General insurance to grow in 15-18% & Life on new biz at 20-25%: Bajaj Finserv

On the general insurance side, the premium would grow in mid to teens in FY18 and life insurance on new business should to grow over 20-25% in FY18, he said.

Below is the verbatim transcript of the interview.

Anuj: If we look at your numbers, quarter-on-quarter (QoQ) there is a bit of a problem because of insurance business. Is this normal Q4 phenomenon?

A: It is different for the life and the non-life business. If you see the non-life number, you will see even for Q4, the gross written premium (GWP) is up 31 percent to Rs 2,260 crore. Profit is down about Rs 43 crore for two reasons. One we had higher investment income of about Rs 20 crore last year Q4 and there were some tax credits pertaining to previous years which we adjusted last year which was about Rs 30 crore or so.

So, on the core insurance side, when you look at a combined ratio for Q4, we were at 92.7 percent. The previous year itself was 94.3 percent, but at 92.7 percent it means purely from insurance we made so much more money in Q4. So, the others are as I said outside of operation. So, that is really on the general side. The other stuff as you know is non-recurring.

On the life business, if you now notice the last 18 months, it has been six quarters that we are growing a rated premium on our new business year-on-year (YoY), QoQ. So, this is now the right direction that we are taking.

Unfortunately our accounting standards require us to expense out all the expenses of long-term policies in the first year which means that when we are growing back, the last three or four years we have not grown till 18 months ago, when we are growing back you are going to see lower profit in the initial years till we build a large renewal pool.

However, that is okay, it only means that the profit is going to come in later years. So, that is where we are for those two companies in Q4.

Latha: The other insurance companies reported strong growth in YoY profits. Is your difference only to be explained therefore by that tax credit that you spoke about?

A: On general insurance side, yes, it is mainly the tax credit as well as I said higher investment income of last year, so greater opportunity for booking capital gains. On the life side, clearly we are very different from our peers because, roughly if you reach about 70 percent renewal premium to total which means new business is 30 percent proportion, then you start seeing very good profit YoY from the renewal book. In our case, we were there four years ago. However, we have lost that balance in the last four years and we are trying to get it back again.

Latha: How much time before you get this 30 percent new premium to renewal premium?

A: I would say it should take us a couple of years to get there. We have seen renewal premium to be flat in this year as well. We think maybe it is one more flat year, but then the new business of this year, of the last 18 months will start kicking in.

Sonia: I wanted to talk a little bit about the lending business as well because over there the AUM growth has been really steady, almost 35-36 percent odd. How are we looking at the trajectory now over the next few quarters?

A: We consistently saved the 20-25 percent growth. If you actually see what we had done in Q3, is we had slowed down our consumer durable financing and our Loan against Property (LAP) financing because we were seeing some early stress and we needed to tighten up our risk policies. Q4 now, our consumer business is again growing gung-ho over 45 percent growth over there.

The LAP portfolio we are still going slow because we want to try and see the effects of demonetisation playing out in the first couple of quarters which are over now post demonetisation. We have seen some amount of slippage on our LAP portfolio which is mainly lending to SMEs. We think it will take them another three to four quarters before they really align with their suppliers and customers towards a lower cash regime.

Sonia: So, this 45 percent consumer business growth, you spoke about SME and how it is weak but what about the other verticals, overall rural, two wheelers, where are you seeing the maximum amount of recovery?

A: Two wheeler again, we are starting to see recovery. That is good. Rural for us because it is small but growing segment. We have grown over 100 percent QoQ as well as our commercial lines, where we are lending to mid-size corporates, that has again grown over 25-30 percent. So, I would say across these lines we are starting to see in Q4 once again very strong growth.

It is only on the SME side, we are the ones playing slow. We want to just wait and watch because as we have always said, we are first a risk company. So, we want to make sure that we are confident that our risk metrics are playing out right before we dial that up.

Latha: SME is a big book for you, it is almost 40 percent of your book. Rs 22,000 crore out of the total Rs 56,000 crore AUM. Will you worry that there could be more bad loans there, after all bad loans have gone up?

A: As far as our SME portfolio and the LAP portfolio is concerned, we have provisioned about Rs 50 crore or so this year as an additional provisioning in case we start seeing some of the downsides of demonetisation in the remaining quarters of this year.

Other than that, we have also in the last 18 months on SME gone completely direct. Over 90 percent of our business is direct, it is not through intermediaries. So, we believe what we are getting now is much better quality customer and please keep in mind even now the numbers we are talking, our loss ratios are still significantly lower than the industry even in this book.

Anuj: I also have a question on Bajaj Finance. This is something I wanted to know, Devang Mody has quit Bajaj Finance and has moved on to Reliance Commercial Finance. Do you see that impacting the kind of business that Bajaj Finance has created? It has been such a huge market leader, but do you see Devang’s exit creating a bit of an issue?

A: While each and every leader in our senior management team plays a significant role but we are not reliant, if I may use the pun, on anyone. Devang has actually been a great, not only team member, but from the beginning till the last day that he was working with us, which was end of March, he has been working fully focused on the company. It is very unusual to have somebody like that, with that kind of commitment.

However, he got the job of a CEO and in a way we are very proud that we are creating leaders of that capability and we already have a very good CEO as you know in Rajeev Jain. So, there will be one or two such positions that come up who get completely ready and if there is a good opportunity outside then they will move over there.

Of course if the top 50 people left overnight, it would affect any company. However we have built enough bench strength.

Latha: Your solvency ratio has dipped a lot in the life insurance business. So would you be raising capital, why this and how do you tackle it?

A: It is a very good point you are bringing in. Our solvency remains the same, what IRDA has allowed us to do now from last year is, our solvency used to be like 800 percent, instead of about 150 percent. Now, the extra solvency which has shareholders’ funds also gets monitored with very tight investment rules as long as you count them for solvency. However, if you separate them out into another fund, then there is greater relaxation as to how you can invest that money. So, that is all that has been done.

The money is still very much there, it is still available as capital but about 200 percent or so, it is about 150-200 percent less, we can’t call it technically solvency, it just gives us more flexibility on investment. However, we could move it back whenever required, but we are still over 500 percent. So, there is no worry at all and the money is there.

Latha: So no need to raise capital?

A: No, not at all. I don’t think this business will need capital for at least five years.

Latha: So Bajaj Allianz does not get chance?

A: That is a separate issue. Allianz has nothing to do with whether the company needs more capital or not. That will be a decision between Allianz and us but there is no change in our situation from the last time we spoke.

Latha: So should we expect this partnership with these ratios, Allianz’s shareholding does not rise any time soon of all?

A: That is speculation, so, I can’t comment on that. However, we will see how things go.

Anuj: At home is there a bit of a friendly competition on between you and Rajiv Bajaj in terms of the kind of wealth you brothers have created; market cap of Bajaj Finance and Finserv right now is more than Bajaj Auto, is there a bit of a friendly competition?

A: We protect and we finance everyone.

Latha: What is the growth trajectory that you are seeing for the general insurance and the life insurance business? This is the first time anything by way of softness has visited your numbers, normally they are very strong but, how are you looking at both topline growth and bottomline growth for Finserv?

A: I won’t comment on bottomline growth; as you know I don’t do that. As far as topline is concerned, again general insurance, mid to larger teen growth is clearly possible. A big swing number could be crop insurance. We have written about Rs 1,400 crore of crop insurance last year, we are budgeting the same this year, but there were some reinsurance losses for the industry level last year and we are seeing pricing hardening over there.

Now in such a situation, if we find irrational competition coming in from government insurance companies, then on lines like that which I have mentioned in the past that on tactical lines we may back down and lose some topline growth to protect the quality of business we write.

Life insurance, on a rated new business basis should continue to grow over 20-25 percent. That is what we are projecting for this year. So, we will see strong growth coming this year for the full year as well. Bajaj Finance continues with its growth, 20-25 percent topline is what we keep projecting and there is no reason why we see different this year. It should be another good year.

Sonia: Do you think the life insurance projection of 20-25 percent is a bit conservative because we have seen some massive deals take place at very high valuations in the life insurance space. Recently we saw that SBI Life deal, 4 percent stake at three times EV. Do you think that in general the sort of the valuations of the sector are going to get rerated?

A: I think today there is still scarcity value around the sector, there are very few stocks out there and a lot of these companies are talking of IPOs and that is why even on the private side the deals taking place today are assuming certain valuations.

Clearly the bank promoted companies do have a short-term advantage but that is something in the medium-term that we will equalise as well whether through strong banker relationships ourselves or by expanding agency. Growth for us there is greater upside. If you see, this year full year basis we have grown on rated premium over 30 percent. So, there is upside over there. However, I prefer being conservative.

Latha: You finance a lot of people is what you said in reply. You mean you finance bikes other than Bajaj bikes?

A: That is the only captive line so far but if you see, I used two words, we finance and we protect. That is tongue in cheek to Anuj’s question. I think as a group we have compared to 10 years ago, multiple businesses now which are doing well. We have been fortunate to be in this position, we have great people doing that and you will always have businesses that go through ups and down, those are cycles.

However, as a larger group of shareholders of the Bajaj Group we are now less exposed to individual cycles because of these number of companies out there. In financial services as you know, only two are listed right now, down the line if the two insurance do get listed as well, it creates tremendous opportunity. So, overall larger group of shareholders and the Bajaj family has hopefully gained in this 10 year period.