Like Sundaram Finance, Ageas is retail-focussed, says the managing director of SFL
Sundaram Finance Ltd. (SFL) recently brought in Ageas Insurance International N.V. as partner in its insurance arm Royal Sundaram. T.T. Srinivasaraghavan, managing director, SFL, explains why Ageas was chosen and the way forward, among other issues. Excerpts from an interview:
Did SFL also look at private equity investors to divest stake in the insurance arm? Why did you decide on a strategic partner?
We did consider the PE option and were in conversations with a few of them. However, philosophically, we prefer and actively seek long-term partnerships and given our DNA, it did not suit our line of thinking, given a PE’s typical time horizon of five years. The prospect of an engagement with a strategic partner was therefore very appealing to us since we ourselves are a long-term player.
Ageas, the strategic partner that we have just signed up with, traces its roots to Belgian life insurer Assurances Générales (now AG Insurance), founded in 1824.The company is the largest provider of insurance in Belgium. Like us, they too are a retail-focused company with a strong Asia presence and importantly, have a strong and proven track record of working in joint ventures. That is something we value greatly. We expect to be able to tap into their expertise and given that they operate in more sophisticated markets in Asia, we hope to leverage some of their best practices in claims management, automation in underwriting and analytics.
What was the need for divesting?
The need was actually regulatory. When we bought out RSA, we went up to 75.9%, as against the threshold of 50% for an NBFC (non-banking finance company), with prior approval from RBI. So, we had to bring it down to 50% within the agreed timeline. We also have several associates in the group who are financial investors in Royal Sundaram. They have been patient long-term investors and it is only fair that we gave them an exit option. Hence, the total divestment is 40% — 25.9% by Sundaram Finance and the balance by our associates.
With this divestment, will there be any infusion into Royal Sundaram?
No, there will not be any infusion at this time. Royal Sundaram is well capitalised and we do not see a need for fresh capital infusion for the next two years, at least.
With the liquidity stress in the system, this income should help Sundaram Finance.
Liquidity has not been a problem for Sundaram Finance, for us it is business as usual. The only adverse impact is that borrowing costs have gone up in light of the liquidity squeeze. This inflow provides us growth capital and will certainly help fund our growth plans.
Has the pressure on Royal Sundaram to go for an initial public offering gone now?
IPO was one of the three options we had examined. In the last three years — after the exit of RSA — Royal Sundaram has registered strong growth, both in top-line and bottom-line. However, the timing was inopportune, given the spate of insurance IPO’s in the past 12 months or so. We did not, therefore, pursue that option.
Will there be change in the style of functioning and the business?
There will be no major changes. The current management team will continue and our partners are very comfortable with that. We will, of course, have a couple of people from Ageas joining the Royal Sundaram team to work in specific areas where they can add value to the business.
How have their JVs fared in other countries?
Their JVs have generally fared well globally. In China, they have been a JV partner with Taiping Life Insurance Company for several years and [it] is a very profitable business. This is the case with several of their JVs in other geographies.
How did you see the valuation?
We had a very realistic sense of what our business is and what it is worth and we believe that the valuation is a fair one. The general view of market experts seems to support our belief.
You have retained the Royal name even after the exit of your previous partner…
Royal Sun Alliance changed their name to RSA Group several years ago and stopped using ‘Royal’ in their name. When we disengaged, we specifically obtained their consent to continue using it. The Royal Sundaram brand is well known in the market and we were keen to retain the name.
Have you launched any unique products in the insurance space?
Royal Sundaram has refreshed its innovation agenda with a couple of new products in the Health, Travel and home insurance space. Our Health Insurance product, Lifeline is the company’s first plan serviced by doctors, offers the widest range of sum insured from ₹2 lakhs to ₹1.5 crore. The cover has three sub-plans to choose from — Classic, Elite and Supreme with varying benefits and premiums. It has consistently been rated amongst the best health insurance products in the market and is comprehensive in its coverage.
This year we launched Travel Secure, our next-generation Overseas Travel plan which caters to every type of overseas traveller from India, be it for leisure, business, short trips to Asia, the 3 lakh Indian students currently studying overseas, and all senior citizens, regardless of age. The ‘Gruhsuraksha’ home insurance plan was launched by us based on the deep customer insights we gained from the 2015 Chennai floods. Gruhsuraksha provides comprehensive coverage from natural calamities, fire and other perils to your home and contents including jewellery, DG sets and solar panels.
What is your view on the premium in the motor insurance business?
Third-party premiums have gone up over the years, partly reflecting the claims experience of the industry. However, own damage premiums are being heavily discounted by some players and others are forced to follow suit. Even today, we do not believe that we are pricing adequately for the risks. We expect this to be addressed as the industry evolves and graduates to more granular, risk-based pricing, in line with the more mature markets.
What is the current scenario with issues relating to NBFCs dominating headlines?
We have to recognise that there are serious structural issues in the system. These have not cropped up overnight. In the instant case, a 30-year asset book was being funded by commercial paper and people naively believed that the plug would never be pulled! They expected roll-overs to continue quarter after quarter. But suddenly, the music stopped.
The problem is that a completely heterogeneous bunch of entities are clubbed together as NBFCs, ignoring the nature of the assets they finance, their asset duration and risk profiles.
An infrastructure financing firm’s horizon could be 20 to 30 years, while for a typical commercial vehicle or auto financing NBFC, it is 4-5 years. For consumer goods financing, the average asset duration is typically 6-9 months. To put all of them into one box and tar them with the same brush is grossly unfair. At an extreme, one could argue that a consumer goods financing company can virtually fund its whole business with short-term money. If you refer to ALM mismatch for long-term infra project financing firms or even housing finance companies (HFCs) that is perhaps justified. HFCs have been functioning for many years and lending long-term going up to 15-20 years.
They still do not have matched funding. As their loans are typically at variable rates, they have covered the interest rate risk. But the liquidity risk remains.
But where is the ALM mismatch for short and medium term lenders? By repeatedly referring to ALM mismatch in NBFCs, a panic situation has been created. The other problem is that in the past year, the bond market has dried up and rates have tightened. Debt issuances have come down. Inevitably, some sections of the media played their own part in creating this panic situation by calling it a crisis. No other NBFC has defaulted to date. Sadly, it is the small and medium NBFCs that have been badly hit. For them, the liquidity issue is very real.
They are the ones who provide last-mile credit delivery, lending to the MSMEs (micro, small and medium enterprises) such as small truck owners, traders and small businessmen. We understand that even their previously sanctioned limits have been frozen by some banks. Their growth is likely to be affected and asset quality could be negatively impacted as well.
As I mentioned earlier, liquidity has not been a problem for Sundaram Finance, it is business as usual. The only adverse impact is that borrowing costs have gone up in light of the liquidity squeeze.
How has the year been?
For CVs, it has been a boom year so far. Part of it is because of the base effect. Last year, the first half was a damp squib, given the pre- and post-GST issues. It is only in the second-half that CV sales really took off. While the H1 to H1 comparison looks really good, by the time we get to March 2019, the numbers are likely to look a little more earthly. Notwithstanding that, there has been real demand and growth, driven mostly by infrastructure, primarily road-building. There has been real action on the ground. Tipper sales are a clear indicator of that, as also construction equipment sales, which have seen a real boom. That is the good story of 2018.
Car sales have been just the opposite. They have tanked quite a bit. I am not quite sure of the reasons. The steep fuel price hike is stated as one of the reasons. Sentiment-wise, it is certainly a dampener. Maybe it is also a case of buyer fatigue. I think even the car manufacturers were not prepared for such a fall in car sales, especially during the peak festive season. In the last fortnight or so, we are hearing of some inventory pile up on the CV front as well. We will have to see how things pan out in the remaining months of the financial year.