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ICICI Lombard General Insurance Company Ltd
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[Audio Gap] I welcome you to the earnings conference call of ICICI Lombard General Insurance Company Limited for quarter 1 FY 2020. I would like to give you a brief overview of the recently ended quarter, post which our CFO, Mr. Gopal Balachandran, will share the financial performance of the company. The general insurance industry registered a growth of 9.9% in first quarter of 2020 over first quarter of 2019, with the industry GDPI moving up to INR 410.64 billion in this quarter from INR 373.60 billion in the first quarter of last year, as per IRDA monthly report. Now excluding the crop segment, the GI industry grew at 13.6% to INR 391.08 billion in Q1 of 2020 as compared to INR 344.33 billion in the first quarter of 2019, as per GI Council. The combined ratio of the industry was 117.2% in the full financial year of 2019 as compared to 109.9% in FY 2008 -- 2018, sorry, based on available information. Further, the overall combined ratio of the private multiline general insurance was 103.6% in FY 2019 as compared to 101.9% in FY 2018, as per GI Council and public disclosures. Some of the key developments in the GI industry during the recently concluded quarter include the authority has issued the circular on March 2008 -- March 28, 2019, notifying the insurance companies to continue to charge the prevailing rates of motor third-party liability insurance cover until further order is issued. The authority has now issued a circular to notify the revised premium rates applicable for FY 2019/'20, which is effective from June 16, 2019. Consequently, this has had an impact on our profitability in the current quarter. The authority issued a circular wherein the insurers shall make available stand-alone annual own damage covers effective September 1, 2019. This circular is applicable for both old and new cars and 2 wheelers, provided the motor third-party cover is already in existence or taken simultaneously. From the standpoint of policyholders, it is a positive development since this gives options, liberty and convenience to buy stand-alone own damage cover from its own choice of insurers. From our perspective, we see this development as a potential opportunity to gain customers given our reputation in terms of claims settlement and large network of cashless garages. Now speaking about the company's performance. The GDPI of the company for Q1 2020 were -- de-grew by 7.6%. Excluding crop segment, the GDPI growth rate was 17.7%, which was higher than the industry growth rate of 13.6%, excluding the crop for the industry. Our GDPI growth was primarily driven by our focus on preferred segments such as fire, marine, motor, liability and health. Consequent to the increase in minimum prescribed rates for certain occupancies under fire segment, this segment registered a robust GDPI growth of 67.3% in Q1 of 2020, thereby aiding the GDPI growth of our property and casualty segment. As indicated in our results presentation, the overall property and casualty segment grew by 28% in Q1 of this year over Q1 of the previous year. On the retail side of the business, SME and agency channel and health indemnity continued to grow faster, and they remain our areas of focus. To harness the potential of these segments, we've been expanding our distribution network so as to increase penetration in Tier 3 and Tier 4 cities. Our individual agents, which include the point-of-sale agents, were 38,581 as on June 30, 2019, as against 25,646 as against June 30, 2018. So in conclusion, we continue to aim on growing our business by creating long-term value for all stakeholders through focus on sustainable -- sustained profitability and prudent risk selection. As we look ahead, we remain excited about the growth potential of the industry as well as our business prospects. I will now ask -- request Gopal to take you through the financial numbers for the recently concluded quarter.
Thanks, Bhargav, and good evening, everybody. I will now give you a brief overview on the financial performance of the company for the quarter ended June 30, 2019. We have put up the results presentation on our website. You can access it as we walk you through the performance numbers. The gross direct premium of the company stood at INR 34.87 billion in quarter 1 2020 as compared to INR 37.74 billion in quarter 1 of last year, a de-growth of 7.6%. However, excluding the crop segment, our GDPI increased to INR 34.88 billion in this quarter 2020 as compared to INR 29.64 billion in quarter 1 of 2019, registering a growth of 17.7%. This was higher than the industry growth of 13.6%. On the profitability front, our combined ratio stood at 100.4% in quarter 1 2020 as compared to 98.8% in quarter 1 2019, primarily on account of long-term motor policies and losses from cyclone Fani. Combined ratio was 99.7% in quarter 1 2020, excluding the impact of cyclone Fani, which is estimated at INR 0.16 billion. Our investment assets rose to INR 237.11 billion at June 30, 2019, as compared to INR 222.31 billion at March 31, 2019. Our investment leverage net of borrowings was 4.27x at June 30, 2019, post the dividend payment and 4.12x before the dividend payment as compared to 4.09x at March 31, 2019. Investment income increased to INR 5.27 billion in quarter 1 2020 compared to INR 5.07 billion in quarter 1 2019. Our capital gains was lower by 29.6% at INR 1.38 billion in Q1 2020 compared to INR 1.96 billion in Q1 2019. Our profit before tax grew by 7.2% to INR 4.75 billion in Q1 2020 compared to INR 4.43 billion in Q1 2019 on account of lower capital gains. Consequently, profit after tax grew by 7.1% to INR 3.1 billion in this quarter as against INR 2.89 billion in quarter 1 2019. Return on average equity was 23% for this quarter as compared to 24.7% for quarter 1 in 2019. Solvency ratio was 2.2x at June 30, 2019, as against 2.24x at March 31, 2019, continued to be higher than the minimum regulatory requirement of 1.5. As we conclude our address, I would like to summarize that we ended the quarter 1 with a diversified product portfolio and healthy financials. The company continues to focus on prudent underwriting while improving its competitive position. We continue to build our distribution with our focus on sustainable growth. I would like to kind of thank you for attending this conference call, and we will be happy to take any questions that you may have.
[Operator Instructions] The first question is from the line of Hitesh Gulati from Haitong Securities.
Sir, I have a couple of questions. Firstly, what is the advanced premium figure for us, which is coming from long-term motor policies on the balance sheet? And secondly, sir, just wanted to understand that given that OpEx ratio has increased, is this also because of the fact that acquisition costs are getting built in because growth in motor segments are sort of higher than what it was previously? Just wanted some color on that, sir.
So to answer your first question, Hitesh, the number sitting on our books for the long-term policy, which we have not booked in as premium, is INR 18.65 billion. The second question, in terms of expense ratio, there are a few components. One is the fact that since we, as a conscious call, have decided to de-focus on the crop segment, the overhead allocation that we had last year, which was getting allocated, and these are typically the fixed costs that we have, which gets allocated across business lines based on premium, that has all got allocated to other lines. So there is a denominator effect. Plus if you see, the sourcing cost of retail business is much more than crop business. So to that extent, the expense ratio for retail business is higher. Last -- I mean this was, of course, part of our business as usual, but we had a brand campaign in this quarter. That also came into the expense numbers this quarter.
The next question is from the line of Deepika Mundra from JPMorgan.
Sir, firstly, on the health segment, we're seeing that the mix is becoming more favorable, with the retail portion growing faster. Could you just comment a little bit on the pricing side in terms of both retail and group health, how do you see that trending this year?
So let me start with the group health. Last year, we saw a pretty decent price increase vis-à-vis the previous year to -- of last year, right? And that's why we kind of entered the group health segment last year, kind of reentered back or refocused back on the group health segment. This year, relative to last year, we are not seeing that much of a price increase because in a sense, the price increase to some extent happened last year. So group health, we are not seeing any further improvement. We are not seeing any deterioration at the same time. So we are being a bit selective. Accounts that we entered, if we are not getting price increase and the loss ratio is high, we are kind of reducing those exposures, while we are continuing our focus, as we have had for the last year onward, of the small ticket, granular group health business. But the growth number is much lower than what we had last year on that segment. On the retail side, there are 2 issues to keep in mind: One, there has been a reclassification based on what the regulatory authority has told all of us. So the group retail, which is basically the segment that we sell to individual retail customers but usually through a partner, could be a bancassurance partner or an NBFC partner, that is in the aggregate group numbers. But we have given the breakup in the presentation that we've put up on our website. And there, on the group health side, we've not -- ourselves have -- sorry, on the retail health side, we've not seen a price increase. In fact, on the retail indemnity portfolio, we have not increased prices for quite a few years, about 6, 7 years now. And we believe there is a time -- it is time for us to increase the pricing, which we haven't done. On the retail side, there's another segment which is otherwise a very attractive segment, which is with the NBFCs. That segment has continued to underperform in this quarter for reasons that are obvious to all of us, and that is kind of -- in a bit of a negative that we are still going through, and this has been going on for the last 2 to 3 quarters now. We were hopeful that this quarter, the NBFC business will pick up. Obviously, it hasn't, and we don't see that happening in the next couple of months at least. But -- and the flip side is the bank performance has now really come back very strongly compared to the first quarter of last year. And that has doing -- done really well for us. So on balance, it's not just -- it's not really a pricing improvement in the retail side. It is more growth in policy volume that we are seeing.
Understood. And sir, just one more question on the motor OD regulation change, which is going to be effective later in the year. Do you think the unbundling will bring in further impact on pricing to what we have seen already?
Look, Deepika, honestly, it's difficult to predict. Having said that -- so we are looking at it as an opportunity because what it will do is certain segments of business where we did not like the TP loss ratios, I mean, there are certain segments, maybe based on geographies or certain uses, et cetera, we did not like the third-party loss ratios, we would have an opportunity of going after the own damage segment. And there are many such markets that we are aware of where the OD loss ratio is very healthy, while the TP loss ratio is very adverse. So that is an opportunity that we are looking at. At the same time, the point that you're making is a risk in the sense that someone who maybe is not -- doesn't have the scale on TP, et cetera, may be getting very aggressive or may get very aggressive on the own damage side. The only caveat or only comfort that we have is if we see the own damage loss ratios for the industry at this point in time, I don't know how much leeway people have of cutting prices any further. So given our distribution, given our service infrastructure and our brand, we, at this point in time, see this as an opportunity. The risk that you're articulating remains, and we will have to see what happens from September onwards.
[Operator Instructions] The next question is from the line of Santanu Chakrabarti from Edelweiss.
Thank you for giving out the agent numbers. It looks like of all the non-POS agents that you have at the moment, almost 1/3 have come on board in the last 12 months. So just would like some granular color on by when do you think this investment might start to pay off in terms of revenue acceleration. And what are the segments which can get impacted? I'm guessing medical and some part of SME fire. And what is the average activation time, some color around that?
So Santanu, if you heard our -- the calls in the last 3 or 4 quarters, we've been saying that this is an investment that we are making for the long term. So this is an investment that we started making last year, in fact, maybe last quarter of the previous year. And we are continuing to make this investment in terms of our distribution largely in Tier 3, Tier 4 towns, as also some of the satellite towns of big cities. Now what we have seen is -- and we call this a virtual office initiative into the Tier 3, Tier 4 towns. So what we have seen is the pickup in growth of business from those towns has been quite significant already. So we are beginning to see that benefit play out. We started seeing that benefit play out from maybe the last quarter of last year. And this quarter, we've continued to see that benefit. So just to give you a sense of the numbers. For example, our agency channel has grown at about 24.7% in this quarter, which in the otherwise muted -- in the environment that the industry is in, is a pretty healthy number. We see this trend continuing because we think that whatever we've invested and we have continued to invest, as you know, it's -- what you invest in the first quarter, maybe by the third or fourth quarter, people start becoming productive 6 to 9 months from then. So we believe that this whole year, we'll see the benefit. And rest of it will depend on how much investment that we continue to make in terms of adding distribution channels.
The next question is from the line of Ajox Henry from B&K Securities.
Sir, my question is with respect to distribution. On the virtual offices, what is the current status now? Because last call, we said we had almost 400 offices. So how have we expanded on that front, number one? Number two is SME growth, your presentation noted that there's a 29.5% growth in Q1. And how far do we see that traction continuing? And third is with respect to the motor dealer touch points. So we were kind of behind in that, and we wanted to expand on that. So this quarter, how did we grow in that as well? So that would be my questions.
So the first one, in terms of the VO, that number is scaling up every quarter. This quarter, the total VO premium, premium that we've got from the VO offices, is INR 143 crore, which is -- which effectively, if you look at the quarter 1 of last year, would have been a negligible number of about INR 60-odd crores first quarter of last year. So that is growing well. The second question on SME, that's grown at about 29.5% this quarter. If you see our SME business over the last 4 years, we've consistently been going up between 25% to 30% year-on-year. And this is, again, because of the investment that we've made in many areas. One is, of course, distribution. Second is in terms of products. I mean, we've done a lot of work in terms of bundling different covers into very simple combined offering, which is convenient. We've done a lot of work on technology for policy issuance using bots. We've used RPA solutions, et cetera, to help orient digital platforms for our agents to sell SME policies. So -- and that investment and that focus remains. We believe that on the SME side, there is still a very large opportunity. In fact, the VO opportunity that we've seen or the numbers that we've seen has largely been motor insurance. We believe gradually, we'll be able to add the health and the SME in some of these remote markets. So that opportunity is an ongoing effort for us. The third one, I didn't get your question because on the dealership touch point, we are by far the biggest player, and we have 60% penetration in the -- in terms of the agency -- or sorry, the dealer points as a company. We don't have 60% market share, but we are present in at least 60% of the dealer points in this country. So that's been our strength. It's not as if we had a problem last quarter.
The next question is from the line of Avinash Singh from SBI Capital.
Just one question on investments. So any deep color on that exposure to that, some of the stressed, I mean, the housing finance companies and some other stressed groups? And -- but the question on that would be that one thing is that, okay, today, you may not have that exposure. But where -- I mean, did you sort of had exposure earlier and you booked certain losses on that? So some -- any color on this exposure around that stressed housing finance or other financial services companies.
So the answer is no, as in we did not have any exposure in ILFS. It's not as if we sold it at a discount and showing 0 exposure. We did not have any exposure to DHFL either. We never had. So we didn't have to book any losses for these exposures.
The next question is from the line of Nidhesh Jain from Investec.
First, sir, any color on motor OD loss ratios are almost 7, 8 quarters high. Do you think the competition incrementally are -- is easing? Any color on the competition in motor OD and its impact on our loss ratio.
So Nidhesh, I mean, there are 2 factors driving this. One is what we've been saying, when you have a long term policy, by design, by simple arithmetic, the loss ratios will creep up because you're sitting on the money upfront. ROE may be fine, but the loss ratio will creep up, particularly for TP, even for OD because wherever you're selling a 3-year policy or a 5-year policy, you're passing on the benefit of renewal cost and also distribution cost being much lower to the customer. So effectively, in OD, the loss ratio will keep on increasing, while the expense will come down. While in TP, the loss ratio will increase while the investment float will income -- will increase. So that is because of the change in dynamics of the fact that long-term policies have come in place. The other point is that -- the second factor is the overall competitive intensity that has increased, as we've been discussing for some time now, again, driven by the fact that long-term policies have come in. People are seeing it as an attractive opportunity. So they're willing to discount the own damage a bit more than what they were in the past. As I said earlier to one of the questions, we believe that industry loss ratios would be much worse on the own damage. If you see our own damage loss ratio, it's about 68%. We believe the number for the industry will be much higher, and we don't think there is a large margin for people to cut prices anymore. Industry loss ratio, when I'm looking at the industry loss ratio, is roughly in the mid-70s for own damage. If you look at the distribution cost for own damage and the fact that it's a retail policy, so there is an expense also, the policy servicing expense, et cetera, at that level of loss, it is very difficult to make it viable.
Sure, sure. And sir, secondly, if I look at Q3 and Q4 performance, your combined ratio was pretty strong. But underwriting value was not being delivered because you were highlighting that it will get deferred. So in this quarter, we are seeing the opposite phenomena, where combined ratio is close to 100%, but we are seeing some underwriting value emerging probably due to the last 2, 3 quarters. Is this correct understanding or...
Yes. So the growth numbers have also got a bit muted. And if you see the combined ratio, there is definitely an issue of the expense allocation. The expense ratio percentage is higher because of the crop going out of the book. But overall, the actual underwriting number has improved. We've looked at the overall loss ratio. If you see, our loss ratio has improved from 76.9% to 75.5%, while the expense ratio has gone up because of the reasons that I said. Gopal, you want to add anything?
No. I think that's what we have been saying. If you recollect, I think what we have been saying is by virtue of -- particularly on the long-term motor policies, what we have been talking about is you would get to see an increase in our combined ratio numbers, which will be more than offset by, let's say, the gains that we will be able to realize on the investment book. And in line with that, what we also -- and this will be the first year where you will get to see the full impact of this particular transition playing out because the regulation came into effect from September 1 of 2018. So FY '19 only saw some element of impact therein, whereas FY '20 will be the full year where you will get to see the impact of this change in the long-term motor insurance guidelines. So -- in so far as the combined is concerned, you will potentially get to see the combined ratio operating around the levels of 100%. But you will get to see the investment income contribution to be relatively higher.
So it means the investment leverage has gone up to 4.27 for us.
Exactly.
The point that Gopal is making.
Yes. And sir, lastly, on the crop insurance, I see that you are still holding IBNR despite you have not written any crop insurance, I think, for the last 1 or 2 quarters. So is it on a conservative basis? Or do you think that the loss will come in the future?
So no, we wrote the rabi crop, right? So if you remember what we discussed in the end of last year, we had said that the kharif crops vis-à-vis what we had held reserve that, looks to be much better. But we obviously don't -- didn't have the complete data for rabi. We still don't have the complete data for rabi. Rabi data, as we said, every time we said, comes in by about -- the complete picture comes by the end of Q2. So we are holding that reserve on the rabi crop. Our sense is that the rabi performance has not been very good. So I'm not sure whether we'll get any major release in the second quarter based on the early estimates that we are getting on the rabi side. So it's not as if we are being conservative. I think we have been realistic on that.
[Operator Instructions] The next question is from the line of Harshit Toshniwal from Jefferies.
Two questions. One on motor third-party premium. Just want to understand that since H2 of last year, we saw a large amount of growth in the motor TP business in the Q3 and Q4 quarters. But when I would be looking at FY '20 H2, then is it that because of loss of renewal for some of the businesses, my growth numbers for TP of FY '20 is going to look a bit lower than the run rate which we are doing in H1?
In Q3, Q4, on a base effect, it could be. But it's not because of any lack of renewals. There's a couple of things. If you see the first quarter of this year, we didn't have any price increase, right? So that has an impact in terms of GWP numbers as well for TP. And last year, for the -- as we scaled up our agency and our CV business picked up, the TP number really increased. Now this year, on commercial vehicle business, given that the price increase on TP for CV has not been in line with what we believe is required, we are getting, again, a bit more cautious on the CV book. So we are moderating that growth, but what we are really happy about is the overall renewal performance is actually better for us so -- on our preferred target segments. So it's not because of renewal. It could be because of base effect in the last -- second half of this year, the coming year, vis-à-vis last year, as also a bit of moderation in the CV business that we are doing this year compared to last year and the third-party price increase or lack of price increase in the first quarter this year.
Okay. But the reason I was asking is that because the long-term policies of -- in two-wheeler and cars, which we've sold in H2, specifically the third-party premium, those particular set of customers won't be there for the next 2 or 3 years. The reason I'm...
No. That's why -- but let's understand this. In the past, two-wheeler policies that we wrote, let's say, if we had written a 1-year two-wheeler policy in 2018 in the month of September, the renewal rate for that 1 year later was around 30% for us, maybe 28%, 29%. Now 100% of that TP will come to us. We'll book it out of the cash that is sitting on our books that we talked about in the beginning of the call, that INR 1,865 crores that is not booked as premium but is sitting as cash as advance premium. So 100% of those policies, we will book. It's actually much, much better.
Okay. Okay, sir. And one more thing. On the fire insurance, can you throw some light on what exactly are we -- the increase which we have seen, what are the segments? And how much are we reinsuring back with the reinsurers on this portfolio, more about the profitability of that part, if it has changed drastically in the first half?
So the fire change has -- the dynamics have again changed, largely driven by the reinsurers' action. What happened in March of last year is that GIC Re, which kind of dominates the reinsurance market in this segment, what they did was they said for 8 occupancies, now occupancies are our jargon for large industry segments, so certain industry segments like power, steel, rubber, pharma, segments where -- textile, et cetera, segments where the historic loss ratio has been very high, and the insurance industry and the reinsurance industry has paid out huge losses. Loss ratio has been very, very adverse. There, GIC basically has upped the rates for us to cede the treaty where GIC is present. What it means is they have said that all of us, as direct insurance companies, have to charge rates as per prescribed by IIB. IIB looks at the industry burn cost, which is the average loss for a particular occupancy, and puts out a burn cost. It's like a minimum viable rate in a sense. And GIC said, if you want to cede any of the business that you write to a treaty where I'm supporting, you have to at least maintain that price as a minimum. What this has done is it increased price in these -- those segments manifold. Now given the fact that almost all treaties, there is a GIC participation or GIC leadership, effectively, the market price for these 8 occupancies have gone up to that extent that I explained. So if you see the industry growth for fire, has been about 48% in this quarter, and our growth has been about 67%. So we've done better than the market because of all the other things that we talked about in terms of SME business and the distribution, et cetera, on the SME side. And also, our corporate business has been doing well, as we are seeing some market share shift from some of the older companies to us, we have benefited incrementally. But overall, as an industry, the fire rates have gone up. And that is why the total growth for the fire segment has been high. Your second question on reinsurance, what we traditionally do in -- fire is a high-exposure segment, right? So it's a very small premium, and the claim can be very high. Kind of similar to -- as you talk about for crop. But -- so what we do is we take a proportional reinsurance, where we cede the policy premium and also the claim in the same proportion to the reinsurers. And we also buy an equivalent of a stop loss, which we call excess of loss covers, which for the book that we retain, it stops the loss at a certain level. Now given what was -- what we saw in terms of fire policy rates, the fire rates going up in the industry, we have taken the decision to retain a bit more than what we used to do in the past. If we were -- if you are doing a proportional reinsurance of x percentage, we have now done it as x minus 10%, we have retained 10% more on our books because we like fire portfolio now at these prices. And to that extent, our earnings -- the share of EP, one is the GWP that you look at, but GWP has a component which we cede to the reinsurers. So if you look at the net written premium or net earned premium, you will see the mix of fire in our portfolio is increasing. So just to give you a number for this quarter versus last quarter same period -- last year, same quarter, that number, the earned premium mix of fire for us was 1.5%. This year, that has increased 2.1%, driven by 2 things: one, the growth number that I talked about; and also, higher retention that I talked about.
Okay. And one more last question, if that's possible. So when I look at the reinsurance rates kind of back calculating it for segment, then for health, it comes to be as high as at 70%, 80%. Rather 50% of our reinsurance fees comes from health business primarily. So what is it that makes us allow such high reinsurance rates, somewhere around 80%, 85%?
So it's not 80%, 85%, but it is a high rate because there are certain types of health businesses where basically, the benefit constructs where the exposure, again, is very high because we pay large claims if the person falls, he suffers from any of these critical illnesses where we reinsure. And given that the overall portfolio is profitable, we get a pretty high commission on that segment.
The number, when I look at, comes at around 75%, 80% of the -- so the reinsurance commission, which we receive versus the premium which we are ceding, that ratio moves between around 75% to 80% for maybe the last 2, 3 years in health.
Yes. So when you look at it from a net of reinsurance basis, I think you could effectively look -- see that number operating at those levels of commission. And as Bhargav said, I think it is all a function of what kind of loss experience that you exhibit. And corresponding to that is what, let's say, the reinsurance. That's what they look at, not necessarily only in this line of business. Across lines of businesses, they would obviously look at what is the portfolio behavior that you are exhibiting to the reinsurers. And they would obviously kind of give a function of a commission that you would get to see as a minimum level of commission. And then correspondingly, on the basis of the portfolio experience, they will also kind of supplement it with further profit commissions, depending on what the reinsurance terms are.
The next question is from the line of Preethi RS from UTI Mutual Fund.
Sir, just to understand what -- as a thumb rule, what would be the broad mix of primary to renewal sales in the motor business?
Sorry, we didn't get your question, Preethi.
Broad mix of the primary sales insurance versus the renewal insurance sales.
Okay. So basically, the mix of new versus old, in a sense, for renewal?
Yes.
Just one minute. It's about 50-50 overall for the overall motor book for us, motor portfolio. Let me give you the latest number for the quarter. Generally, it's been about 48:52. For this quarter, the number is 44.6% for new and 55.4% for old, which is renewal sales.
Okay. Okay. Sir, if you look at our OD trends, the motor OD trends, we have been outperforming the industry, at least for this particular quarter. So what part of this growth is actually structural? I mean, how do you explain this? What do you attribute this market share gains to?
This is largely the same reason where -- why we have been kind of growing in the last couple of quarters. It's basically the investment that we made in distribution mostly last year, early part of last year, and we were continuing in quarter 3. So agency channel has really grown for us, almost 25%, as we've explained. The second is even as new OEMs are coming into the market, for example, the new ones that have just come recently like Kia, MG, et cetera, we are entering even those tie-ups. If anyone else -- anyone new one comes to the market, we have been a preferred partner for most OEMs, and that doesn't change. We've also, last year, added a few new OEMs that has helped us in terms of increasing the OEM numbers. And lastly, as we get into the virtual office, these are Tier 4 markets, right, where we may not have a presence in -- we may not have had a presence in the past. So the dealer could have given the business to someone else or a small -- even if you may be with the OEM. As we are going into the hinterland, our share of the dealer business from those local markets are also increased. These are not new OEMs, existing OEMs, but we are getting into smaller towns where we may not have really a control over the dealership in that sense. So distribution is really what is helping us.
So does that also explain the mix of CV going to 55% and two-wheeler dropping by a similar amount?
No. That's just a different aspect. The CV growth is largely driven by agency for us last year. And also because till last year, for 3 years prior to that, we had seen pretty interest -- good increases in third-party price rates by the regulator. And we found certain segments of business which was earlier maybe something that we did not find profitable. We have -- we've started writing those businesses last year. So CV business for us grew as a category last year. This year, we are again calibrating a little bit because as I explained earlier, we've not seen the price increase that we see that we need to get. And to that extent, CV is coming down. Gopal, any other points that you have?
No. I was just only saying that I think one of the points that we have been talking about is particularly on the own damage side of the business. On the long-term motor policies, as we explained, there has been pass-through of cost that has happened to the customer. So if you look at it from an average ticket size standpoint, the average ticket size has clearly kind of come down relative to, let's say, what you would have seen in the prior periods. And for us, two-wheeler, of course, is a very large proportion of the overall motor business. And that would also kind of explain, let's say, the relative proportion of two-wheeler coming down in this quarter vis-à-vis what you would have seen in the earlier period. But that largely kind of gets offset with the higher amount of the advanced premium number that we gave, which kind of moved up from roughly about INR 1,300 crores which was the number that we had at the end of the financial year '19 to almost about INR 1,865 crores at the end of this quarter.
The next question is from the line of Shreya Shivani from CLSA.
Sir, I just wanted some clarity on the -- for the full year, financial year of FY '20, if you can give a guidance or some clarity on the GDPI net premium number and combined ratio, you have mentioned that it should be at 100%. What do you think the loss ratios, what range should we expect that to be in?
We don't give a breakup of the loss and expense as a guidance as a practice. What we rather prefer to give is combined because our approach to a business segment is dependent on the combined number. There could be segments where the loss ratio is very low, but the expense is very high and vice versa. So rather than loss ratio, we're just focusing on 1 of the 2 numbers. We focus on combined, and that's the number that we kind of talk about. The second aspect that we focus on as a company is the ROAE, where we have said that we want to maintain an ROAE above 20%. And if you see the first quarter, that's something that we've been continuing to deliver. And the ROAE will be driven also by the investment leverage that we are seeing, given the impact of the long-term policies. So even if, let's say, combined deteriorates a bit from last year, 98-point-something percent to close to 100%, we believe the investment float will compensate for that. In terms of growth, what we've been saying is that in the medium to long term, we believe the industry and ourselves, we will continue to grow between 15% to 20% in our preferred segment. This year, given that we are dropping the crop, we don't -- we have not run a single tender in kharif. So kharif season is over. And in any case, the focus for us is not to write too much of crop business. So assuming that crop business goes out, that was about 17%, 18% of our business last year. So even if you grow the rest of the business by 15% to 20%, total top line will be muted. But our preferred segment will continue to grow at 15% to 20%. That's our endeavor.
The next question is from the line of Neeraj Toshniwal from Emkay Global.
So basically, just wanted to know on the long-term motor OD, how we are doing on that? Any attachment rates towards bundled policies we are selling?
That -- we will be able to talk about -- if you're talking about the renewal rates of the OD for a TP that we've written, that we'll be able to tell you from September. In terms of the long-term two-wheeler policies where we are selling a 5-year TP, how many buying own-damage component as well?
Right.
That number is, right, roughly about 20% now for two-wheelers. What is positive is in this quarter is that Maruti has now started driving the long-term OD as well, and that number has gone to -- Maruti's business segment, it has gone to close to 40%. So in aggregate, given that Maruti is almost half, that number for private car overall is about 9%, the increase from the 2%, 3% that we had in the last quarter. So that's a positive.
Right. So that is helping even the higher numbers coming in. So I just wanted to get some color on that. So on overall motor scenario, which has been really bad, any comment on that? I think the newer -- there has been a lot of production cut, and the new vehicle sales has been very poor. So how do we see that, I mean, on the insurance per se as well?
So as we've been saying, the insurance number will be driven -- at least for us, will be driven by 3 key factors. One is the new vehicle sales, which I think all of you are seeing what the numbers the SIAM is publishing. I'll just add one small caveat to that. SIAM publishes the numbers based on what the OEMs kind of push into the dealer network. What we see is -- or when -- we see a seller policy when the dealer sells a policy to the final customer. That number, the actual true sales to the end customer, that number, we believe, is not as bad as what SIAM is talking about. We believe based on our interaction with the dealerships, talking to FADA and our own -- our own experience, that we believe that number is a single-digit negative, could be minus 7%, 8% is our estimate for private cars. And similarly for two-wheelers also, it's a similar number. So it's a negative number but not as big a negative as the headlines that you're seeing. So that is one factor in terms of our overall growth in motor. The second factor is, if you see, as I explained, that the long-term policies that we wrote, particularly for 2-wheelers, 100% of them will renew at least for the long term. That -- vis-à-vis what we used to have in the past, that is a positive. And as more and more 3-year or a 5-year own damage penetration increases, that will also benefit us. The third thing is market share shift. If you see the growth that we've had in motor this quarter, the overall growth is largely driven by the distribution increase that we've had. So if you look at our number for motor, the overall growth has been about 14% in this quarter, which is much higher than the industry growth number. So if you see the industry growth number for motor, it's about 8.6%. Our number is 14% -- sorry, not 8.6%, but 4.3% for the industry. We are at 14%. Now the last factor that plays a role is the pricing. And in pricing in the first quarter, we did not see a TP, third-party price increase, which we saw from June 16. So to that extent, that will help a little bit, overall about 4%, 5% on our portfolio. We see a 4%, 5% price increase because of the TP book, but we'll also have to watch the price -- if any price -- if at all there is any further price correction on the OD side. So I'm just giving you what drives the overall GWP growth numbers for us. These are 3 or 4 factors, not just the new vehicle sales that is the headline today.
The next question is from the line of Sanketh Godha from Spark Capital.
I just wanted to understand -- or I wanted to understand the size of benefit-based premium, health benefit-based premium in our overall numbers, and that is first question. And second thing was, just to -- wanted to understand how much the VSO (sic) [ VO ] has started contributing to our overall GDPI? And which segment is driving VSO (sic) [ VO ] growth? And the last question is that, how is our concentration with respect to Hero as a OEM?
So on the first one, Sanketh, I think, so far as the benefit product is concerned and so far as our retail business, the extent of growth that we have seen on the benefit portfolio is roughly a 21% increase. The numbers are about INR 2.4 billion last year. That has kind of increased to about INR 2.90 billion. That's on the increase that we have seen on the benefit portfolio. And so far as the contribution of the virtual office distribution that we have been talking about, I think as explained earlier, the amount of premiums that we've been able to generate out of the distribution that we have done in the virtual office for this quarter stands at roughly about INR 1.4 billion. And that number, if you were to look at in quarter 1 of the earlier year, was roughly at about INR 60 crores or about INR 0.6 billion. So the investment that we have been doing has started to kind of play out. Obviously, we will get to see the impact of it playing through the rest of the year as well, given that we were able -- we were doing the ramp-up of the increase in distribution through the whole of last year.
Yes. But the segments which are driving growth in VSO (sic) [ VO ], means motor, health? Is it…
So large part of the -- so as explained earlier as well, I think at this point of time, the growth that we are getting to see on the virtual office is largely contributed by motor. As and when we kind of get to see that achieving critical number, obviously, we will want to use this distribution investment that we have made to also look at trying to do cross-sell of other products as well.
Okay. And finally, on that Hero concentration we have within two-wheelers, Hero OEM concentration?
Concentration in the sense -- I mean, we are there -- most of the OEMs we have -- there is Honda, Hero, TVS, Royal Enfield, even Bajaj now.
No, no. My question is that the 27% of GDPI, which we collect in motor business from two-wheelers, out of the 27 percentage, how much would be driven by Hero MotoCorp?
Okay. Yes, one minute. We'll just look at it. About -- roughly about 30%, 35% of the two-wheeler business comes from Hero.
35%, right?
Of the two-wheeler business.
Yes. Yes. Got it. And finally, if I can squeeze in one more question. Within fire, are we focusing on doing home dwelling? Are we significantly present there given we have a decent banker -- big banker tie-up? The home dwelling fire insurance, do we focus on, given it is highly profitable? Or are we -- we intend to focus…
Of course, we do. In most of the bancassurance tie-up that I'm talking about, we do home insurance as part of that. If you are probably -- you're probably asking the question to compare with other insurance companies. There is a classification issue here. We classify that as part of a miscellaneous line of business. Some companies, we believe, classify that as fire line of business.
So can we get the size of that business, if you can quantify in rupees billion?
We can look at that and give it you.
I will give it you separately.
Definitely, we can give it to you.
The next question is from the line of Rishi Jhunjhunwala from IIFL.
Firstly, on fire. So you mentioned about the rates going up substantially, which is reflected in the GDPI growth as well, and that, in most of the cases, you have proportional treaties. So I'm assuming that if loss experience were to remain the same, then loss ratios should improve dramatically in the fire segment. Is that the right understanding?
If the loss experience in terms of total loss cost remains the same, loss ratio will increase -- it will improve, sorry.
Yes. So I mean -- so basically, you have been doing less than 100% loss ratio in fire for the past 2, 3 years. So assuming the similar kind of loss costs remain, then there should be substantial improvement in the loss ratios.
That is the reason why we've decided to retain 10% more of that book this year. That is our expectation as well. But, Rishi, one thing you should keep in mind is fire is, at the end of the day, difficult-to-predict business because one large loss happens, there can be some implications. But what we've done is we've also tried to granularize that business to the SME business. And the other thing that you should note is that this price increase that we're talking about has happened for 8 high-hazard industries, occupancies as we call it. In the past, we were anyway a bit cautious about those segments. So the incremental benefit that we've got has not so much been because of this. We also got benefit because of the overall growth in the other segments as well. We've got a benefit from these segments. It's not as if we've not, but we also got increase in some of the other segments.
Understood. On the motor side, the growth that we have seen on the OD specifically, much better than the industry on the GDPI side. How much of that would be due to market share gain on the volume side versus a mix change?
Well, that's a tough one to explain. If you look at the market share, market growth, I'm just looking at the segment-wide numbers now. If you see own damage component, our market share has grown from 11.4% to 12.8% for this quarter, like-to-like quarter. If you look at third party, the market share gain is a bit muted. It's grown from 6.4% to 7.1%. So it is a bit of mix in the sense that there's been more OD. And that's largely driven by the fact that if you see our private car market share has grown, our CV market share has not grown as much and CV has more third-party than -- and less OD.
Okay. No, I was more asking, say, even within OD, the fact that when we do more passenger or more commercial versus two-wheeler, the premium ticket size goes up. And as a result, GDPI will look better rather than the volume change in terms of number of policies sold.
No. No. That is not that big an issue for us, at least in this quarter, because if you see -- in a sense, that would be true if segment-wide, there were very different growth numbers for us. So we've grown most of the segments this quarter. Private car, for example, most segments we've grown, where we wanted to grow. So it's not largely because -- there's been a little -- relatively, we've not grown the two-wheeler as much, two-wheeler segment as much as private car. Private car, we've done well and grown more. But across the board, we've had decent growth. Just to give you one new factor to consider. If you look at the share of the OEMs, that also has grown for us. So it's not just -- so that was roughly about 12.5%. That's grown by a couple of percentages more. So it's not as if we've kind of focused on certain segments. And this is, I'm giving you the aggregate number at the OEM level.
Understood. And on the -- you talked about long-term OD, 20% for two-wheeler, 9% for four-wheelers. Just wanted to understand, I mean, so how has the pricing been for you and for the industry when we talk about 5-year and 3-year OD policies? Because, say, a couple of months ago, at least at that time, the pricing was largely linear to the number of years when we did some of the checks. But I just wanted to understand, is it largely in line with how TP rates have been for long term? Or do we really have some bit of better pricing in there?
As in whether the prices increased on the OD side for long term?
Yes. So basically, if you were charging INR 15,000 for a four-wheeler for 1 year, for 3 years, is it INR 45,000? Is it INR 35,000? What kind of a…
We discount it because as we've explained, what we do when we price the OD component, for example -- TP, as you know, is -- it's a formula that the regulator has given and that you are aware of its status. So it's kind of equally apportioned across a 3-year or a 5-year, as the case may be. On the own damage side, what we do is we look at the -- let's say, it's a 3-year policy. Rather than price it at 3x, what we've done is we've given benefit of the fact that we won't have any renewal effort. In the next 1 year, we will not have to send a policy. There's no cost of printing the policy, et cetera, number one. Equally, the distribution commission for the second year is slightly lower than what we normally pay for renewals. Plus, we have the investment float. So all of that has been factored in. So if you see the price for a private car, rather than 3x for a 3-year, it's about 2x to 2.25x for a 3-year policy. Giving the discount -- which is why as we explained, the loss ratio will gradually creep up for own damage component also, but the expense will come down. Expense ratio will come down because all these expenses benefit are being passed on to the customer. And equally, the investment float will play through.
And what we are seeing, Rishi, also is, I think you can also see, even for the industry, you are actually getting to see an increase in the OD loss ratios. If you were to see, for example, a year back, the loss ratios for the industry as a whole would be roughly in the range of 66%, 67%. If you look at the latest numbers, that has touched to a level closer to about -- in the mid-70s.
Right. Because the other thing I wanted to check was, basically, how does the recognition work? Is this just 1 by 3 for 3 years, even for OD?
So there is a recognition based on a certain formula that we were following. Effective May, the regulator has given a specific number on how you allocate the premium over 3 years. It is largely linked to the IDV of the vehicle. You recognize more in the first year and less thereafter.
Yes. Yes. Fair enough. And one last question on your new business strain. How much that would have impacted this quarter's earnings growth?
Which is what you get to see on the expense ratios, Rishi. You would have definitely seen an increase in the expense ratio numbers that you would have seen for us. And also, if you were to see the growth rates, for us, has been at about 17.7% relative to the growth that we would have seen in quarter 1 of the earlier year.
For the non-crop business.
On the preferred segment businesses.
Rishi, one more clarification on the response that I gave in terms of the mix of business. As I said, the two-wheeler business for us has not grown in line with the private car business. So to that extent, it could also be because of the higher ticket private car numbers. But in -- basically, the point that I'm making is that it's not because of any vacation of a certain dealership or a certain category of business.
The next question is from the line of Nischint Chawathe from Kotak Securities.
Just a couple of questions. What is the impact of cyclone Fani, I mean, if you could quantify it?
So the impact of cyclone Fani on the net, which post the reinsurance, some of the amounts will be paid by the reinsurer, depending upon the specific example, the net effect for us is INR 16 crores in this quarter. The gross loss will be more than that, roughly about INR 35 crores. The net loss for us is about INR 16 crores. So if you look at the combined ratio for us without Fani, that number would be about 99.7%. And if you see the -- our share of total insured loss of the industry as we understand it today, this number is about -- roughly about 1% of the industry loss. So the trend of our share of loss being much lower than our national market share continues even with this cat event.
Sure. Now what is the outlook for growth in the fire segment this year? I mean, I guess it's a combination of higher tariff and volumes. But any sense -- I mean, can we expect a 40%-plus industry growth for the full year or 60%-plus for you? How should we think about it?
So at this point in time, we believe the industry will grow at the -- will -- should sustain this level of growth because, as I explained, it's a structural change, because of what GIC has done for those 8 occupancies. The…
How large are these 8 occupancies? And what is the percentage rise that we are seeing here?
The -- these occupancies contribute roughly about 35% of the industry. The second thing to keep in mind is that Q1 is a very strong quarter for fire because most of corporate renewals happen in Q1. So in terms of volume, the number may be a bit muted, but both numbers should be maintained relative to the other -- in the other quarters. The last point that I'll make is that there is a committee that the regulator has formed to look at -- to relook at the IIB rates. So this GIC price increase recommendation is largely based on, as I explained, IIB burn cost. Now the burn cost is something that -- there's a committee that has been formed to look at whether the burn cost needs to be modified. Now there could be 2 outcomes of that. Outcome one could be that increase the number of occupancies, we are only talking about 8 occupancies, we could see more occupancies being covered by GIC. In that case, the premium could rise for even other industry segments. Equally, if in any of the burn costs, the actual calculation shows that the burn cost should be lower than the current number that IIB has, it could come down a little bit. Our estimate is that it's probably more of the first one, as in more sectors may get covered. So we think the fire growth rate in the industry will continue for some time. Even the other -- the rates for nat cat, the cover -- the price that we charge for earthquake and the nat cat perils, what we call STFI rate, that has also gone up a little bit this year. So all that we should sustain.
And on an average, how much has been the rise in this 35% of business?
Oh, it's not a percentage. It's by a factor. It's increased by 4x to 6x in some segments. The average for all these 8 occupancies is about -- the rate increase is more than 2x.
Okay. Just on the health business. I guess you mentioned that group business was kind of more profitable last year, and competition seems to be creeping up a little bit. So any guidance on loss ratios on the health side? Are we kind of…
Look, let me clarify what I said. What I said was that last year, vis-à-vis the previous year to last year, that is 2017, '18, we -- last year, we saw very, very sharp price increases. So the loss ratio came down significantly previous -- compared to the previous year. Now as prices increase, we also entered quite a few new corporate accounts because it became viable for us to enter those accounts. Relative to -- now, this year, relative to the previous year, we are not seeing any similar increase in prices. But we are not seeing any major deterioration. We just -- our sense is that group health prices are largely holding. What we are doing is, given that the entry also was selective, we don't expect the group health business to grow at the same pace as we had last year.
But around 75% loss ratios should possibly be maintained, I think that's what we can assume?
Yes. We think it should be maintained. In fact, what we are doing is accounts that we entered last year, not all of them have performed as well as we would have anticipated. If it does not perform as well, then you would want to kind of either increase prices or reduce exposure. So that calibration we keep on doing. That is something that we are doing this year also. So at least the effort from our side will be to reduce the loss ratio rather than let it go up.
And any scope of retail business kind of getting more interesting, the individual business side, individual health?
That is our key thrust area for us as a company. And if you see what the numbers that we have given out in terms of growth across segments, for the retail business, we've had a very good quarter in spite of the fact that a very large part of our business which comes from NBFCs, we have not seen too much of a growth. In fact, we have seen a small degrowth for obvious reasons, because of underlying disbursements are happening in some of the NBFCs. The pure retail indemnity business, which is largely driven through agency, the new indemnity business has grown by more than -- close to 49%, a bit more than 49%. Of course, that doesn't reflect in the overall numbers because the overall number has renewals also. And our renewal book is relatively small for the indemnity piece. But the new business is growing quite well for us, largely, again, driven by the agency scale-up that we've done and that we are continuing to do.
Sure. Finally, any guidance on crop business this year?
I think it remains the same. We said we will be selective. We don't believe that the crop business now at the terms that the reinsurers are giving us can be viable. Look, at the end of the day, this is a social insurance, right? We believe that given the reinsurance terms, breakeven rates for crop business is now at around 75% to 80%, which is not a number that you can expect to earn from a social insurance scheme for a sustainable period. So we are remaining cautious till the reinsurance market changes. And at this point in time, we've not won a single new tender for the kharif season. We'll see what happens in rabi. Our sense is that the same trend will continue in rabi also. The only other commentary on the crop is the fact that there is still some business of the rabi book of last year, for which we will have to, in the second quarter, account for the final losses. Now whether the loss that we are holding is adequate or not, based on data, we will have to see that.
Sure. And just one final clarification. You mentioned that in the car segment, around 9% of the new business is a comprehensive policy.
It's a 3-year -- so if you recollect, it's a 3-year own damage and 3-year third party.
That's right. That's around 9% for you.
Correct. That number in the last quarter was about 3%.
Thank you. Ladies and gentlemen, that was the last question. I now hand the conference over to Mr. Bhargav Dasgupta, MD and CEO, for closing comments.
Thank you, guys, for coming and joining us on this call. Today, I guess, is a busy day for all of you. And we look forward to interacting with you in the days ahead. Thank you.
Thank you very much, sir.