any information, we immediately put in the auto reserve depending on the line of business and depending on the type of play. And then as the data evolves, the reserve is continuously updated. Now in any year, because we are a large company, we have a large number of claims settlement, a majority of almost all of this claims settlement, my understanding is that, has come out because we have settled those claims and whatever reserves are there, again, the claims would actually be absorbed. Simultaneously, we actually would calculate the IBNR based on the current trends, and that will be the ultimate expected loss ratio, which is what is reflected in the price.
Yes, Nidhesh, Tapan here. I think if you look at the question you asked, this is a natural behavior of GI industries. The actuaries have specific tools, and wherever they see a trend in which they feel that the reserving should be strengthened, they strengthen it. And like Sreeni mentioned, where claims get settled, the reserves get released. So release reserve is a good sign because that means that the company is adequately reserved. And that happens every year, like Raman mentioned. It is not something that is unique. If you look at the past years also, you will see reserve release. And if you'll see that there would be strengthening happening where the actuary feels it is low. Strengthening that you see is mostly because of -- there was a TP pool way back much earlier, if you remember, the history now. And that TP pool has given an ULR, which is ultimate loss ratio the pool had given, and way back -- and that is where the companies have reserved themselves, but that ULR fell short. So prudent companies have strengthened that. Where they feel that, that is going short, they have strengthened the reserves because if they see the trend is not moving up, they have strengthened it. But overall, if you see there's a reserve release happening for a company, and as a triangle, it is a good sign. And if you look at BAGIC, 7% to 8% is normally where the reserve release keeps on happening when it settles claim. So that shows that we are adequately reserved over time. Does it answer your question?
Yes, yes, yes...
Nidhesh, there's one more point here. If you look at, we have generated about INR 1,500 crores of net AUM surplus and that itself is an indicator -- despite the impairments and all that. And that itself is an indicator that our cash flow is significantly higher than our profit after tax about 1.5 times.
Yes, yes, yes. And coming to BALIC, we have seen a quite sharp growth in non-par segment. And for the month of April also, you highlighted that 30% of business has come from non-par. Given the declining interest rate environment and probably the interest rate environment may remain subdued for sometime, how do you see that non-par strategy going forward? And how are you hedging these products? What are the level of guarantees that you're offering?
Tarun?
Yes. So see, it's a very good question, and it's something we are always keeping a very shock -- hawk-eye on this. What we typically do and our approach is that before the year starts, we usually hedge our future business based on our plans for almost 9 to 10 months of business yet expected. So in terms of holding bonds, so we've been taking some calls pragmatically. So we've been doing a lot of partly paid bond hedging. And we've got a significant portfolio build on that. And these are fairly high credit rating and strong groups that we've built. There is no letting off on credit risk on this portfolio. And we've -- basically, even if we today, hypothetically, did not bring down our guarantees on the other side for the next 8 to 9 months and continue doing business, we are well under control. But having said that, we will be going ahead and taking a call on this dynamically, and we review it every quarter. So we will bring down, for sure, but I won't be able to say when. But like I said, even if we did not bring it down for the next 8 to 9 months, we are absolutely comfortably hedged for a portfolio business we've not yet written. The other bit on non-par is at -- although non-par was 30%, but there's also term business, which is part of non-par. And in terms of NOPs that is really going up. It's been a -- there's a good amount of tailwinds on term plans, both offline and online. And I can see my agency business has also picked up quite well. So that is also bringing up the non-par portfolio.
Sure, sir, sure. And can you just say the details of assumption change variance, what is there?
I'll let that question be answered by Bharat, and then maybe I'll come back for any additional...
He's asking about assumption changes.
See, these are a smaller impact of the -- the second order impact in terms of the mortality and death which I shared earlier. It's a small number of INR 24 crores, which has come both from the mortality and lapse. Because when you change it, all your future risk unwind and all [ this has to change, it's a smaller number and is part of the assumption change ]. Nothing significant there other than the usual mortality lapse assumptions update.
The next question is from the line of Ashish Sharma from ENAM Asset Management.
Just 2 questions. First on the BAGIC on the outlook for combined ratio. I think the Q4 trend was positive, I mean, even if I look at number existed for the crop. Any sense in terms of any outlook you can give on how we see combined ratios? And then I think secondly, on the similar thing that given that we'll see that investment yields will be under pressure, will it be paramount for industry to sort of focus on underwriting profit? Second would be on BALIC in terms of the outlook for VNB margin, sir?
Okay. First, let's talk about the combined ratio. So if you look at, the Q4 looks good, even without crop also, like it's about 97% combined ratio. The fundamental difference is if you look at times when we had floods and times we didn't have floods. So if you take out the flood impact, our combined ratio would be -- again, we're making good underwriting profit. So in Q4, we didn't have any major flood event. That is how this moves in the kind of business that we are in. And in fact, last call also, I mentioned that that I see it improving as time progresses. Now if you look for this year, obviously, I can't make any forward-looking statement, but if I look at the current trend, because of lockdown, 2 things have happened. Hospital occupancy is about 30%. Now this has 2 meanings. Either hospitals were fleecing to the tune of 70% or people are holding back their treatment. Now if they are holding back treatment, it's actually more worrying because if they come back, then the claim size will actually move up. Because if you've treated it early, it is still easier to treat, and the cost is lower. So one of the feelings can be that if I look at the claims for health, as lockdown eases out or people, they are not able to postpone their surgeries or treatment, that may start moving up. So that has to be seen along with the impact of how COVID starts moving up. Right now, COVID has not moved up to an extent that we find it alarming or significant. But looking at the trend, you never know how it moves up. So that can have an impact on the combined ratio going forward. The second, if I look at motor business. So in the lockdown period, yes, the motor OD and motor TP would be lower. But as it's opening up, the pent-up -- the previous losses would start coming in, and people started using more private vehicles and commercial vehicles starts putting in more hours on the road because they have to catch up for the lost time, that may lead to high increase in frequency going forward. So there would be some benefit in loss ratios where lockdown is on. There would be a spike of more than a normal when lockdown is off. So the play of these 2 will decide how the combined ratio comes out as the year progresses. That would be there. Does it answer your question?
Yes, sir. Just on trying to balance the decline in investment yields. So will it be now even more important for players in the industry to focus on underwriting profit? Just some perspective on that.
If you look at BAGIC, we have always been an underwriting company. I have a lot of times mentioned this. And in fact, if you go back to maybe a couple of years, you'll hear one of my statements saying that in the European market in the past also, companies did not focus on underwriting, when sharp fall happened in investment returns, so those companies had a tough time. So in the Indian market also, this would happen now. As you see, and rightly, as you're pointing out, investments are going. But a company like us who have been focusing on underwriting over years and the discipline of culture is there, I think for us, it will not be such a huge issue because I think investment income has always been on top of what we try to achieve on business results.
If I can just add to what Tapan said. As I said earlier, our objective has always been profit over growth when times are tough across all our businesses and BAGIC is no exception. Historically, it has shown over the last 20 years that we have always been an underwriting-focused company. In the market, different players have different objectives. There are small players who are still trying to get to scale. They will be hungry for capital. Availability of capital will drive how much they want to gain market share. In terms of larger companies, which are using cash flow underwriting, the PSUs are very good examples of that, but there are some private companies as well. They would have a fall in investment income. There will be no equity gains to be taken possibly for some time, and therefore, one would normally expect they should tighten their underwriting, but this is a free market and one has to see how they cope with this. So it will be a play of different factors, and each company will have its own objective. And our objective, I think, Tapan has already outlined in very specific terms, it's that we will not sacrifice a significant amount of profitability at this stage. We will continue doing what we are good at. And that's the best way we can.
Perfect, sir. Perfect. And the question on BALIC on new margins. So we've reached 9.9% for FY '20. Any outlook on that would be helpful, sir.
See, I don't think we can give a forward-looking -- make a forward-looking statement on this. But let me just give you some building blocks for this. If you look at, and I think Sreeni very clearly mentioned that, till a few years back, we were writing negative VNB. Now that is the statement of the past. And we've seen a 47% growth in new NBV for last year already. So therefore, the focus really is on VNB in a big way. There are various levers that work towards this. Of course, there is -- the first one we started was with persistency. Our persistencies have improved significantly, as you're aware. We are very clearly on that building block and we're very focused on that, so much so that the February block of even the third year persistency, which is the 25th month, first time after 8 years, hit 70% and above. Now it's something that I'm kind of not so gung-ho about because it has to go up further. But I'm also quite positive that the trend is really upwards. The second bit is usually on the product mix. And as you know, about 3 years back, our product mix used to be about 72% ULIP. Now that time, we were trying to get to scale because we were really turning around the company, there was -- the ULIP products are very good. So we were trying to get into a higher customer segment, which is typically more profitable, so -- which is the affluent and above, which we've been successfully able to do. Our ticket sizes reflect that. Once we've reached the scale, we have basically shifted our product mix significantly to the same customer base and upselling more and more. So what we've been able to do is almost get our ULIPs down to half of the entire company's portfolio. That is a big part of a movement, a needle mover for VNB. The third needle mover really is the channel mix. So about 4 years back, our agency used to contribute 91% of our channel mix. That -- so BALIC was really a one-horse story. Now that has changed significantly. And if I might be -- now it's almost that agency is approximately 55-odd percent. And we've got 3 other channels going quite strong for us, which is a proprietary sales force, which is an extremely disciplined upselling channel and the most profitable retail channel, a very high quality of business and persistency. The second bit is the bancassurance channel. So last year, we got the maximum number of bank partners, including Axis, RBL and KVB and also 2 Middle East banks. So mature banks in the private sector were up for tie-ups. We got all of them. So the channel mix is shifting.The third channel is the online channel. We were -- in the ULIP space, we were the leaders because online, I believe ULIP if it can bear low cost, it's really online that you need to [ therefore ] sell it. And that has gone quite well. We are now -- now that we have a presence in the online space, we are now moving back space into the term business. That is helping in a significant fashion. The focus will also be on the fourth lever, which is on cost, to control our costs because what we see ahead is not necessarily clarity. There is no clarity on what is going to happen going forward. Sreeni did make a statement that people would rather keep cash in their pockets than commit to a very long-term product as of now. So we have to see how it goes. We've had an encouraging April versus the rest of the sector. But I'd say it's only versus the rest of the sector. Surely, there's a lot to be seen, and the year has just about started. So a longish answer to a short question, but it is more important to understand the -- that the company is now basically looking at new business premium and new business margins as any other company is, and we are strongly in that path.
The next question is from the line of Anirvan Sarkar from Principal Asset Management.
Sir, I have 2 questions, one for your general insurance business and other for the life insurance. For the general insurance, if you could throw some light on what the impact of the change in motor TP liability calculation is on the business overall, that would be great. And for the life insurance, I'm sorry, sir, you have already mentioned this, but what is the persistency assumption for your VNB calculation? So those are my 2 questions.
Just before that, I'll just state, are you referring to the new some -- kind of draft, which states that the way the obligation would be deferred to motor TP?
Yes, sir, that one.
It's a draft and we are still [ not ] to go ahead. But having said that, we have seen so many things. We have seen the motor pool. We have seen the decline pool. We have seen the abandonment of both. So regulation is something which is across the industry. And BAGIC has always been on top of how to interpret it and how to adjust the business according to the opportunity available. Tapan?
Yes. I think more than that, the question should be that if you see this year, there has been no increase in TP rates. I think that has a direct impact on the business. So if you look at it, normally, you get a 7% to 8% increase and this year increase has not happened in TP, right? And that is why the previous question on combined ratio is being discussed. So you would have those inflations happening. But again, because of the lockdown and less user vacant in those months, I think that is where the playoff will happen. So that has a more impact. I think on the draft, we'll see how it comes through. It's too early to comment on that.
Got it current -- yes, go ahead.
Yes, that was the question. Any other question you have?
Yes. The other question -- this is -- there is a follow-up to this. So do you disclose the breakup of your motor premiums by vehicle, like car, CV and 2-wheeler? Is information available anywhere?
No, I don't think, so it's overall level, but then it is too much into -- getting into business details of how do we run into business. But if you look at GI disclosures and the information available, it is exceptionally good from [ RDF ] side or the council side, I think a lot of information gets available.
Sure, sure, sir. And my other question was on the life insurance business. What's your persistency assumption for the VNB calculation?
Yes. So see, the persistency assumptions actually vary with the product. So there are no one standard persistency product assumptions. We are talking about a pretty varied segment of products. And it's really part of the actuarial calculation, something we don't really declare. If you're asking me, if your question really is that are we feeling confident that we'll meet our assumptions? Yes, we are. And we actively look at assumptions -- to providing the assumption with the market forces.
Have you changed these assumptions in the latest numbers?
Bharat?
Last year -- Bharat?
So we typically, every year, we revisit -- basis our December experience revisit all our assumptions -- persistency assumptions. And we have this time gone -- as Tarun rightly said, we have gone literally in more detail in terms of going to the product level assumption as well as at a channel level persistency assumption across the cohort, so all that has been considered, at least for the March numbers. And going forward -- it is, as of now, on the same basis. But going forward, as we declare our results, we'll update based on recent experience.
The next question is from the line of Hitesh Gulati from Haitong Securities.
Congratulations on a very good set of numbers. Sir, a couple of questions from my side is, what will be the advanced premium numbers in the general insurance business? And sir, also, the ratio of NEP to NWP looks very close to 1 this time, sir. Any specific reason for that? And I have 1 more question after you answer this on the life insurance, please.
Can you repeat the question, please?
Sir, the advanced premium number for the general insurance business?
Raman, do you have the number?
Yes, just giving Sreeni. So there are 2 parts to it. One is on the motor, it's about INR 760 crores. Plus there are other lines of business also. That's another INR 260 crores. So in all, about a little over INR 1,000 crores.
Sir, the ratio of NEP to NWP looks close to 1 this time. Sir, any specific reason because the mix on a year-on-year hasn't changed, just trying to understand that?
See, that is -- actually is a onetime basis with method. So as business goes ups and down according to the business mix, it is a normal formula only. There's no particular reason for that. I think we have degrown the group health. In group health, you will find that more of earned premium of previous year in certain lines we have grown, so there will be less. So the function of how the NEP moves depends on how the business mix in terms of the reinsured business versus the retail business will move. Very difficult to give an overall comment on the company's NEP to NWP.
And sir, general insurance companies follow 1 x 365. That's right. And the health insurance are following 50-50. That comment is right.
Yes, yes, yes.
And just 1 last question, sir. New business strain on the life insurance piece, I just want to understand which are the segments, which causes the highest strain for us, because protection is something we added only in Q4 this year, but we do a lot of ULIP and non-par also. So just any qualitative comments on that.
Bharat?
Bharat, do you want to take it?
Sorry, I just missed the question completely.
Where the new business strain -- likely to come from which product lines?
So new business entry, we are no different than -- typically the business strain will come from the unit line business as well as the non-par business. Within non-par, sometimes, as Tarun mentioned that, we are pushing towards the protection business. And within the protection, there are a few variants. If you are on a limited pay then you can have some strain in terms of initial years. If it is a regular pay, it will not be there. So it is more like a balancing of something between non-par and UL only. Par is generally not a new business strain line of business.
Next question is from the line of from [ HR Gala from Finvest Advisors ].
This time, we don't find the breakup of life insurance business according to the channels. Can you provide that, sir? The breakup of the new business premium, INR 5,179 crore in FY '20, according to the channels, that breakup is not there.
I think they have given in our mix the overall channel mix, right?
No, it's not given. I think there is no slide in your presentation that how much has come from the banca, how much from individual agents, corporate agent, direct selling, brokers online. I think this is the classification, which you used to give in last year.
Disclosure, right. We normally give that channel-wise. Let me just check which slide number it is.
I can give you that. I can give you that. There's no point looking at the new business premium based on channel mix. It's better to look at the individual-rated new business premium. Yes. So -- which is -- around 56% was agency last year. The --
Which is -- last year [Foreign Language] FY '20?
FY '20.
Agency was 56%.
This is down from 70% the year prior. The online business was around 11%, which is up from 9%. The institutional business, which is basically bancassurance brokers, was up from 11% to 21%.
11% to 20%, okay?
And proprietary sales was static at 11%. The year prior it was 10%.
Okay. Fine. Now another question is at the group level, is there any thinking of converting Bajaj Finance into banks?
No. This is something we keep deliberating. As of now, we have no specific plans to do so.
The next question is from the line of Daulat Shah (sic) [ Bharat Shah ] from ASK Investment.
It is Bharat Shah, not Daulat Shah. 2 questions. Essentially, if you look at the quote of any insurance business, it revolves around 3 principal ideas: underwriting skills and the profits, investment management and the returns, and the third aspect will be the growth. So my first question, if I have to take a combination of underwriting profits and investment returns. On underwriting, we have done a fantastic job all through, where our combined ratio consistently is being well ahead of the industry curve. We have remained very prudent. And just to chase growth, we have not sacrificed the quality of underwriting that we have done. So full marks there. But I do have concern about the investment for both in BAGIC and BALIC. There are consistently poor quality investments, which are made. And quarter-after-quarter, year-after-year, some write-offs or the others keep happening and diluting the overall quality of the returns, both for the unitholders as well as for the shareholders. It -- I can't help feeling, but investment management, which should be core of any insurance activity apart from, of course, the underwriting and growth, which I'll take up later, but investment management function seems to be kind of a secondary or less paid attention to kind of a function. That is the impression I get. I would welcome comments.
Okay. I will get at that question. If you know, Bharat, last year, we made a provision for IL&FS. We are not only company which was exposed to IL&FS and across the industry you had a few people who had that. On hindsight, we can say we could have invested or not invested, but I'm not getting into that. This year, we had already announced in the first quarter the additional impairment potentially from DHFL. And then in the Yes Bank, also, we had investment. However, in Yes Bank after SBI took over RBI decided to cancel the AT1 bonds, right? They are still going to honor the remaining part of the NCDs and other things is what the new management has told us. However, none of these investments are new. These impairments have always been there. We have already disclosed it end of last year and in the first quarter of this year. As we got more detail, we have made extra provisions. Now most of the provisions are behind us. We are 100% provided for IL&FS. We are 100% provided for Yes Bank. And we are 75% provided for DHFL. And in addition, we have provided for a couple of performing investments as well, which means that the companies are not defaulting. They are continuing to pay interest. But based on our assessment of the impact of COVID and potential price close, we have made that.Subsequently, we have completely revamped our investment portfolio via our investment strategy between Bajaj and Allianz and the companies we have sat together. We have redrafted the entire approach to investments, particularly on the credit side. Because when you manage investments, it is very easy to say that I put a lot of money in equities. Equity market fell 30%. I lost 20%. That is also not a good story for life insurance or general insurance. Because insurance is a business of protection. It is not about beating the index or doing better than something else, which is very badly. But in the process, we have completely revamped the whole thing. We now go in with the refined names, which I think I mentioned in the last quarter as well. We have a specific list of approved credits, which we'll go through. We have strengthened our credit team. We do not use only credit ratings now. We also use our internal models. We have also across the group a stress investment forum, where we have, depending on the testing, either a weekly or a fortnightly call, where we look at all common investments across the group as well and then take a call on what is to be done. So the credit of the team after this event happened -- they have also got rid of quite a few investments at reasonably good prices, much before some of them became more impaired. So we should give credit to the team that there are a couple of investments we actually got out of in the year of reasonably good amount. So the residual balance now is not there. The team has been strengthened. The policies have been strengthened, and we'll be going forward.As you mentioned, in general insurance, the investment cannot be a driver of the profit. It is the float generation that is important. On the float, you have to invest it conservatively because on the insurance side, our balance sheet is full of risk. People come to us because they have risks. But if you want to take investment risk and underwriting risk, then the 2 may not -- in some years, we will do pretty bad results. It could even affect your solvency. On the life side, the par business is very long term. There are 90-10 rules. And there are IRDA guidelines as well, where you have to invest a minimum amount. The amount of flexibility you have is not that much. In terms of unit linked, our performance is in line with most of the competition. We are among the top quartile performance, almost all our funds. And one of our funds, Pure Stock Fund, compares well with most mutual funds in the industry as well. The non-par is a guaranteed product. We do not take any investment risk there, either on the credit side or on the equity side. It is about managing the guarantees. And as Tarun said earlier, we are fully protected for our expected business for at least 1 year. As we go forward, we look at more hedging options. IRDA's new product guidelines now allow us to also reset the interest rates when there is a big decline. So therefore, we have never been very aggressive in offering very high interest rates or taking high exposure on our product suite, which some companies have done in the last year. And as interest rates have fallen, we have appropriately adjusted our interest rates once already, and we'll be doing so again as and when things are required. So yes, if you asked me 1 year ago, your comment was valid. If you ask me today, I think we are a lot more confident company about our ability to manage investments and take it forward.
This is Tapan here. If you look at the return, it's been 7.9% for the year, which I would say would be comparable or better than most of our peers in the market that would be there.
So not as much on the quantum of return, in terms of the quality of return, if we keep getting drawn like a magnet to some of the bad exposures, like IL&FS and Yes Bank, [indiscernible], DHFL, et cetera, then I think it is the predictability and sustainability, which comes into the question. So while quantum of return in a particular period may be good or bad, that may be happenstance, accident or chance, but it is sustainability, solidity, predictability and focus on investment management in a conservative way because, as Sreeni correctly pointed out, insurance itself is a risk activity. Therefore, the investment activity, which has to aid to that, must counter that risk and should be able to create a predictable earnings. Otherwise, the whole thesis of insurance business gets diluted. So if I have to go by Sreeni's comments, I assume investment function is now a core function and not one of the functions in the activity, I hope.
I think that during the year, we now have a very strong internal committee on investments. They meet every month. And apart from the investment team, we also have other professionals, including the CEO and the CFO, who get involved in assessing the market, where the direction should be, looking at the performance and what kind of calls need to be taken. We are obviously not -- we are looking at a very long term, continuously managed program. So just because, for example, the equity markets fell, there's always a tendency now, let us increase our equity exposure. But that's not the way we will manage our investment. We will look at the market and gradually increase it because it's not something we keep dipping into every year. And the asset set is that we never have so far required investment returns to cover up for our underwriting failures, which I think is the biggest risk for an insurance company, especially a GI company. So having said that, yes, when you have an investment, which is not performing, I think that is normal in any investment portfolio. How quickly you react and how you recognize the problem early and what action you take is very important. I must admit that last year, your question was very valid. We realized that we were not quick enough in reacting to some investments. But going forward, we are very confident that this will not happen again.
Yes. The second part is on that growth issue. The -- again, my comment here is relatively less on BAGIC, but it is on BALIC. We have been -- as I mentioned earlier, we've been very, very prudent in our underwriting risk, and that reflects very clearly over a long period into our combined ratio on the BAGIC side. So full marks to the firm for that. The growth issue equally is important because the growth issue will be a function of the kind of a brand, kind of distribution network and kind of innovation of a healthy variety, which will create right kind of product suites. On the BALIC side, growth has chronically been an issue, mainly led by our weakness on the banking distribution side. Some part of it we have addressed. But do we think we have a likely healthy balance of underwriting and growth in BAGIC? We are kind of reaching a healthy balance between underwriting performance as well as growth in BALIC as well.
You're asking specifically about BALIC, whether we have the right mix of growth and profitability, is it?
No. My question is in BALIC. While our underwriting, I would assume, will hit the same character in the prudent sales we have displayed in BAGIC side. In BAGIC, both growth and underwriting have remained healthy. In BALIC, as far as growth is concerned, we have some legacy distribution weaknesses, especially on motor side, also probably on the innovation in terms of the products. Do we think going forward, we seem to -- we will have a healthy balance between...
I'll hand it over to Tarun. I got your question. As for the BALIC, if you see, yes, between 2012 and 2015, we did go through a very poor performance because we lost -- we had no bancassurance. We were predominantly -- 90% of our individual-rated premium was coming from our agency channel and the agency channel was losing -- I mean was becoming a high cost channel to drive growth. So therefore, probability was getting affected, and we had overruns, and therefore, we have negative margins. In last 3 years, I think there has been a significant transformation. We have transformed every quality of business. Our persistency, while it may not be among the top 3, it's very close -- within touching distance of the top 3 or 4 companies. In terms of margins, we are now at double-digit margins after overruns. Pre-overruns, we are between about 17%, 18% margin, which is we think is sustainable. In terms of product innovation, the ROMC, variety of products, we have been at the forefront. What we have not done and what -- which can actually bust a life company is offering excessive guarantees. We did see in the market products, which are offering 6%, 6.5% guaranteed return for 20, 25 years. But 1 year down the line, when I look at those kind of products, I think those companies will have to review what they offer -- want to offer in the future. Obviously, a small amount of business, which does not hurt your balance sheet much to maintain growth is there. So if you look at the last 2 years, our growth has been significantly better than the market. Even this year, if you look at April as well, the market is down 40%. We are still at 1% growth. So overall, I think the transformation of BALIC, which I've been talking about for the last 3, 4 years is, we have the confidence that it is firmly on track. There is work to be done. We will continue working on the same levers of business, both growth and profitability. Our focus is not on margins. Our focus is on new business value, which is a function of both growth and the margins that you get, and we will continue on that trend. Tarun?
I think it's very appropriately answered by Sreeni. See if I look at the -- your point is valid, Bharat. And I really appreciate the way you look at things here. There is -- I can see there's a deep insight of insurance there. See, the point is the -- if you look at the large companies, which you track, they are solely and wholly almost, if I might say so, except maybe, leave aside 1, 2 here and there, largely led by bancassurance, and the growth is particularly led by that. Also, they're owned by banks, and/or if nothing, at least 60%, 70% of their business comes from a bank, 1 bank, usually the promoter bank. We, of course, do not have that legacy. Now you can either take legacy as a problem or you could take it as a benefit. The way we've been taking it is more as a benefit. As you're building and you're right, we are almost rebuilding this business in the last 3 to 4 years, and it does take some time. It doesn't just get switch on, switch off. So therefore, we are being very careful that no one single distribution will kind of decide of it. No one customer segment will decide of it. No one product segment will decide of it. So therefore, we will be derisking from all aspects.That having said, last 3 years, we -- and you're right. We have structurally shifted our distribution significantly to get banks. So the focus has, of course, been more on private sector banks. Public sector, there's been mergers, and we did have tie-ups with Dena Bank and Syndicate Bank, which moved into -- to Bank of Baroda and Canara Bank, respectively, and we lost those distributions. So we saw more certainty coming in from the private sector banks, and we've got access, RBL and KVB, like I said. And we do have a smaller segment of banks, which we basically almost are building up, which are the 4 SFBs, and there is the India Post Payment Bank as well. So what this has helped us with is try to do various segments of customers, various product segments and not any one single bank. We expect to hold more than a certain percentage of our business, which is therefore going to be derisked. Because as you see a few, and I won't name any -- see a few players in the market. If one bank sneezes, their life insurance company ends up catching cold. So we are very clear about that as we are building it up. And you'll see more and more news around this because we are very clearly focused on developing a more rounded business.The benefits of bank as it's underlying under current in your statement is that it is more variable than fixed cost because you're relying on a partner distributor and you don't need to develop the entire distributor -- distribution yourself. What we are doing, therefore, is trying to, of course, get more banks. But at the same time, the -- if you thematically look at the variable bit, we are also ensuring that the agency business we're trying to make into a more low fixed cost, high variable. And that is something that we will keep focusing on as well. And that is where the benefits will come. The growth story started off quite well last year, until like February we were double the growth rate of the sector. In March also, we did not fall as much. April has been comfortable. It's a little difficult to talk of growth at this point for this coming year. But having said that, if the markets were to degrow, of course, my broad brush statement would be that we would be better placed. If the markets will grow, we'll be growing far faster than the rest of the sector. Will it be a very large growth for the GDP for the industry this year? Unlikely, very, very unlikely, as we know. So therefore, we cannot much talk about growth. What we are using is we are trying to only just getting -- we're just only focusing on getting other parts of our matrices right. You talked about BAGIC's good underwriting. I can tell you, last 4 years have been spending BALIC as well in trying to get good underwriting. We did not launch our term plan for the first 2 years because I was not confident of the underwriting. Last 1 year, it has been beautiful the way the underwriting has been happening. And that has given us the confidence to get into the term market. And now we are plunged into that, and we are getting more and more share. I can tell you already in terms of number of policies, we are one of the top 5 in terms of term business. So that is a trend that is going forward. All your points are noted, and you can pretty well be sure that we are making it a more rounded ball than a ball with edges.
I'm delighted with both the answers, and I feel far more reassured, as I've always been about the business of Bajaj Finserv. And I'm also -- I also appreciate your comment about some of the people rushing into the guaranteed products, but which can -- many of the actions will have cost and repercussions later and not at the time when the action is undertaken. Therefore, your prudence to remain on the right side of that guaranteed kind of probable issue in a right way is something I deeply appreciate. Thank you for both the answers and all the very best.
Thank you, Bharat. [Technical Difficulty]
Is there a problem on this?
Is there any problem in the line?
We are there, Sreeni.
I'm also here, but I'm hearing some beep.
Let's wait for some time.
Nobody else from JM.
Can the operator, please help?
Sanketh, your line is in talk mode.
Sure. A couple of questions on general insurance business. Basically, I just wanted to understand the BAGIC scale, new CRM, which has been mentioned in the presentation, how it will help in our business with respect to the renewal business and also anything which could improve our loss ratio. And whether -- I also wanted to understand, it's completely a new thing which we have started or we have acquired it from somewhere.
Okay. Thank you for your question. I think CRM is a normal process that is there. So what we have done was we had individual CRMs there. Now we have put it simply together, and obviously, the flow and the customer view gets better. And you can see the history of the customer, how it's moving, what are the issues, what products it has. So it is just the enhancement of our capabilities in terms of looking at the customer. So the customer experience will get better and in terms of how we look at cross-sell and upsell will get better and in terms of servicing will get better. So our hope is that this will lead to a better customer experience.
Yes, yes. Is it predominantly towards motor business or it's nothing to do...
I said we individually had CRM for different departments. We're just trying to put it all together and have a consistent flow.
See, let me just add to what Tapan said. Both BAGIC and BALIC are undergoing significant technology transformations. And the pace of that will further accelerate after this knockdown and the number of customer acceptance of digital business. There are a number of digital properties that we have in both the companies we have built over the last few years. We do not advertise that so much because a lot of them are behind the scenes, helping the customer. Our Caringly Yours app for BAGIC is really state of the art. Similarly in BALIC, we have apps for the agent. The entire office on the fingertip is available for both the companies. This CRM is the next -- the latest version of software, which will put together all the properties that we have, and it will sit on top of the core systems. In both the companies, we are also enhancing the core systems. And in the process of changing the core systems, we are doing significant amount of engineering to make all the processes seamless as well. So this is a journey we've undertaken. We started about 1.5 years ago, and it will last another couple of years. But we're hoping that with this, it will put both the companies on a technology pedestal, which is very strong. The other area we have made deep investments in the last 2 years is in analytics. Clearly, BALIC had a bit of a drawback because there is no requirement of a basic KYC to take an insurance policy. But over time, we have built the database and with more retention of customers we have increased the number of people we have got in the data. BALIC also has significantly improved the quality of data. And I must say that the growth in renewal premiums that we are seeing in both the companies is largely coming out of the focus on using this analytics and the data-driven approach to business.
Okay. Got it. And just another question -- 2 questions. One on BAGIC, just wanted to understand your investment book mix, any significant exposure on average duration of the bonds. That is on BAGIC. And second on BALIC, given we had a little adverse experience in group held -- group life or credit life whether we have -- we changed our pricing in credit life in the coming years -- in this year? And second, just wanted to know the basic this thing, the VNB margin is based on effective tax rate or statutory tax rate?
In BAGIC, our duration is 3.1. We do not have any -- we have some NBFC exposure, but the exposure is much more nominal now. Same with BALIC on the non-par and the shareholder funds. As I said earlier, we have cleaned up a lot of the investments. We have made provisions. And we have sold out some of the investments that -- much before things got worse. So I think we are on a reasonably good wicket here. Going forward, yes, there is an external market risk. Today, even there are companies you thought were first class also could become bad. But that is that market risk that we have to take, and we have to have early problem recognition, act on it. That's about it. The second question, I will let Tarun handle it.
Yes. So you asked 2 questions. One was on the credit side. The other, I didn't get, the credit insurance. The other one was on?
Other was on, just to understand, the VNB margins, what we have reported closer to 10%. Is it based on effective tax rate? Or is it based on statutory tax rate?
Okay. So the second one, I'll let Bharat answer. I'll just close the first 1 quickly with you. So see, credit life is actually a very lovely product. The genesis of bancassurance from France was actually entirely based on the credit life kind of products a long time back, and therefore, works quite well. Dynamically, what we've been doing last couple of years is that we've been pricing our credit life quite close to mortality experiences. The challenge usually is that the very difficult times to get -- very difficult to get lead indicators. You can always get lag indicators. But what we've done last year is that we've taken that by the -- the bull by the horns and doing a lot more dynamic pricing and ensuring that we've now got systems online with all our MFI and bank partners and the mortgage book. The bulk of the credit life hit that usually has been coming in the market is in the MFI business. There, we've been letting go of all the partners we used to have. So we've been market leaders in that. But what we've done is now we're just down to about the key 7, 8 players who are a lot better placed in tech and risk systems. So that portfolio has only been getting better. What we've also done is, as we have gone this year, we have already repriced our reserving and passed that cost down to our partners. So this should be a lot better place. But having said that, this is -- like I said, it doesn't have too many lead indicators. It's largely lag indicators. What we've also done is a lot more analytics happening on the MFI defaults and also on MFI kind of ratings that we have. At the same time, doing a lot of analysis around the kind of products that are sold, which usually could be joint life or single life products. We're also quite mindful of the exposures we are taking to various states depending upon the dynamics we are seeing in every state. Because we are a pretty large -- we write about 2.5 crores of number of lives overall in our credit life business. So you see a lot more dynamic pricing there. Bharat, can you answer the second one?
Yes. With respect to the tax rate, so we don't use ETR today. We use around 14.5%, 14.6% as our tax rate. But obviously, given the change in the DGTA, if we were to take an ATM deduction, this will be an upside only. But for timing, we don't take that.
Can you quantify that margin? How much upside we can see from 10%, maybe just to understand how we are on effective tax rate?
See, we don't -- we haven't done the detail working in terms of the margin uplift. But when I looked at the ETR, the ETR, given if we consider our current dividend rate, so the effective tax rate for this year would have been 13.9% instead of what we have used as 14.5%. Now, this both will have an impact on both on EV as well as on the VNB. That we haven't quantified because we don't shift to ETR as of now.
The next question is from the line of Akshay Toshniwal (sic) [ Harshit Toshniwal ] from PremjiInvest.
This is Harshit here from PremjiInvest. 2 questions. One on the protection. Our initial strategy was to price the product lower than the peers, but we used to focus on 100% underwriting. So I think you mentioned about new product launch where the underwriting norms will be a bit easier and cover limit seems to be lower. If you can throw some light that do we also plan to shift a bit in the strategy to rely some returns on the medical and focus on growth in that path? That's the first part. And the second part is your outlook of -- on crop insurance. Both from the perspective that now with clear policy, how do you think the market is growing at? And then -- and given our past experience of the 2, 3 years, how do you see this?
So what's the first question to the life company?
The first question was in the life insurance, yes.
So your question largely was that on the term and how are we going ahead and underwriting and whether we're using telemedical? Is that the question?
Yes. And do we plan to -- and you also mentioned about some new product launch where the underwriting standards will be a bit dilution, if I heard it correctly.
Yes, yes, yes. Okay. So yes, Sreeni had mentioned about that. So we entered the term market in January, and basically testing waters after a long time. And we initially, therefore, got to very tight risk controls. It basically meant that any policy we sold had to undergo medical. We were also at the same time using a very low-cost term cover. So we were the least priced in the market. That helped us a lot to develop distribution, develop brand and also get people interested more in our term offerings. But having said that, the COVID part has hit us. So as a result, we are now refiled our term plan, where we are looking at nonmedical rates and reducing nonmedicals as well. This should be -- in the next 1 month, we should be having that launch. Of course, therefore, the way we are looking at the -- easing the underwriting is more on the way the medical underwriting is done. What I personally believe is that telemedical and more so even video MERs can be sometimes more effective if done properly. So we are developing strong capability around that. We already have sorted it actually. And to top it all, we are also now intending to use learnings from underwriters and use some artificial intelligence benefits, where we can use data from one driver to the other and be able to standardize some of these things. So we are in a little better place to handle googlies in these situations. So largely, yes, while underwriting is going to get stronger in the way we assess them, it is going to get lenient in the way medicals are done.
Okay. And since we are currently priced around 40%, 50% -- 30% to 50% lower than the major players, that's from medical underwriting justifies that kind of a price decline. All I want to understand that are we compromising on the margin or is it just the underwriting strength, which gets captured in the lower prices?
Okay. That's a very good question. See, it's actually the better quality of life. So what's happening is because we are -- so there is -- while medical is one part of it, the other part of financial underwriting, where we do not -- today, a lot of life insurance companies take people, take customers with very low income. And so even if you have a INR 2 lakh annual income, you will be able to get a INR 50 lakh cover or a INR 1 crore cover. So we are very clear that we are tighter on the financial underwriting. And what we have seen with the aggregator who has a lot many much information from other players and even otherwise from our agency channel is that -- are the number of graduates and the better lives that we are getting is far higher proportion versus what we used to get in the past and versus what other people are getting as well. So there are a few aspects other than medical underwriting that play there. In terms of -- I don't know the margins of other players, so I can't comment on that. But because the quality of life itself is so good, I don't see there will be an issue around VNB.
If you want a parallel, if you look at our GI business, also, the philosophy is the same. It is about the ability to select good business underwriting. Underwriting is not about price, right? It will be market determined and therefore, at a given price, if you select better, you can still make money. That is basic principle.
Sure. Okay. And sir, on the general insurance side, the crop insurance aspect so it has been a volatile business. We had a good rabi season in Q4 specifically, but we had not so good Q3 in the kharif season. In general, how should 1 look at that business from -- and how do you look at that business specifically? And with the 3-year clause rather than a seasonal contract, how do you think that can impact?
Tapan?
Okay. Yes, I'll take the question. So if you look at our crop business, over the years, you will not find a single year in which we lost money. Even this year, also combined ratio is below 100%. All business in GI business are volatile. If you look at automobile business, 1 in 5 cars has an accident. If you look at health business, 1 in 10% gets admitted. We are in the business of risk. So I don't think that I can say that we would be so sure that no claims will happen at any point in time. Our crop is a significant part of the business for the industry. If you look at about 18%, 20% industry business is crop. As a leading player in industry, I think we are into all lines of businesses. Crop is also one line of business. It is not something that it's a separate line of business. If you look at we're into motor, we're into health, we're into crop, we're into liability, we're into fire, we're into engineering. And you will see us in most of the lines of businesses, we would be close to our market share. So if you look at BAGIC market share, if it is at close 7%, you'll find most kind of business are at 7% or a bit lower, a bit higher, depending on how we play that. And crop is also like that. You'll find crop that also we had the overweight and underweight. It will be close to other market shares. That is our philosophy. We try to write all lines of businesses, and we try to understand and do it well. So past track record says that we have always made money in crop also. And going forward also, we shall look at opportunities. It is a question of right pricing. It is not a question of what is good or bad in GI business. And volatility in GI business of claims is always there. We had 5-plus last year. Now that also is volatile. So if we get afraid of volatility of business and we move out of all lines of businesses to be secured, I don't think that is a business model. In the GI business, risk is there, volatility is there. Good underwriters know how to spread the risk and how to underwrite the business. And if it's not good pricing, then we don't write. So that is the philosophy, which has been there for all lines of business. And for crop also, it remains the same.
So the limited thing, I would say, is that don't look at crop as a top line business. It's a business which we select every year depending on available terms of pricing as well as reinsurance capacity and various other factors. Depending on that, we take a thought season by season. The good thing is that's a short-term business. So what you do in July by, of course, September where you stand. You can take quick calls on that. And so far, as Tapan has said, it has been profitable, and the company wants to continue that. It is not something that if there's no business, you can say that it is bad forever and it's good forever. It's never been our approach.
Okay. Understood, sir. And maybe last one, just if you can touch upon the 3-year regulation.
So that is fine. If a 3-year contract comes in, the pricing is done on that basis in the market, and that is how it works out. So the players would decide what is the right pricing for a 3-year contract, and they would look into it, and that is where the data would be there from their perspective.
And pricing is decided annually? Is there any clause of annual revision or it's kind of fixed 3-year pricing?
No, it's a 3-year pricing. That's how the tenders get done, but tenders can be decided on that basis. There would be an exit clause with penalty, but that is what the government is looking at. So those will get refined as the tenders keeps on coming.
Supported by reinsurance that we end as well.
As there are no further questions, I would now like to hand the conference over to Ms. Bunny Babjee for closing comments.
On behalf of JM Financial, I would like to thank Mr. Sreenivasan and the senior management team of the insurance businesses and all the participants for joining us on the call today. Thank you, and have a good day. Bye-bye.
Thank you, JM. Thank you all.
Thank you. On behalf of JM Financial Services, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.
Thank you, everyone.
Thank you.