Life insurance arm to be profitable in FY12: Reliance Cap

Reliance Capital's FY11 consolidated net profit was down 33% at Rs 291 crore versus Rs 435 crore. Its consolidated income from operations declined 10% to Rs 5,330 crore versus Rs 5,890 crore.

Sam Ghosh, Group CEO of Reliance Capital in an interview with CNBC-TV18 spoke about the peformance of the company and the road ahead.

He said that the life insurance space has shown profits in the last two quarters. The overall profit for the last year has been about Rs 34 crore. The company's margins declined in the last quarter in this space mainly because the company was focusing on the participating products where it gets only 10% of the profits. It expects the life insurance business to be profitable in FY12.  

Below is the verbatim transcript of his interview with Udayan Mukherjee and Mitali Mukherjee of CNBC-TV. Also watch the accompanying video.

Q: Take us through the quarter as you saw it, where did some of the pressure come in from?

A: For Reliance Capital as a whole the figures were very satisfactory. Most of our core businesses have outperformed the figures they had posted last financial year.

If you take the asset management, life insurance, commercial finance and home finance businesses as well as Reliance Money and Reliance Security business, all four of them outperformed their last financial year significantly.

The only place where we had a one time hit was on the general insurance side where all the general insurance companies had to take a Rs 7,000 crore hit of which we had to take a proportion of that. So that has been the only negative in this.

That is a one time hit but as a industry they have slowly started moving upwards. This year we can see growth in GWP will taking place as well as reduction in the losses will certainly happen as the aim is to breakeven.

Q: Focusing on life insurance, what kind of performance do you see from that vertical in specific going ahead and how would you breakup how this year has gone down for life insurance?

A: In the life insurance space we have shown profits in the last two quarters. Overall profit for the last year has been about Rs 34 crore. The volume of the business it has obviously come down.

This is because of the focus on the traditional business as opposed to the unit link in the last financial year. It is difficult to compare because one was purely a unit linked product that we are selling and this year it is 50% tradition of 50% unit link.

Why has the new business margins come down slightly? The main reason is that we have been focusing on the traditional platform. We had been focusing on the participating products where we get only 10% of the profits so therefore the margins obviously come down in the last quarter.

Normally in the last quarter this always happens because the agents are chasing more business. In the third quarter however we had more non par business where it is more guaranteed business and  the margins are much higher. Going forward quarter on quarter we would obviously focus on the non par business for the first three-four quarters.

That will at least ensure that our new business margins come back to about 16-17% which is where we expected it to continue. The growth rates will come back from the second half of the financial year because the first half is comparable only to the last financial year which was mainly a unit linked business platform where we are now 50% tradition. So we expect the first two quarters to be a bit slow.

Q: Given that the new premium issues have been a little sticky, do you still think that you will be profitable on the insurance front in FY12?

A: The number of policies we sold have come down by 15-20%. But, more importantly because we moved from unit linked platform which was 97% of the business was unit linked to today being 50% of unit linked business.

What happens there is because you are focusing on tradition based policies, the average ticket size per policy is low, therefore your premium comes down. Therefore new business premium for the current year in the second half has come down.

If you look at the projections for the next financial year FY11-12 first two quarters we will show slight reduction in new business volumes. Primarily because you are comparing unit link base to a 50% tradition base but Q3 and Q4 again we show growth.

This means for the whole year we should be able to show 10-15% growth taking the four quarters in place. The good thing for us is that we have not put in any capital in the last two quarters.

Going forward no capital is required. We will show profit for the whole financial year QoQ so, that is the big positive for the life company. It has turned profitable in the last two quarters and going forward the next four quarters it will show profits and thereafter the profits will be there.

Also Read: Indian non-life insurance sector is a goldmine: S&P

Q: For commercial finance what kind of growth is it that you expect to see and on what kind of margins?

A: It has been a big change for us, last year we had about 25-30% unsecured business this year nearly 97% of the business is fully secured. This   has helped in a way that our profitability has grown up, NPAs have come down and we had 100% growth rate.

Going forward,  we are talking about 25-30% topline growth and in terms of profits we would like to have growth of about 100% this financial year, if we can achieve 25-30% topline growth rate.

In terms of the RoE also though this year we will hit about 15-16%, going forward it will be well above 18-20%. Therefore net interest margins this year we have been very successful in keeping our NIMs keeping above 5%. We expect that to keep it around 5% level.

The primary reason for that is that though the interest rates are going up we have been able to pass most of our interest rate hikes to the customers.

Therefore, 70% of our book is floating which means that we can pass the interest rate hike to the customers. Most of our customers are SME types customers who can absorb this interest rate hike.

Q: Could you give us some clarifications on when you intent to do the Reliance Life IPO, whether there is any further monetization plan through any of your businesses like general insurance that is possible in FY12?

A: The Reliance Life and the Nippon deal is with the regulators. The process is going on, they are asking for information and we are providing that. We expect that in not too distant future the transaction will be complete.

In terms of the IPO, the guidelines have come out but we have no plans of looking at an IPO for the life company now because we are already working with the Nippon Life.

On to the general insurance side again we have been waiting for the M&A guideline and regulatory approvals to come. Once that comes out we can look at the general M&A activity in the general insurance side.

With regard to the asset management again as I mentioned earlier at this point there is no plans to bring in partner o the asset management business. But, as when the opportunity arises and as when it is the right time we will have significant value creation there.

Q: What is it that you see in the coming years in terms of an earnings contribution and the mix and on what kind of return on equity?

A: For FY11-12, the asset management business and the commercial finance business should contribute to 60-70% of the earnings mix. The life insurance business will also turn profitable, so maybe 75% will come from these two businesses.

The broking and distribution business will also bring in significant profits. But, it will not be to that extent though the RoE will be great for the broking and distribution business because it is purely fee business. The amount of capital injected to the business is negligible.

So this year though they will hit 10-12%, FY11-12 they will be certainly above 20%. For the asset management they will be well above 30-40% levels if not higher and they should continue with a similar trend.

The commercial finance and housing finance are about 15-16% this year RoE and next year they are expected it to be above 18%. For the life insurance, it would be first year it would be 10% RoE but going forward it will be much higher.