We are not out of the woods yet but we are definitely seeing green shoots, says Vibha Padalkar, MD &CEO.
Q1 was expected to be a weak quarter because of the lockdown but despite the disruption, you have managed to post some healthy numbers and a 6% profit growth which was above expectations. What are the factors that contributed to the profit growth in what was supposed to be a very rough quarter?
It was a combination of factors. April and May were definitely tough but when you look at June versus the industry, overall for the quarter our market share increased by 100 bps and for June specifically we degrew only 3%. The reason I say only 3% degrowth is because when you look at the base effect, last year we grew by 87% in June. So, against the base of 87% we degrew 3%. So even without Covid, June would have been a bit of a tall ask but we sailed through it and so things are getting definitely better. We are not out of the woods yet but we are definitely seeing green shoots and people willing to engage through non-face to face modes of communication.
Second point was if you were to look at our expense ratios, we have been fairly nimble in terms of reducing our costs. So from an expense base of 13.4% in the first quarter of last year, we brought it down to 11.5% and that also contributed quite significantly and this is without having to take tough calls on mass layoffs and things. We were able to do that and be fairly nimble on our cost.
Third, some of our segments like protection, grew from about 5% of our business in Q1 of last year to 11% in Q1 of this year and it doubled versus the rupee value of protection that we wrote last year. A combination of these three factors, led to an overall good set of numbers on the bottom line.
Also wanted to understand your VNB (value of new business) margins moderated to about 24.3% in the quarter gone by, what are the factors that influenced the margins and also going forward where do you see them sustaining at?
In the first quarter of last year, we sold a lot of non-participating products, especially our flagship product Sanchay Plus that was launched at that time. We believe in a balanced product mix and getting it back to about a fourth of our business is what we would be comfortable with and that is exactly what we did. So reigning in Sanchay Plus on par, that was one.
Second, in the first quarter of the year like we just discussed, top line de-grew by 19% and that also had an impact because about two-thirds of our business is fixed cost or semi-fixed cost and that will have an impact in the short run. Also, our margins ended just shy of 26% and so not very far off in terms where we ended last year.
The first quarter of last year was more of an aberration rather than the first quarter of this year. We are well on our path to a smooth upward curve on our new business margins. Of course it depends on Covid.
Given the fact that persistency ratios have witnessed a slight decline sequentially, what are the trends that you are seeing at the backdrop of this lockdown? Are customers showing a tendency to preserve cash at a time like this?
Yes, you are absolutely right. The cash conservation requirement is very strong and I do not entirely blame them but we are telling our customers to pay their premiums because during the pandemic, we are witnessing that it is even more important for people to be well covered for both themselves as well as their family. But yes, renewal growth is also a function of persistency and it has grown by 24% in quarter one of this year. But I will watch this space. We are taking a cautious approach and we do not think that we are out of the woods yet in terms of persistency and how renewal is panning out.
The level of disbursements by banks and NBFCs continues to remain under stress and that could weigh on your protection growth. How do you see the contribution of bank partnerships in the overall disbursements mix? Has the credit growth impacted the attachment rates as well?
Credit life due to disbursements has gone down by about 70% but rather than lamenting on things that we cannot control as we have no control on how much banks and NBFCs disburse and we understand the reasons why they have gone into a shell and are unable to disburse. Our attachment rates have not gone up, our share of business especially in the multi-tie ups, where there is a partner, has not gone up. In fact, in some partners, it has gone up slightly and we have ensured that.
Second, protection comes in various forms. Credit life is one but equally important is retail protection and that is very much under our control. That is why we have ramped up on our retail protection focus and that has grown year on year by 50%. You will agree that overall on the protection basis, we have been able to make up for the loss in margins while topline loss will remain what it is but protecting our bottom line by focussing on how we get a larger share of retail protection.
VNB witnessed a degrowth of about 43%. Should this quarter be treated as an aberration also? In our last interaction, you mentioned targeting 20-25% on VNB growth could be difficult to forecast but what would you target for FY21?
That is very difficult in the Covid situation. Pre-Covid, we used to say that 20-25% was a kind of number that we were sailing through. We might have a little bit more visibility after we are halfway through the year but right now, I do not want to put out a target.
To your point on VNB degrowth, there are two reasons for that. One is the unusual level of growth that we saw in quarter one of last year on the launch of our blockbuster Sanchay Plus that I mentioned and given just shy of 30% of margins, that translated to very high levels of VNB growth in quarter one. That is why while last year also, we had a growth beyond 25%, but nevertheless the 20-25% range seems doable on a steady state basis.
Second reason was Covid and given the top line degrowth of 19% and given the fixed cost base that will have an impact on our new business margins and consequently VNB. But we are not too worried about it because as we see growth coming back and it should start moving upwards very noticeably.