Strategy of balancing profitability and growth

ULIPs have performed better with the turnaround in the markets in the last few months, says Mr Sashi Krishnan, Chief Investment Officer, Bajaj Allianz Life Insurance. In an interview with Business Line, Mr Krishnan discusses equity market trends and the performance of Bajaj Allianz’s debt and market-linked ULIPs. Excerpts:

What is your outlook for the markets after the recent steep climb?

Equity markets have corrected steeply in FY09 with a decline of over 35 per cent. The market is now trading at an attractive value for the long-term investor at an FY10E price earnings multiple of 15-16x after factoring in macro-economic indicators.

The RBI has continuously injected liquidity through cuts in CRR and a reduction in policy rates, resulting in a fall in interest rates by 300-400 basis points over the last six months. This has resulted in easy availability of credit and a lower interest cost for corporates, which should lead to a growth in earnings. FIIs have been one of the key players in equity markets. After the continuous withdrawal up to February, FIIs have become net buyers in March and April.

Increase in global liquidity and improvement in US markets have driven the recent equity markets rally. Valuations appear attractive, and with the macroeconomic situation stabilising, the equity market outlook for the current year should be positive.

How was the performance of your ULIP products over a one and three-year period ?

Equity funds have performed extremely well as compared with the benchmark in the last year. But they have been unable to generate substantial positive returns for the investor. Nonetheless, over a longer term, funds in the large-cap and the mid-cap have delivered healthy returns and have outperformed the benchmark comprehensively in case of Bajaj Allianz Life Insurance.

With interest rates going through a full cycle in the past year, several gilt mutual funds generated returns as high as 20 per cent. How was the performance of your debt-oriented products?
Last year has been a good one for fixed income funds in general as the interest rates have eased sharply towards the end of FY-09. Our fixed income funds have generated about 15 per cent return during the last year. While the liquidity continues to be good, we do not see further easing of the interest rates in current financial year. Thus the returns from bond funds should be moderate for the current year.

Why has your gross new premium and weighted new premium gone down by 30 per cent in the last year? This appears to be low compared with the industry average.

Bajaj Allianz Life Insurance has pursued a strategy of balancing growth with profitability. Business has slowed down and overall growth in premium has been just 10 per cent. However we are one of the few life insurance companies to show a profit of Rs 45 crore in 2008-09. In the last few months customers have realised that life insurance offers the best opportunity for long-term savings. So overall we can be optimistic about the future. Nevertheless, we are also conscious that 2009-10 would be a tough year.

New business declined by about 35 per cent while renewal premium grew by more than 100 per cent. The fact that we could increase our renewal premium substantially demonstrates our focus on persistency. At the same time we are conscious of the fact that we need to continuously come out with new products as customer’s preference is shifting fast.

What is your investment strategy in ULIPs?

We offer different categories of funds for investors. In equity, the large-cap funds would follow an investment strategy comprising of a top-down approach to investing. Investment in these funds should be the core of their equity holding for any investor of Bajaj Allianz. These funds would have an average risk profile.

Mid-cap oriented funds would follow a bottom-up approach in terms of stock selection strategy. This is a relatively high-risk product.

Over the last couple of years, we have introduced the asset allocation funds which have been a popular investment option as it gives the investor the benefit of equity and fixed income instruments depending on the prevailing market scenario. The fund manager has the flexibility to reduce equity exposure when the markets are overvalued and vice versa.

In addition to equity funds, we also offer investors the option of investing in cash and debt funds which are invested in fixed income instruments.