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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Thank you, and good evening, everybody. I welcome you to the earnings conference call of ICICI Lombard General Insurance Company for the First Half of 2020 and Q2 of 2020. I would like to give you a brief overview of the half year and the quarter ended September 30, 2019, post which our CFO, Mr. Gopal Balachandran, will share the financial performance of the company.The general insurance industry registered a growth of 16.7% in the first half of 2020 over the first half of 2019, with the industry GDPI moving up to INR 955.33 billion in H1 FY 2020 from INR 818.74 billion in H1 FY 2019 as per the GI Council report. Excluding the crop segment, this growth would be 14.4%. The overall growth and growth excluding crop segment was 22.3% and 15.4%, respectively, for Q2 FY '20 as compared to Q2 FY '19. The combined ratio of the industry was 113.1% in Q1 FY '20 as compared to 108.9% in Q1 2019 based on available information from public disclosures. Further, the overall combined ratio for the private multiline general insurance was 107.7% in Q1 2020, as compared to 101.8% in Q1 2019. Let me now turn to some of the key developments during the recently concluded quarter. The Motor Vehicle Act -- amendment act 2019 came into effect from August 9, 2019. This act is expected to bring a positive impact in increasing penetration in Motor Third Party segment. The imposition of heftier penalties is expected to bring discipline among the motor vehicle owners, thereby leading to lower accident incidences. For insurers, we envisage that the introduction of time limit for claim intimation may reduce claim incidents. Overall, the act is positive both for the insurer and the insured. On September 20, 2019, the Taxation Laws Amendment Ordinance was promulgated to give any existing domestic company an option to opt for lower income tax rates, subject to the condition that it will not avail itself of any specific exemption or incentive. This tax cut makes India's tax rate comparable to many of its international peers and is anticipated to make India a promising investment opportunity. For our company, we welcome this development since it results in a higher disposable income, which we propose to reinvest in the business. The quarter witnessed significant disruptions on account of widespread floods in many states. These floods have been reported to claim several lives and cause severe damage to property. The economic losses and the insured losses on account of these floods are estimated to be INR 280 billion and INR 20 billion, respectively. As for our company, the gross loss from these floods are estimated to be INR 0.74 billion, whereas the net loss, which is net of reinsurance, is expected to be INR 0.49 billion in this quarter. Speaking of the company's performance. The GDPI of the company in the first half of 2020 de-grew by 11.8%. However, excluding the crop segment, the GDPI growth was 16.2% compared to the industry growth of 14.4% on a like-for-like basis. Our GDPI growth was primarily driven by our focus of preferred segments such as fire, marine, motor, liability and health. Consequent to the increase in minimum prescribed rates for certain occupancies under fire segments, this segment registered a robust GDPI growth of 69.5% in the first half 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 28.9% in the first half of 2020 over first half of 2019. On the retail side of our business, SME and agency channel and health indemnity continues to grow faster and remain our areas of focus. To harness the potential of these segments, we have been expanding our distribution network so as to increase penetration in tier 3 and tier 4 cities. Our individual agents, including POS agents, were 41,113 as of September 30, 2019, as against 28,718 as of September 30, 2018. We have also entered into a bank assurance tie-up with Standard Chartered Bank in Q2 of FY '20. In conclusion, we continue to aim for growing our business by creating long-term value for all stakeholders to 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 request Gopal to take you through the financial numbers for the recently concluded half year and the quarter.
Thanks, Bhargav. I will now give you a brief overview of the financial performance of the company for the half year and the quarter ended September 30, 2019. We have put up the results presentation on our website. You can access it as we walk you through the performance numbers. Gross Direct Premium Income, GDPI, of the company stood at INR 64.4 billion in first half of current year as compared to INR 73.05 billion in first half of 2019, a degrowth of 11.8%. Excluding crop segment, our GDPI increased to 63.86 billion in the first half of current year as compared to INR 54.95 billion in first half of 2019, registering a growth of 16.2% compared to the industry growth of 14.4%. On a quarterly basis, the GDPI de-grew in quarter 2 FY '20 by 16.4% over Q2 of 2019. Again, if you were to exclude the crop segment, GDPI growth for quarter 2 this year was 14.5% over quarter 2 of the last year 2019, as compared to the industry growth of 15.4% for the same period. Combined ratio stood at 101.5% in H1 2020 as compared to 100.1% in H1 of 2019, primarily on account of long-term motor policies and losses from catastrophic events, which is estimated at INR 0.61 billion. Combined ratio was 100.1% in H1 2020, excluding the impact of catastrophes. Combined ratio was 102.6% in quarter 2 2020, as compared to 101.1% in quarter 2 of 2019. Combined ratio was 100.6% in Q2 2020, excluding the impact of catastrophes. Our investment assets rose to INR 239.99 billion at September 30, 2019, as compared to INR 237.11 billion at June 30, 2019. Our investment leverage net of borrowings was 4.09x at September 30, 2019, as compared to 4.27x at June 30, 2019, which was calculated post dividend. Investment income increased to INR 10.14 billion in H1 2020 as compared to INR 9.54 billion in H1 2019. On a quarterly basis, investment income increased to INR 4.87 billion in Q2 2020, as compared to INR 4.47 billion in Q2 2019. Our capital gains was lower at INR 2.07 billion in H1 2020, as compared to INR 3.21 billion in H1 2019. Capital gains for this quarter was lower at INR 0.69 billion as compared to INR 1.25 billion in quarter 2 2019. Our profit before tax grew by 4.9% to INR 9.36 billion in H1 2020 as compared to INR 8.92 billion in H1 2019, whereas PBT grew by 2.7% to INR 4.61 billion in Q2 2020 as compared to INR 4.49 billion in Q2 2019. We would like to remind you that PBT for H1 and Q2 of the previous year had the benefit of one-off reinsurance recovery of INR 0.58 billion. Excluding the one-off impact, PBT grew by 12.2% in H1 2020 and 17.9% in Q2 2020. Consequently, profit after tax grew by 6.1% to INR 6.18 billion in H1 2020 as compared to INR 5.82 billion in H1 2019, whereas PAT grew by 5% to INR 3.08 billion in Q2 2020 as compared to INR 2.93 billion in Q2 2019. As mentioned earlier, PAT for H1 and Q2 of the previous year had the benefit of one-off reinsurance recovery of INR 0.58 billion. Excluding the one-off impact, PAT grew by 13.4% in H1 2020 and 20.6% in Q2 2020. The Taxation Laws Amendment Ordinance 2019 promulgated on September 20, 2019, amended the Income Tax Act and the Finance Act 2019 by inserting Section 115BAA, which provides domestic companies with an option to opt for lower tax rates, provided they do not claim certain deductions. The company has elected to exercise the option, and has accordingly recognized the provision for tax for the quarter and the half year ended September 30, 2019, and has also remeasured the deferred tax asset at the lower tax rate prescribed in the said section. This change, which has been recognized in the profit loss accounts for the current quarter and the half year, has reduced the provision for taxation by INR 0.07 billion, net of onetime charge of INR 0.84 billion on account of reversal of deferred tax assets as of April 1, 2019. Consequently, the effective tax rate was 34% in H1 2020 and 33.2% in Q2 2020. Return on average equity was 22.3% in H1 2020, as compared to 24.4% in H1 2019. The ROE for Q2 2020 was 22% as compared to 23.9% in Q2 2019. Solvency ratio was healthy at 2.26x at September 30, 2019, as against 2.2x at June 30, 2019, continuing to be higher than the minimum regulatory requirement of 1.5x. The Board of Directors of the company has declared interim dividend of INR 3.5 per share for H1 2020 as compared to INR 2.5 per share for H1 2019. As we conclude our address, I would like to summarize that we ended the current half year and the quarter 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 now thank you all for attending this earnings conference call, and we'll be happy to take questions that you may have. Thanks.
[Operator Instructions] The first question is from the line of Dhaval Gada from DSP Mutual Fund.
Just 3 questions. First is, could you comment a little bit about the pricing environment in the major lines of business? That will be first question. The second is if you could give some thoughts around earnings growth, PBT earnings growth, that one should sort of look for? I mean I'm just thinking through on -- if you look at various levers that we have, be it claims ratio, OpEx and investment income, if you look at claims ratio, the gap between motor OD and TP is probably the lowest at this point of time. Health is probably sort of clocking the best claims ratio. OpEx, we are doing the utilization right. So OpEx ratio tends to sort of move higher as the benefit of the denominator of crop goes away. And investment yield is where it is. So I mean, what would drive earnings growth apart from just top line growth from premiums? So just some thoughts around earnings growth trajectory that one should look for. And the third was a data-keeping question around reserve releases during the second quarter and the first half.
So let me probably start with the third question first. As you know, we look at the numbers on a quarterly basis but we disclose the overall releases for the whole year. And at the end of the year, we'll disclose the total release for the year. But obviously, there are numbers that flow through during each quarter. In terms of the first question on the pricing environment, I'll probably kind of look at it slightly segment by segment. On the commercial lines, we are reasonably satisfied with the pricing environment, particularly in the property side. As you know, because of the GIC intervention, the rates for certain occupancies, particularly 8 occupancies have increased significantly. And if that reflects in terms of the growth rate that we are seeing in the property segment, particularly the fire segment. One of the things that we've done this year is we decided to retain 10% extra given the increase that we saw from March 1 this year. And this is, in a sense, was long overdue. I mean these are the structural stresses in the system over the last 10 years that was building up. Finally, there is price increase in the property segment. If I look at some of the other segments, group has been in the corporate side. The other large piece would be, let's say, the group health segment. Pricing -- prices are holding. Last year, we saw a pretty sharp increase in prices. This year, we are not seeing any significant increase off that base. So we are kind of a bit more muted this year on the employer-employee group health business, but the rates are holding. It's not as if it's kind of reducing anymore. Coming to Motors TP, of course, as you know, is tariffed. But on the own damage side, what we've been seeing and we've been talking about for the last maybe about 3 quarters now, we've seen a bit of stress on the own damage pricing. And as we see the industry data also, of course, we don't have the 6-month data, but industry data for even for Q1, the industry loss ratios have increased by roughly about 7%, 8% last year, and we believe the number will be worse for the industry in the 6 months. So even if you see our numbers, the only loss issues have climbed for this quarter over a similar quarter last year. So if you see our numbers, the Q1 loss ratio for motor only was 71.8%. Last year, the same quarter, this number was 59.7%. So these are, of course, financial numbers. There will be some reserve adjustments that happens. But just to look at Q1 to Q2 numbers for own damage, that's moved up from about 68% to 71.8%. So there is -- that stress is continuing on the OD side.But most other lines, the pricing is reasonable. Even, let's say, retail health, pricing is pretty good. We have one, maybe a bit of a specific issue that we've been going through for the last almost 4 quarters now, which is a large part of our retail health business is benefit segment, which we -- I mean, we've always been a more benefit company on the retail side than indemnity, and the benefit products are largely distributed through bancassurance or NBFCs. While the bank segment is continuing to do fine for us, but a large part of our business, which we use to get from the NBFC segment, that has almost disappeared for -- on the benefit concern. And hence, that has an impact in terms of our -- the profits on that segment of the business. That segment of the business is quite profitable, as we've discussed in the past. So that has one impact. But overall, generally, health -- and so in some from, mix per se had an impact. But overall, we are quite okay with the health pricing. So in a nutshell, I think the pricing environment, the one piece that we are seeing a lot of headwinds is the motor OD. Otherwise, largely, we are okay with most other lines. Okay. The last question. The second question -- the second point that you had is earnings growth trajectory in terms of drivers of earnings growth. So you've kind of identified the key aspects, right? Last year, we did this big investment in distribution. We added more than 2,000 sales guys on a base of 8,500 at the company. So it was a very large investment that we made. Most of it came through in the second half in terms of people joined us by the second half. So that base effect is playing through this year. I mean the full cost is something that we are bearing this year. And related to the first half, that has been one factor that increased our OpEx this year. It's not just a normal retailization of business. This has been a one-off big investment that we made last year, as we've kind of shared in the past. Secondly, in terms of expense ratio number for us, because of the crop number going out of the GWP base, just because the numerators become smaller, the expense ratio has gone up. In terms of drivers of profitability going ahead, so there are multiple factors. So we've made this investment. We hope to see it play through in terms of business growth, that's one. Our view is that the OD rates have reached a level where it is beginning to hurt everyone. While not just other, even for us, it's hurting. And we are beginning to see some good conversation around renegotiations with OEMs, et cetera. How much of that will play through? I mean, honestly speaking, I said this at the last quarter conference call also. So it's probably a repeat of what I said last quarter. But my sense is that the stress is building up, and we will probably see some release in terms of -- at specific OEM levels, we hope that we will see some correction in pricing. So that could be one of the factors. Otherwise, it's normal business growth as the costs play through and business volume picks up as also our -- the investment leverage is increasing, all of that will be a factor in terms of earnings growth going ahead.
And you should be looking at, Dhaval, again, the objective that we have set to say that at the end of the day, the businesses would continue to generate an ROE in that range of 20% at the end of the day.
One more factor that I'll just touch upon, which I didn't is -- I said it in the opening remarks, we generally believe the Motor Vehicle Act will have a very positive impact in terms of the third-party business. Of course, we will have to wait to see implication in terms of the price increases that we get, et cetera. But I think even for the existing book, we should see some benefit play through once the rules are framed. I mean it will all depend on the rules being framed, which we are hopeful that will get done maybe in a few months from now.
[Operator Instructions] The next question is from the line of Nishant Chandra from Temasek.
So the question is just to understand the claims ratio better by business lines. So if I look at the motor numbers, would it be fair to say that it now has about 10-odd months of the full year impact of the post MISP pricing flowing through and the respective claims pertaining to that, right? That's the way to interpret the numbers?
Yes, I think you're correct, Nishant. Largely, it's about, yes, maybe about, yes, 10 months of impact playing through.
Okay. Okay. And hence, directionally, maybe it's like 1 or 2 months more for it to get to reflect steady state. Because I mean, as you look at the baseline for future predictions, I'm just trying to understand what will be the right baseline to think of?
Yes. So again, obviously, this is very dynamic because there are 2 underlying factors: one, the point that you're making is absolutely valid. So it's kind of stabilizing maybe another month or so from that perspective. Now if you are able to get some price corrections, that will be another factor going ahead. But one more factor you have to remember is that the long-term book that we have written on the OD side, and this is largely true for the 2-wheeler segment, not so much on the private car. The pricing of the OD book was, if you remember the discussion that we've had where we -- about 12 months back, we've priced the OD, 5-year OD, at a lower price than the -- it's not a multiplication by 5. It's lower. We passed on the benefits in terms of expenses in terms of the -- a bit of the investment benefit and a bit of frequency assumptions that we made. So the loss ratio for just that long-term OD book of 2-wheelers will be higher than the loss ratio of everything else, or let's say, the annual policies. That impact will play through a little bit more. But in terms of combined that, we don't believe has a negative impact.
Got it. Actually, if you include the investment income that you get from the floor, it will be offset even more, I suppose, right? That's basically the concept.
We think so. That is our expectation, yes.
Okay. The second one I had was just to understand the market dynamic with respect to PSUs. There's been some news flow around capitalization of PSUs. Are you seeing any downside of the capitalization in the form of increased price competition and all of those things?
Look, again, that's very difficult to predict because it will depend on how much capital is given. Look, let's say, if -- at least what is in the public domain in terms of merger of the 3 entities and then capital infusion. I don't see that as a big negative for the private sector because rather than having 4 PSUs that's competing inter-state between themselves and with everyone else, you'll have 2 companies. So that would, we believe, should be a positive. But it will also depend on the extent of capital. And I don't foresee that there will be a lot of spare capital being given in the current environment, give them the leeway to do what happened in the first 10 years.
Understood. And just one last point, which is on -- just from motor perspective, right? Would the market book be materially different from your book? So if I, let's say, do a consolidation of the entire market, are you now closer to a weighted average of...
No, no. We are significantly different from the market. If you look at our mix, we are today, about 55% of our mix would be -- almost 55% would be motor, I mean, private car. Roughly 30%, I'm giving you Q2 numbers, roughly about 30%, 31% would be 2-wheelers and 15% will be commercial vehicle.
Okay. Market has a higher weight in commercial?
Market would be 40%, 45% commercial. And maybe about 45% similar -- slightly more commercial vehicles, slightly less private car and then rest of it will be 2-wheelers.
The next question is from the line of Hitesh Gulati from Haitong Securities.
I just wanted to know the number on the balance sheet on advanced premium from long-term motor policies?
Yes. Gopal, will you answer?
Yes, I'll get that one. So the number at September end is about INR 2,268 crores.
Okay. And sir, what would be the percentage of motor OD that are going for long-term policies? Do we have an updated number on that?
Yes. So the number has increased for private car from what it used to be 1 year back. If you remember, last year, the number was about 3%, 4%. That number now is 10%. For private -- for 2-wheelers, the number has dropped. It is now roughly about 24% that is going for long term as against last year. If you look at the full year number, that was 29%.
Okay. And sir, just one last question. So in terms of tax rate after this half year over, can we assume a tax rate of 25%, 26% for the second half of the year? Is that a right assumption?
Yes. So when you would see the results for quarter 3 and quarter 4, you will see the tax rate at about 25% for both those quarters.
The next question is from the line of Utsav Gogirwar from Investec Capital.
Just a couple of questions from my side. Can you help why the investment book has increased only 1% on a sequential basis? That is my first question.
So if you look at the overall investment assets, it also includes the effect of the fair value change account. For example, the investments in equities and mutual funds are required to be considered in the balance sheet, including the mark-to-market. That number, if you recollect at the end of quarter 1, we had a mark-to-market gain of roughly about INR 230 crores. Corresponding to that, if you were to see the numbers for the end of half year, the mark-to-market gain stands at about INR 101 crores. So when you see the growth in the investment asset, it has to be looked at in the context of the change in the mark-to-market position on the equity book. Yes. Second is, if you look at the amount of taxes, particularly in the context of advanced tax that we are required to pay. In the first quarter, the extent of advance tax that we pay is 15% of the whole year. In the second quarter, we are required to pay 30% of the expected profits of the full year. And that's on the basis of -- and if you recollect, this particular amendment that happens with respect to the lower rate of tax, that announcement came post the payment of the advance tax in September.
So we paid tax on the earlier rate effectively.
Okay. And sir, second question is, we started selling long-term policies from last year. And now it's like more than 1 month. We must have renewed the policy. I just want to understand what percentage of motor OD policies we have renewed for the long-term policies which we sold?
So what we are seeing on a base -- so we are basically very happy with what is happening in the long term because the renewal rates have increased for us. If I look at just the -- so we look at the renewal base on the whole. Generally, we look at the overall renewal base, the overall renewal base, and we look at the renewal rate, and that number generally has been about 60% for us. But if you look at just the OEM to OEM after 1 year, that number used to be about 48%, 49%. We have seen a 6%, 7% lift in terms of renewal rates on the long-term book. So we are happy with the increase in the renewal rates that we are getting for the long term, which is, if you remember, we've been saying that this is a bit of an unknown, but we were optimistic given that the base policy was with us on the TP side. We were reasonably hopeful that we would have a better renewal rate than the past, and that is actually playing through, at least in the first month, 6% to 7% increase in the like-to-like book.
Okay. Sir, just last question from my side. If I look at the individual indemnity that is growing at a pretty fast rate. And in H1, it has grown around 67%. How do you see this book growing for next year -- H2 and H1? It will continue to grow at a similar rate? Or it will slow down? Can you give us some color on that?
Look, our endeavor will be to continue to grow the indemnity book reasonably fast. A 69%, 70%, obviously, may or may not be sustainable. But the endeavor will be to continue to outgrow the market on that number. I mean there is obviously a bit of a base effect because if you see our indemnity book, it's not very large, and we are growing this through multiple models. We are growing the retail indemnity, which is 1 to 1 -- which is counted in the retail numbers, there is also a group indemnity that we've structured, which we are selling through our distribution partner, which is part of our group other category. But altogether, we are seeing the 67% number that you are seeing. But yes, I mean, our endeavor will be to continue to grow that faster than the market.
The next question is from the line of Sanketh Godha from Spark Capital.
Just wanted to understand given that Motor TP loss ratios have come down compared to what we have reported in last year and Q1, is it that we have factoring some benefit of Motor Vehicle Act in the quarter itself?
No, Sanketh, that we will wait for the data to come through, as we've been saying. We've not done -- we've not taken any judgmental call in the reserve release.
And then any estimation why this loss ratios have been lower compared to what we have done in FY '19? I mean the 400 basis point improvement looks like decent improvement in Motor TP loss ratios.
So Sanketh, if you recollect, I think what Bhargav mentioned was the business mix that we're writing, let's say, for the half year relative to, let's say, what we would have had, even at the end of FY '19, that mix has undergone a change. If you recollect, for example, commercial vehicle as a segment used to contribute about 21%, 22% of the overall motor mix at the end of FY '19. That mix, if you -- at the end of the half year, CV is contributing -- starting to contribute about 15% to 17%. And that's -- and relatively, if you were to see between the third-party loss ratios of a private car or a 2-wheeler and a commercial vehicle, commercial vehicle inherently has a higher loss experience. So given the shift in the portfolio mix that we continue to keep doing as a company, we have seen, let's say, a slight moderation in these third-party loss ratios. The other factor, which I would also say, in this quarter, what we have also seen is unlike the price increase announcements that typically happen in the -- by the April 1 -- at the beginning of the year. This year, the announcement for the price increase only came into effect from 16th of June. So to that extent, one would have also seen some kind of a price increase happening on the third-party book as well.
Got it. And if I look at motor OD, so the 72% loss ratio, which you reported in Q2, I mean, if I exclude the impact of cat events, then are we at a similar level as what we reported in Q1 for the motor OD loss ratios because this deterioration is more because of the floods across the countries?
So floods have played a role. I don't often -- I don't think we've looked at the exact number between the 2, but -- do we have that? How much of that -- but there is definitely a deterioration in it. So the 3% gap between what was there in Q1 and this quarter is not all because of floods. It is also because of the underlying pressure on the OD. And I think the point that Nishant made that it's basically business that has got written from September, October of last year, the OD rates have come down after the long-term policies came in. And the book is now getting matured and accounted for, for the whole year. So it's just playing through in terms of the mix of NEP that we are earning from the older book. So in the first month of this period, let's say, in the last year, in the third quarter, we had a book of business that we had written in the -- prior to that period, right? And that income and that rate was -- that loss ratio was lower. So that effect is now fading away. And the full impact of the underpricing or aggressive pricing on the motor OD is playing.
Yes. Got it. And just -- I mean, the investment leverage actually from the full year did not increase is predominantly because of the Gopal's explanation that we paid higher advance tax and also the mark-to-market gain was there. So that is only the reason why our investment leverage did not improve in the half, right?
There was another factor. Gopal explained the total investment corpus. There's another factor. Last year -- sorry, last quarter, we paid the dividend for the full year before the end of the quarter 1. So we paid it on, I think, 29 June.
29th of June.
29th of June. So there was that denominator effect also in terms of the net worth.
Yes. Actually, I was comparing from FY '19 -- sorry, March '19 to September '19. So it remained flat at 4.1 -- 4.09 and 4.09. I believe it's advanced premium number, it should have improved.
Yes. So that is because of what Gopal explained. I thought you were comparing Q1 to Q2.
No, no, no, I was comparing from full year to half. And finally, just one thing. I just wanted to understand our persistency in retail indemnity business. Because despite we are growing new business very aggressively, the retail indemnity growth looks a little lower. Is it to conclude that our drop off rates are a little higher or anything of that kind? Or how do we read it basically?
Look, so if we look at the mix, each mix has its own patterns, at least on the -- on each of the lines, let's say, retail indemnity that we sell directly through the agents, our renewal rate on a portfolio basis, I'm not talking about 1 year, 2 years, 3 years, I'm saying, in aggregate, the retention rates are around 83%, 84%. And that number is kind of holding on. The other aspect that we'll have to study is we have kind of launched a lot of group indemnity policies. Their renewal rates we'll have to study how it plays through because relatively new for us, which we can't comment as of now. But the rest of the business, which is in line with what we were writing, our renewal rates are holding on. Gopal, you want to add anything?
No, the only other point, Sanketh, I would say is, I think on the indemnity book, we have given -- if you recollect, one of the things that we've been talking about is we have relatively always had a lower base. So when you look at the indemnity growth in the aggregate, the renewable base is a relatively lower base. And therefore, whereas the new part of the business is growing quite well, because of the base effect of the renewal book that tends to have some kind of an impact in terms of the aggregate growth on the indemnity book. But to answer your point on the persistency, the persistency is about 80%.
The next question is from the line of Avinash Singh from SBICAP Securities.
A few questions. First one on that impact from MV Act. Can you help us sort of some color on number of motor policies growth across your 3 categories of private cars, 2-wheelers and CVs, at least, I mean, one would expect because, I mean, data -- September data suggests that, okay there have been a strong growth in Motor TP premium. So we'd like to know that, I mean, how the sort of number of vehicles or number of policies have changed for you? So that's question one. Second, when it comes to now profitability. Despite the crop going out almost entirely, even if I were to look half year '19 to half year '20, I mean that despite crop going out, the claims ratio has not improved. I mean one would expect it to improve because crops have very high claims ratio. Now on the OpEx side, if I were to look, I mean, not looking at the ratio, of course, the ratio will go up because now denominator is growing smaller. The OpEx growth has been very, very strong. I mean the absolute OpEx in the first half has grown close to 30% kind of a rate. So I mean what's going on there? Because now, I guess, a significant portion of your new investment started distribution and is also in the base as well. How do you see this OpEx trajectory going forward? And what explains this claims ratio not improving despite crop going out?
So if you look at the aggregate loss ratio for us in this quarter, our number is 74.5% -- 74.6%. And same number last year was 80.4%. So quarter 2 of last year to quarter 2 of this year, we've seen an improvement in terms of aggregate loss ratios. The benefit of the crop, there are multiple aspects. Let me just explain in -- try to explain in a couple of minutes. One is the fact that while we benefited in terms of crop going out, we have, as I explained, had to increase or we've seen increase in losses on the OD side. So that has been, to some extent, compensatory of each other. And if you look at the amount of business that we would retain of the 2 books, crop we retained -- we used to retain only about 25%. So the earning component of crop was much lower. The NEP component the crop was much lower than the 17% mix that we had of crop in terms of GWP mix. Unlike that in motor, we retained almost everything. So the NEP component of motor is much higher. So on a blended basis, the motor loss issue impact has a bigger negative drag than the improvement that we have because crop is out. But in spite of that, overall, our loss ratio for this quarter is better than last year same period. Coming back to your question on expenses, I think you've hit -- you hit the nail on the head. The issue is, one, there is a -- on the expense ratio number, there is a base effect. But in terms of growth of OpEx, it's about in the mid-20s. It's not 30%, but that growth is largely because of the base effect of the fact that we added this -- the investment that we did in terms of sales force and distribution during last year, which wasn't playing through in the last year, and that is coming through in the current year. We hope to get the full benefit of this investment that we are making in terms of the specific business areas that we've invested. You've seen that play out in the retail health indemnity to some extent. And even SME business is growing close to 30% for us. And motor agency, particularly for private car and 2-wheelers, is also growing quite well. The other small thing that, again, between base effect of the previous year to this year, we ran the corporate brand campaign in this half year, which wasn't there last year. And that has had some impact in terms of the expenses.
Okay. And on that policy count, if you can help motor policy count if...
Yes, Gopal is just responding to that.
Yes. Avinash, so if you look at -- so the number of policies that we sold for the month of August on motor overall was roughly about 9 lakh policies. If you look at the same count for the month of September, that number is at about 17 lakh policies. And within that, the old policies that we have sold was 500,000 policies in August. That number has gone up to 10 lakh policies for the month of September.
So we saw a very large spike in September, largely for 2-wheeler old book. And both third-party only has also some comprehensive, but third-party old -- for 2-wheeler it was a big spike. We're honestly seeing the October number is not sustaining at that level of September simply because I think some of the states have rolled back the penalty, et cetera. So we will see how this number plays through. But even once it has been rolled back, we still see a number which is much higher than what we used to see in -- till August, let's say. And we are hopeful that after elections in a couple of states, I think that those states will again come back in terms of enforcement of the Motor Vehicle Act. So what we have seen is, the moment this gets enforced, we'll see a very healthy spike in the policy demand for -- particularly for old 2-wheelers.
The next question is from the line of Harshit Toshniwal from Jefferies.
So this is more related to motor insurance. I just want to understand that if it's a INR 100 Motor TP premium for a car, then how are the premiums split between 3 years? Clearly, the first 2 years will have a higher proportion. But for a 5-year 2-wheeler and for a 3-year TP car, how does TP premium spread over the year?
It is divided equally, divided by 3 for private car, divided by 5 for 2-wheelers.
So our recognition in the P&L given that, more towards the first year premium or we recognize premium equally over the years?
So Harshit, in terms of third party, as Bhargav said, when you write a 3-year policy, it is simply 1 by 3. So each year, you recognize a pro rata premium, and that's for a private car. If you're issuing a 2-wheeler policy, which is 5 years, then it's simply 1 by 5. So 20% of the premiums that you collect for the 5-year period. So far as third-party is concerned, gets recognized in each of the years. On the own damage part...
Just to complete the point that Gopal made, the rest of it, let's say, the balance 4 years or the balance 2 years, as the case may be, it says advance premium, the number that Gopal earlier talked about.
And so far as the own damage is concerned, again, if you were to stick to, let's say, a private car own damage cover that's also taken for 3 years, that would get recognized over the 3-year period in proportion of the insured declared value of the vehicle.
The period of the first year is a bit more, and it gradually reduces because the IDV of the vehicle reduces over the 3 years.
The next question is from the line of Ajox Henry from B&K Securities.
Sir, I wanted to know if you have the loss ratio for long-term motor number. I just don't know how far it's deviating from the short term.
Maybe we can give it separately offline. Right now, we don't have it with us, but we are looking at the overall motor book. That's the way I'm looking at it.
And structurally, this number will be increasing, the long-term policies as a proportion of total motor?
Yes. I think we've explained this in earlier calls. If I just -- maybe but I'll still do it again. If you look at the TP policy, as we explained, it will be divided by 5. Let's say a 2-wheeler TP policy will be divided by 5, but by the fifth year, there is a claim inflation. So that will have some impact. The denominator number remains the same. The numerator number could go up because of claim inflation, right, number one. But there is a compensatory factor. We believe the frequency will drop because the whole pool is now insured. We -- our experience of older vehicles is that the frequency of claims come down. So that's a bit of an unknown. So we'll have to see how that plays out. But we believe, fundamentally, there will be some increase in the TP third-party loss ratio just because of the claim inflation, as I explained in this case. For own damage, definitely, as I explained earlier, the loss ratios will increase because we priced it accordingly. Because there's no expense there. We are not spending any money on issuing a policy. We are not going after a customer to renew the policy. The distribution costs are lower for a long-term policy for the second and third year or the fourth or fifth year. So all of that benefit has been passed on. And hence, the loss ratio will go up. Expense ratio for that piece will come down. And combined ratio, we believe, while it will go up a little bit, but it will not be significantly adverse. On top of it, we'll have a benefit in terms of the investment float that we are sitting on. So on an ROE basis, we believe it's positive, but the loss ratio will be going up.
And the claim inflation will be lower than the expected returns coming out of the book -- investment book?
No. Our experience of third-party claim inflation is higher than the return that we make on our investment book. And that is something that we use for our reserving as a company. Each company does its own actual estimate of the claim inflation for third-party and uses it to hold the reserves. That number is not something that anyone discloses, but our number is a double-digit number, higher than the investment returns that we make.
Okay. So that will anyways flow into what's on [ 15 and 16 ] [indiscernible].
Sorry, we didn't understand what you said, sorry.
No, if the claim's actual experience is better than the expected inflation you have factored in, then the pass-through should be released through the results, right?
Exactly, exactly.
The next question is from the line of Madhukar Ladha from HDFC Securities.
Most of my questions are answered. Just a couple of things. One, I see these expenses of management in shareholders' account, they have risen quite a bit. It's about 27% year-over-year and 36% quarter-over-quarter. So what is the reason for this sharp rise?
I'll just ask Gopal to answer that question. He's just getting hold of all the numbers. Do you have any other question, Madhukar?
And second, even investment yields declined were impacted in this quarter. And given our equity book is not too large and fixed income rates have not moved that much, what would explain this reduced investment yield? And finally, a couple of data points that I missed in the beginning. You may have covered them. So what was the CAT loss provision year-over-year? And also, you also mentioned that there was this other one-off recovery in the first half last year. Can I have the amount of that?
Yes. So let me...
Gopal, you can answer. So basically, we have 3 one-offs in this quarter, which are adverse compared to last year -- rather 2 compared to last year and the tax write-off that Gopal explained, but I'll ask Gopal to...
Tax. I understood.
Yes. So Madhukar, so far as catastrophic losses impact is concerned, as we explained, we have seen a series of floods in this quarter. That impact for the quarter 2 has been about INR 49 crores. If you recollect, we had the Kerala floods in quarter 2 of last year. That impact, which we had taken in the P&L, was about INR 25 crores. So that's one impact that we have seen in so far as catastrophic losses are concerned. On the point of one-off reinsurance recovery benefit that we have seen in quarter 2 of last year and first half of last year, that amount was about INR 58 crores.
INR 58 crores. Okay. Was there any cat loss provisions in 1Q of this year?
That was about INR 16 crores. Just wanted to get, Madhukar, the expense of management numbers you are referring it to over H1 over H1? Or are you referring to between quarters?
2Q over 2Q and Q-o-Q.
So these are normal. There's nothing which is unusual, Madhukar. In terms of -- there are certain expenses, which is prescribed by regulation, whether it is in respect of, let's say, the CSR expenditure or the interest that we're required to pay on the subordinated debt. There is nothing which is unusual in terms of the expenses that we have seen in this quarter relative to the prior period. The only other piece which is there is with respect to the investment income that we realized from the terrorism pool. That number has been relatively lower. So otherwise, there's nothing which is unusual in terms of any expense of management.
The investment pool is something that is an industry pool and GIC manages it and gives us the income with a quarter less.
And that comes in the shareholder's account?
Yes, as a part of the disclosure, yes.
And that comes as part of the shareholders as income from investments or just...
So that comes separately as a part of the operating income numbers that you get to see. Where you separately also get to see the investment income from terrorism pool separately.
Understood. I'll take a look at that. The final question was why did the...
So the investment yield, so I think what we are seeing is the existing book is being obviously carried at decent yields. We -- in the first quarter when rates went down, we did reduce a bit of the duration and switched to slightly shorter duration paper and that led to some amount of profits that we made in the first quarter. Obviously, still lower than the previous year of this year, but some readjustment of duration happened. So there's -- and the fresh investment that -- the fresh money that is coming in, what we're reinvesting is in a slightly lower rate compared to what you would have had last year. That's the only reason.
The next question is from the line of Rishi Jhunjhunwala from IIFL.
So a couple of questions. One, so the September month actually saw a 36% year-on-year growth for Motor TP for you. Just wanted to understand what would be the split between: one, the fact that Motor Vehicle Act was implemented recently and as a result there would have been higher compliance; two, last year, for September, the long-term TPs were introduced. So there would have been a drop rate every year, but this time, it's pretty much 100% renewal. And three, the underlying base rate in terms of how the auto volumes are going. So can you give some sense in terms of how that is split? Because the compliance rates might go down, but the renewals, 100% renewals will continue. So just wanted to understand that.
So Rishi, one number that we kind of gave out in the earlier -- in response to the earlier question was with respect to the policy count that we have seen as a change between August and September of the current year. Just to kind of repeat those numbers, for the month of August, on the -- on an aggregate basis for motor, we sold about 9 lakh policies. That number for the month of September, again, aggregate numbers of motor policies that we have sold, is about 17 lakh policies. Within that, the split of old policies for the month of August is 500,000, which is 5 lakh policies. And for the month of September, that number has increased to about 10 lakh policies. So clearly, we have seen a spike in the number of policies that we have seen for the month of September, consequent to the changes in the Motor Vehicles Act.
And how much would be, like, the renewals or the second year renewals that would have come through for the long term?
So on an average, again, what we have seen, I think, again, as Bhargav explained earlier, the extent of increase in renewals that we have seen relative to the last year, we have seen an improvement by about 6% to 7%. But that's for the OD component, Rishi, because TP is anyway there.
Yes. Okay, okay. And the other thing is, I just wanted to understand, for the past 4, 5 months, our growth in TP has been slower than the private sector growth. And private sector is almost 60% of the market. Of course, we know PSUs are anyways bleeding. So -- and TP is tariffed, right? So I just wanted to understand how does the competitive intensity drives in the market share shifts happen because in that since and why we have slowed down versus other private players?
So if you look at the mix across the total motor component, private car, 2-wheeler and CV, we've had very robust growth in private car and 2-wheeler book. But we've consciously cut down a bit of the CV business. I think we've been saying from the beginning of this year that we didn't see a price increase in TP on CV, which we thought was required, and we've been cutting down a bit of the CV portfolio. So if you look at -- even during, let's say, the Q2 last year to Q2 this year, our CV portfolio in Q2 last year was about 22 -- in terms of mix was about 22.5%. Just for Q2 of this year, that mix has come down to 14.2%. So we've actually had a very sharp de-growth in CV but it's been a conscious call that we've taken. But if you look at just in terms of the aggregate policy growth or GDPI growth for the other segments, if you look at private cars, we've grown at about 21% in terms of GDPI, 31% in terms of policy. If you look at 2-wheelers, we've grown in terms of GDPI. I mean I'm giving Q2 to Q2 numbers. Whereas, we've grown 26% GDPI, 30 -- almost 36% in terms of policy count. So the 2 segments that we are focusing on, we are growing well above, really well above the market. But CV, and CV has a large TP component rate, even in the policy that you write, TP and CV is a bigger piece, that has been negative for us as a conscious choice.
And have you seen any impact of the regulation around splitting of policies going forward between OD and TP, which was earlier supposed to be only a comprehensive package? Any kind of impact on either pricing or your business?
Pricing. So as we explained, we -- one of the things that we were uncertain about was that now with the split, how many people who were with us for, let's say, someone who has bought a 3-year private car policy or a 3-year or a 5-year 2-wheeler policy. Would we lose out because of this people coming with OD only and the narrative or the hypothesis was that some new companies coming in with OD only, will be able to kind of get a higher share of the OD-only business at the cost of display. That's not being borne out, at least by the first month. As we explained and Gopal talked about it, our renewal rate for 1-year segment for the customers who have to have a OD-only renewal with us, that number has actually increased by about 6%, 7%.
The next question is from the line of Jaimin Shah from RWC Partners.
On expenses -- just on expenses, I wanted to understand a bit more because when I see your line -- the line items, it's largely on advertising and publicity and sales promotion. So 2 points here. One is how much is of that front-loading sales commission and the push for the advance premium because you -- at that expense, you need to kind of front-load as well. And if, on second half, that growth kind of plateaus out because starting last year your third quarter, you had that advance premium. So that's question one. And also, just wanted to understand expenses on the distribution versus technology side because last time you mentioned you were pushing on the distribution and technology. So if you just kind of briefly split on what are you doing on both sides? Distribution, I think you have spoken enough, but on the tech side and whether it goes through amortization or through kind of expenses.
So I'll just answer one part of the question, then I'll ask Gopal to give specifics as much as he can. One is, in terms of the advertising expense, as I said, we ran a pretty large corporate brand campaign in the first half of this year, which we didn't have in the last year. But apart from that, there is some amount of expenses that you are talking about in terms of business promotion, which is more related to the business sourcing and the booking of that cost upfront. In terms of mix, I think the larger investment has been made in the distribution. On technology, where we wanted to invest was more in terms of doing some innovative stuff on the digital side. While we've made the investment in terms of teams and the -- what we call the virtual digital organization, all of that is done. But we've not -- and then we even developed products, and we've kind of filed it with the regulator, but we've not spend the money that we want to spend in terms of both the brand as also technology that we envisaged at the beginning of the year. So I think our technology costs might go up a little bit in due course, but we don't see that as to be a very high number.
And just to answer the other point, Jaimin, I think that is -- we don't do any amortization of expenses. In terms of regulation, whatever spend that we do, whether it is for branding or whether it is for, let's say, expansion of manpower or, let's say, even expansion in distribution. In terms of regulations, all of those costs are required to be taken upfront. So some part of the expense increase that you get to see either as a part of advertising or, let's say, sales and promotion. As we explained earlier, in this half year, we have also run our corporate campaign, which would have kind of seen, again, an upfronting of expenses that we are required to incur. And secondly, also in terms of the business mix, relatively now a higher proportion of mix of business comes from the retail part of the business. Where, again, any kind of costs that you incur for writing the business, including any expansion, those expenses are required to be expensed out of it.
Okay. And on -- in your opening remarks, you mentioned that plan -- you plan to reinvest the lower income tax benefit. Could you explain where you are investing? And how much would go through, so let's say, customer investment in the business and shareholders?
Yes. So we are -- obviously, not everything will be reinvested for the -- so we are looking at how much of that we want to plow back. As of now, we think a little bit of increase in headcount, which we probably may not have done otherwise. We are considering, depending upon some of the bancassurance partnerships that we are signing up. We are also looking at some new channels within existing banker relationships, where we are thinking of adding a bit more head count. And I think the other thing that we do want to look at is the piece that you picked up, which is on the technology side. Do we need to spend a bit more? We are calibrating those plans. But some of it -- so in a sense some of it will be plowed back, but obviously, we will get benefit as well in terms of the overall profitability.
Okay. If I may just one, any plans to do rabi?
As of now, no. The other thing just to add to what I just said also is that IRDAI has allowed what they call the sandbox initiative. So every company had to file products that they want to bring upon, which are very different from what is available in the market, and we filed a host of products. We don't know how many of them we will get the green light to go ahead, but that will be the other piece where a bit of technology investment and all of that will be involved.
Is that FD part of that one, the FD product?
Sorry? These are the regulations that have come very recently, Jaimin.
This is -- the regulator has come up with a -- they called it a regulatory sandbox to allow experimentation for both insurance companies and noninsurance companies, insurtech companies. And they gave a window of about a month to companies and insurance companies, and others to apply with specific product or business ideas. And that window just got over early part of this week. We filed a bunch of products. They're supposed to come back and give us the green light within 1 month. So we don't know how many of our applications will get a green light. But depending upon that number, that's also something that we have to invest a bit. It's a good development in the sense that they're allowing innovation in the industry.
We take the last question, which is from the line of Nischint C. from Kotak Securities.
This is Nischint C. from Kotak. Sir, just 1 or 2 things. Firstly, can you share the loss ratio for the health segment alone? I know you regrouped the numbers this quarter.
So if you look at the corporate health, which is the employer-employee health loss ratios for the first half of the year, it's about 98%. On the retail side, again, we have -- as we have explained, there are 2 components to the business, which is the retail benefit and the retail indemnity. The indemnity part of the business is more or less operating at around 65% levels. And the benefit part of the business is operating between 70% to 75% loss ratios.
And then so how do we compare this year-on-year? I mean just trying to understand that.
So this number on the benefit side, the retail benefit number has more or less kind of remained the same, whether we look at the first half of the last year or first half of the current year. On the indemnity part of the business, again, as I said, the number has been in that range of 60% to 65%, whether you look at the first half of the last year or even if you look at the first half of the current year as well. And on the group side, the employer-employee health, again, first half of last year, that number was similar numbers at around 98% also. Even in the first half of the current year, that number is about 98%.
And let me just also step in and add one more point that I keep making, Nischint. Loss ratios are something that ideally should be looked at on a yearly basis, not on a quarterly basis, simply because of the fact that there could be some -- on a financial year basis or rather quarterly year basis, we have these line-by-line reassessment of the past reserves, and there could be some releases at a point in time, which could skew the number for a quarter. But overall for the year, you will get a better sense of the book. And I think that's what Gopal has kind of indicated to you.
That's fair. But what is then driving the difference? I mean if I look at health, travel and PA and that particular line item, what's really driving the difference between first half of '19 and '20, where it's kind of gone down by around 600 basis points?
Again, it's a function of the mix of business, Nischint. What kind of mix that you write will drive. For example, the indemnity part of the business in the first half of the year, if you would have seen, we have been able to kind of grow the book at about 65%. Relative to that, as Bhargav explained as a part of the -- in response to one of the calls, on the employer-employee health, that part of the business, unlike the previous year, where we did see some kind of a price increase, this year, the pricing has been more or less similar or muted. And therefore, we have kind of taken a cautious approach to write the employer-employee part of the business. So that's, again, a function of the loss experience. And thirdly, these are typically short-tail lines where you would get to see the experience of the reserving estimates that you make tend to play out as the portfolio starts to expand. It's a function of all the 3 components in terms of the loss ratio change that you get to see.
Sure. Second one, is there any change in dividend policy?
I think we have always had a dividend policy. And the decision to what levels of dividends are to be proposed as a function of the approval of the Board and the shareholder wherever as applicable. And in line with that, we are in line with the dividend policy, we tend to place the proposal for a dividend on a half yearly basis. In line with that, this half year, again, we went back to the Board, and the proposed dividend is at about INR 3.5 per share. That compares to about INR 2.5 per share in the first half of the last year.
So can you kind of say that the payout ratio goes up? Or how should we think about it? Maybe we should just look at it at the end of the year.
I think we should obviously look at, again, the dividends at the end of the year. But in terms of the payout, on an average, if you would have seen historically over the last, let's say, 3-plus years, it has been an increasing trend. In the past, we would have been paying a payout ratio in the range of 20% to 25%. Over the last, let's say, couple of years or so, the payout ratios tend to be in the range of 25 to 30%.
Thank you. Ladies and gentlemen, I now hand the conference over to Mr. Bhargav Dasgupta for closing comments.
So thank you, guys. I know it's pretty late. It's been a long day. Thank you for joining us on this conference call.
Thank you.
Thank you.