Markets Hold Out Against War Fears
Indian equity markets held out against geopolitical fears and staged a sharp pullback
On Episode 608 of The Core Report, financial journalist Govindraj Ethiraj talks to Mahesh Balasubramaniam, Managing Director of Kotak Mahindra Life Insurance Company (Kotak Life).
SHOW NOTES
(00:00) Stories of the Day
(01:00) Markets hold out against war fears
(01:29) Gold prices hit an all time high, cross Rs 100,000
(04:34) Oil prices are in uncharted territory for now even as consolidation waves continue
(10:07) China is seeing another DeepSeek phenomenon, this time it is in biotech.
(11:59) India’s life insurance business, riding on post Covid shifts, is pushing the digital frontiers though the majority is still physical.
NOTE: This transcript contains the host's monologue and includes interview transcripts by a machine. Human eyes have gone through the script but there might still be errors in some of the text, so please refer to the audio in case you need to clarify any part. If you want to get in touch regarding any feedback, you can drop us a message on [email protected].
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Good morning. It's Tuesday, the 17th of June and this is Govindraj Ethiraj, broadcasting and streaming weekdays from Mumbai, India's financial capital, but in transit right now.
Our top stories and themes,
Markets hold out against warfares
Gold prices hit an all-time high across a hundred thousand rupees,
Oil prices are in uncharted territory for now, even as consolidation waves continue.
China is seeing another deep-seek phenomenon, this time it's in biotech.
And India's life insurance business, riding on post-COVID shifts, is pushing the digital frontiers, though the majority is still physical.
Markets Hold Out
Indian equity markets held out against geopolitical fears and staged a sharp pullback. The benchmark indices, Sensex and Nifty, rose almost a percent. The Sensex closed up 677 points to 81,796.
The Nifty was up 227 points to 24,946, quite short of 25,000 but close. The broader markets were also positive. Nifty mid-cap and the small-cap indices were up about 0.9% each or just under a percent. Now, while investors have been flirting with gold consistently for the last few months, the war in the Middle East has now re-emphasised the safe haven status for this yellow metal. In India now, gold has climbed to a new all-time high of Rs 1,01,078 per 10 grams, that's clearly over the 1 lakh mark for the first time on Friday. At these prices and the likely chances of going up, Indian markets are likely to see demand slow down, particularly from non-investment buying.
Even silver prices and futures remain at their recent highs. Globally, gold prices have already closed above 3,450 per ounce and could hit fresh lifetime highs soon, so it's all sounding familiar now. In international markets, spot gold fell about 0.5% to 3,415, after hitting its highest level since April 22, according to Reuters. Meanwhile, a report in Bloomberg pointed out that mutual funds are losing interest in power generation and utility stocks as power demand falls. Here's the background. In April, demand was actually projected to hit an all-time high of 277 gigawatts across the country on the back of heat waves.
But an early monsoon has changed that. Last year's peak demand was about 250 gigawatts in May, though expectations were that it would cross 260 gigawatts. So peak power demand for this year was expected to cross about 270 gigawatts, which has not happened by all appearances.
So demand for appliances like air conditioners and cold beverages have also been hit, particularly since the respective industries had ramped up production. Meanwhile, a recent bout of increased tariffs have helped Indian industry. Bloomberg also reported, quoting a JM Financial report, that Indian steelmakers may see their profit margins improve this quarter, thanks to better prices of hot-rolled and cold-rolled coils after the recent 12% safeguard duty and cheaper coking coal costs.
Meanwhile, India's imports were lower in May, leading to a lower trade deficit. India's merchandise trade deficits, that's physical goods, narrowed sharply to about $21.8 billion in May, thanks to lower imports. The trade deficit was lower than the $25 billion projected by economists at a Reuters poll, and below the April deficit of $26.4 billion. So total goods exports stood at about $38.7 billion in May, while imports were about $60.6 billion. And if you were to contrast this with April, imports were at about $64.9 billion, and exports stood at about $38.4 billion. So the export numbers are almost the same, but the import numbers, there's about a $5 billion difference.
Meanwhile, India continues to hold strong on services trade. The trade in services showed an estimated surplus of about $14.6 billion. This is the surplus as services exports rose to about $32 billion, while imports increased to about $17 billion, according to India's trade secretary, who spoke to Reuters.
Oil Moves
First the latest, oil prices edged down on Monday after rising about 7% on Friday, as the renewed military strikes by Israel and Iran over the weekend did not affect production and export. Brent futures were down almost $1 to about $73.30 a barrel mid-Monday, and West Texas Intermediate Futures were also down to about $71.99. The larger question could be where oil prices could land and stay in the near term, which will of course determine, among other things, inflation levels in India, which are at current six-year lows. Low oil prices have been a key component of the bundle of positive macroeconomic signals helping India's economy, both on the consumption and investment side, particularly with growth slowing down in the last year.
But predicting oil prices will not be easy. CNBC reports that the CEOs of two major energy companies are monitoring the war between Iran and Israel, but they aren't about to make firm predictions around where oil prices could go. Speaking at the Energy Asia Conference in Kuala Lumpur on Monday, Lorenzo Simonelli, President and CEO of energy technology company Baker Hughes, told CNBC's Squawkbawk Asia, that, my experience has been, never try and predict what the price of oil is going to be, because there's one sure thing, you're going to be wrong.
At the same conference, Meg O'Neill, CEO of Australian oil and gas giant Woodside Energy, told CNBC that the company is monitoring the impact of the conflict on markets around the world. She said that forward prices were already experiencing very significant effects in light of the events of the past four days. CNBC also quoted as saying that if supplies through the Strait of Hormuz are affected, that would have even more significant effects on prices as customers around the world would be scrambling to meet their own energy needs.
However, as of Sunday, the Straits remained open, according to an advisory from the Joint Maritime Information Centre, and Iran was apparently considering closing the Strait of Hormuz in response to the attacks, but nothing like that has happened at this point. Meanwhile, consolidation waves continue in the global oil and gas industry. Yes, this is going to be a long oil and gas segment.
Abu Dhabi National Oil Company, or ADNOC, has made a close to $19 billion offer for Australian energy company Santos in what is being termed as one of the most audacious overseas moves yet by the Middle Eastern company to expand its production of liquefied natural gas, or LNG, according to a Bloomberg report. Now, ADNOC's investment arm XRJ-PGSC joins peers including Saudi Aramco in targeting LNG, tapping the potential of one of the fastest-growing fossil fuel markets since Bloomberg. This deal could give stakes in major operations in Australia and Papua New Guinea if it can secure regulatory approvals, which are not going to be simple at all.
So, the Adelaide-based Santos is Australia's second-largest fossil fuel producer. Santos, interestingly, has been an attractive target for rivals and has LNG assets from oil operations in Alaska and a domestic gas business in Australia. Seeking to the Asia-Pacific region, Bloomberg is also reporting that Petronas, Malaysia's state-owned oil and gas company, wants to expand output from more affordable assets abroad in an effort to cut production costs and rein in declining profits.
Petronas is seeking to produce oil at a breakeven level of $50 a barrel, from $60 to $70 in the past five years, according to its CEO. The firm will focus more on countries where it already has a presence, including Canada, Suriname, Brazil, Turkmenistan, and several Southeast Asian nations, though it doesn't rule out going into a new country. It also said earlier this month it will cut about 10% of its workforce to reduce costs.
So, crude prices are higher now because of the war in the Middle East, but the overall outlook for prices is weak in favour of oil-buying countries like India. Now, this is because overall macro projections, as we've been discussing here, are putting demand lower and supply higher in coming months and perhaps years. Petronas says it's optimistic about the untapped potential in the country, including off the coast of peninsular Malaysia, where international oil companies have shown interest to explore.
Petronas' CEO also said, and this of course resonates with other CEOs of energy companies elsewhere, including in India, that for the last 10-15 years, we've been saying that our reserves will last only 15 years, but today they will last another 15-20 years. So, with India managing to extract more oil from wells that were considered dying, including in Bombay offshore, perhaps there is more oil to be found, even in places that were once fertile or now given up. Speaking of which, India's Energy Minister, Hadeep Singh Puri, has said that India is very close to discovering a Guyana-scale oil field in the Andaman Sea.
Hess Exxon Mobil Corp and CNOOC, that's the Chinese oil major, are a consortium, have made more than 30 discoveries in Guyana's offshore water since 2015, and the Minister says that large-scale oil discovery in the Andaman region, similar to Guyana's, could help expand India's economy from the current $4 trillion approximately to about $20 trillion. In an interview with The New Indian, the Energy Minister said that the government's recent reforms and aggressive exploration drive are laying the groundwork for a major find. Guyana, by the way, saw that discovery transforming the country in the global energy market.
Within India, crude oil production is currently concentrated in regions like Assam, Gujarat, Rajasthan, and the Krishna Godavari Basin, and of course, Mumbai High.
China's Cancer Drugs Drive Up Biotech Stocks
The hottest Chinese stocks are not tech stocks riding on the deep-seek innovation in January, but biotechnology stocks. China's biotechnology stocks are amongst the hottest performers in Asia this year, and funds are tipping further gains, a report in Bloomberg says, adding that sector rally outpaces the 17% gain in China's tech stocks since January. The Hang Seng Biotech Index has surged more than 60% since the start of January. A senior analyst at Exxon Asset Management told Bloomberg that China's biotech is no longer just an emerging story.
Unlike 10 years ago, it's now a disruptive, force-shaping global drug innovation. The science is real, economics are compelling, and the pipeline is starting to deliver. This surge has evidently been triggered by global MNCs, and both deals involve cancer drugs.
Pfizer said last month it was paying a record $1.25 billion to licence an experimental cancer drug from China's 3S Bio Inc., and also invested about $100 million in the firm's shares. Two weeks later, Bristol-Myers Squibb said it would pay Germany's BioNTech SE as much as $11.5 billion to licence a cancer drug that BioNTech had itself licensed from China's Biotheus Inc. in 2023.
China's growing influence on pharmaceutical mergers and acquisitions and dealmaking is also causing investors to take note, says Bloomberg, to get a sense of numbers. The value of such deals just in the first quarter involving local players doubled from the year before to about $37 billion, which was almost half of the global total of $67.5 billion. So half the world's deals in pharmaceuticals happened in China.
So all of this is being referred to as China's Biotech's deep-seek moment and the belief that, of course, there is a belief that there is much more upside from here.
The India Life Insurance Outlook
There was a wave of awareness of mortality post-COVID-19, which also led to more people taking up life insurance policies. While India's life insurance market has growth, it's usually also because of high levels of product innovation and investment, like features, which means that not only do you provide for your dear ones on your untimely demise, but also earn returns in some form from your premiums in your lifetime.
The interesting part is the rising digitisation in both areas. One is when you apply for a new policy and second, when you make a claim or submit a claim to the insurance company. While overall digitisation, and we'll hear more about it, is still low in contrast to the market size, it is growing with rising technology adoption and adoption by both providers and users like you and me.
So what this means is that for many particularly younger digitally savvy Indians, getting a policy is much simpler than before. But the issue, of course, is whether they will take that policy. I caught up with Kotak Mahindra Life's Managing Director Mahesh Balasubramanian to get a sense of the overall outlook for the life insurance space and what was changing.
INTERVIEW TRANSCRIPT
Mahesh Balasubramaniam: COVID probably was a watershed moment in the history of mankind and it has impacted a lot of industries and I'm sure it has impacted the life insurance industry as well. We really see a lot of things have probably changed post-COVID in terms of customer behaviour, insurance companies, the way they're relating to customers, and a whole lot of things changing based on what we believe is keeping up with what the customer wants. First and foremost, I think the awareness went up significantly thanks to COVID because I think everybody realised that, look here, this is not something which happens to somebody else.
It can happen to me or my near and dear family. So the awareness immediately resulted in an uptake in term insurance products, but after that, I think it went back to a little bit more inertia from the customer side. But what has happened post-COVID is, in COVID, all of us were able to tide over our processes and we're still able to operate while we're all operating from home because of the fact that we were able to digitise a lot of our processes.
So pre-COVID, it was physical first and digitisation was optional. I think post-COVID, it has become digital first. Anything and everything we do we are moving virtually into a paperless organisation.
Right through the lifecycle of the customer, our endeavour is to make sure that we can operate without collecting a single paper from the customer. Right from customer onboarding, to processing, to underwriting, to policy issuance, to servicing, etc. A settlement of claims.
Everything today is done end-to-end digital, which also helps you offer hyper-personalisation to customers. It helps you offer bespoke products and solutions to consumers. And even in the sales process, a lot of digitisation has come in terms of agentic tools, AI-led customisation for customers.
So I think a whole lot of digitisation has happened in the last post-COVID and all of them are really changing the way customers are consuming products and changing the way we are approaching the business in terms of our agents relating to customers, our employees relating to customers. For instance, let me give you a simple example. Today, virtually every insurance company, I'm not talking only about Kodak, I think the entire onboarding process of customers is paperless.
We do collect one or two documents. Today I can collect Aadhaar KYC. I can do a PAN verification because the PAN has been provided to me.
I can use account aggregators to scrub and get data about banks. So entirely my financial underwriting today can easily be done without collecting paper. I think the account aggregator is one which probably needs more usage.
The identity of the customer and the KYC, etc., is being done a lot more digitally now. With account aggregators probably picking up, we'll see a lot more underwriting happening based on dipping into various account aggregator databases rather than collecting IT returns or collecting bank statements or something from the consumers. So the entire process is now done digitally.
And thereafter, the policy issuance, even medically, we do something called video FMR today at Kodak Life, which is basically a doctor getting on to a call with the customer and having a chat with them. And this probably takes away a lot of cases where otherwise the customer would have gone to a medical centre for getting his medicals done. So there are three kinds of medicine.
One is video FMR. Second is to send somebody to his house. A phlebotomist goes to the customer's house and conducts this. And in the third case where the customer steps into an actual lab.
So we are trying to do as much as possible where the customer either sits at home on a video or we're sending somebody home to the consumer. And then we're also looking at AI-led interfaces for facial recognition, whether we are able to pick up underwriting cues when we're talking to a customer where through facial recognition today there are tools available where an image can be studied through an AI model and it can tell you whether you're a smoker, whether you're in good health, etc., by looking at you and the way you interact. So are you using this right now?
We are using it today, but it has not become full-fledged because the reinsurers are yet to really get comfortable with many of these. But a lot of pilots are getting run and lots of data has been getting collected. It's a question of time where we can take it to a level where we can say, hey, for very many cases through a combination of video FMR, video medical interviews and facial recognition can be completely underwriter policy.
Govindraj Ethiraj: So on the claim side, if you were to look at, let's say the last year and when I say last year, I mean, maybe you could say financial year or calendar year. How many claims would you have settled in the same level of digital adoption or adaption? And how would you rate the level of friction, though you're not the customer, but the customer would have experienced it?
Mahesh Balasubramaniam: Well, honestly, we are moved to a fully digitised process on claims as well. Customers can log in a claim through any of our channels, whether it is a website, whether it is a call centre, the customer doesn't have to walk into a branch at all. Some customers do walk in because a branch is accessible to them.
But the model is designed actually for an end-to-end digital process where they can lodge a claim, they can submit their certificate, documents, et cetera, right? And end-to-end claims will be settled without the customer physically meeting anybody from the quote of life. And that's true of most of the industry where into the nominee's bank account, automatically the money will get transferred.
So you can actually sit at home if you have lost one of your dear ones. If you have the policy document and quote the policy and lodge a claim, right, along with the death certificate and et cetera, everything can happen at home. So to that extent, our process is entirely digitised.
Govindraj Ethiraj: Right. And I know that this is a hybrid world and you also said that you're going to add about 70 branches and you're targeting about 400 by the end of this financial year. So in a larger sense, why would you be adding so many branches or rather, what is your specific business case for, let's say, adding more branches versus building digitally?
Mahesh Balasubramaniam: First of all, India is a very large country. At 350-400 branches, are we doing justice to the vast expanse of this country? I'm talking about India, I'm talking about Bharat, I'm talking about rural India.
I think branches, whether it is banks or whether it is insurance companies, branches would be required. I don't think we are at a stage where all our products are consumed completely digitally. Secondly, our business model, especially in life insurance, is still digital when it comes to selling, right?
Unlike motor insurance or maybe two-wheeler insurance, which has probably migrated more to an end-to-end digital model, customers who today want to buy a life insurance policy, if it's a pure term, can still be done digitally because the level of understanding required in a pure term is very simple. I pay a premium. If the event happens, my nominee gets the money.
Whereas our investment products, whether it is ULIPs or whether traditional plans, require an advisory approach where we are engaged with the customer in terms of physically meeting the customer and giving them solid financial advice, which also means that it requires a lot of agents to be on the field to go and talk to customers. Since the digital insurance model by D2C end-to-end digital is hardly 3-4% of the life insurance industry. A large part of the business comes from bank assurance.
A large part of the business also comes from agency and direct marketing that we do. So, all this requires a physical interface because my agents need to come to the branches to get trained. My employees are sitting in my branches.
So, it's still a digital model. I think insurance will continue to be a digital model for quite some time now. And at 400 branches, I think we still have a lot more ground to cover.
While services can be rendered digitally, the sales process is largely digital.
Govindraj Ethiraj: Is there a figure for that? So, if you say that, let's say, last year, X amount of premiums were raised and how much was it through digital and how much non-digital, which includes bank assurance and direct?
Mahesh Balasubramaniam: Again, it's a slightly layered question you're asking me. Direct sourcing, where we go to the customer and D2C sourcing, either directly or through web aggregators, would still form more than 5% of the industry's business. But the payment mechanism is still digital.
We have stopped collecting cash for quite some time now. So, the payment mechanisms are still digital. The renewal comes digitally through Snatch and ECS.
So, all those have gone fairly digital. The process of selling and counselling and advising a customer is what is done digitally today. So, if you look at the payment collection, almost 75-80% of our payments are all digital today.
Renewal again happens largely through digital through the ECS route the customer has already put on his account.
Govindraj Ethiraj: Right. So, you're saying in terms of actual sourcing of new premiums, it's about 5% roughly. Let me come to the other question.
So, in terms of business growth again, you've said recently that about 35-40% of your new business premium is because of new products. So, what does that fundamentally tell us about what consumers are actually buying and why they're buying it?
Mahesh Balasubramaniam: See, our product philosophy is layered on three aspects. First and foremost is what is the persona of the customer who's actually approaching us, right? And that broadly in India, you can categorise into four parts, salary, self-employed, retirees and maybe homemakers, if I have to use a term.
So, broadly, you can classify the population into this. This is in terms of the occupation of the customer. Second is the economic strata of the customer in terms of being mass customer, affluent customer, mass affluent and H&I customers.
That's the economic disposition of the consumer. The third element which comes in the life insurance industry is the age of the customer in terms of how old the customer is. So, if I look all this into a three-by-three kind of a cuboidal structure, our products are all designed to make sure that it addresses the lifestyle requirement of a customer, the age the customer is in.
Suppose somebody is at 25-35, we really strongly advocate the customer to start looking at a pure term because at the age that he is in, it will be far cheaper for him to buy a term insurance policy than you and I are going and trying to get a term insurance policy today. Now, in the term insurance policy, what has happened in the last few years, customers in India like to get something back and if you're a 35, you buy a term and you survive the term policy, they have this feeling that the fact that he's alive is not enough, right? He wants something back.
That's when a product like a return of premium product where in term insurance, we said, okay, if you want your money back, we will have a product where you can take your money back. Similarly, there are customers who say, I want to cover for 30 years but why should I pay for 30 years? I'm happy paying for 10 years, right?
Then there is a product called limited premium but the tenure is fully there till 30. Then there are customers who want capital guaranteed products. I want to invest in markets but I want my capital back.
Then what we do is, we try to offer them a capital guaranteed product which has a combination of a traditional plan which is a non-part traditional plan and a part of it goes into ULIP or equity which still gives them a blended combination of a capital guaranteed product. So, depending on the lifestyle, depending on the risk of the consumer, I think various products have been evolving. For instance, in the retirement space, a lot of work is happening now.
We all have something called deferred annuity where if you're 45 or 50, you pay premiums for 7-8 years. Then you say, okay, I want my retirement money after 65. I've got enough savings.
I'll invest for about 10 years and start getting my annuity or pension from the 15th year. That's called a deferred annuity kind of a product. Then we have products which are catering to ULIP and a combination of ULIP and term.
So, we call it TULIP. In fact, Christian is TULIP and many companies are now having their own version of TULIPS. We were pretty early in the game.
I wouldn't say we were the first people to enter that market, but we took an idea from somebody else and modified it a little bit better to make it sit within our boundaries. So, this is a combination of a term plan and a ULIP plan. It gives you the cover of a term plan.
At the same time, it gives you the returns of a ULIP as well. And if you survive the policy without mortality hitting you, then you still have a certain amount of money which comes to you, right? So, this is one more product we launched called the TULIP or the termed cum ULIP plan.
Then something on the annuity side, while we are all looking at fixed rates and fixed rate guarantees are fine, there are some customers who would like to ride the interest rate wave. Therefore, we launched a retirement plan on the participating line or the PAR products, where we don't offer a guaranteed return, but the customer invests through the policy and gets a return which is linked to the market where the interest rates will keep going up or going down. For instance, we are waiting for the policy tomorrow, and interest rates may go down.
And again, after three years, it may go up. So, the customer is investing in a policy which helps them to write the investment interest rate pattern. And thereafter, his pension also is determined at the point of where the pension starts.
His corpus is raised on the backdrop of a variable interest rate. So, these are the various products we have launched. And each of these products, thanks to a lot of customer research, thanks to understanding the gaps in the industry, we have been able to create a niche.
In fact, on the term side, we came up with another product called Gen2Gen Protect. Let's say you're there, you have a child who's 15 years old or 13 years old. You take a term policy for the next, let's say 30 years.
Let's say you're 35 and you take a term policy for 30 years or 25 years. At 60, normally an individual does not require a term policy. Because term policy is supposed to help you with lack of earnings in case you are hit by mortality.
It's a substitution product where it substitutes the earnings of a living member. At 60, you don't need a term, but your son now would become 30. So, you pay the premium in case you survive the policy.
At the age of 60, we'll give back the money you paid and the cover transfers to your son or daughter. So, it's called Gen2Gen Protect where you're covering two generations in one product. So, this is a new innovation we brought for the first time to the industry last year.
So, to summarise what you're saying is that we look at niches, we look at trends, we look at what is thematic and topical for the consumer and we come up with products every now and then, which helps us have a relatively new story or something which is different from what we have been offering to consumers. And this is a journey. I'm sure we are doing something, competition is doing something.
Sometimes you are playing catch up with what competition has done. Sometimes we go out there first and launch a particular product. But I think as customer needs evolve, as their, what you call, awareness goes up, we are able to customize various products for various customer profiles and various needs.
Govindraj Ethiraj: Right. And customers are clearly always looking for new products, which I'm assuming is what attracts them to the proposition of life to start with. Okay.
Last question, Mahesh, how are things looking to you as you look ahead for the next six months to a year? And is there something new? Is there anything else that you're expecting on the regulatory front?
Mahesh Balasubramaniam: Well, regulatory, I think we have had quite a lot of action in the last two, three years. We've had a lot of regulatory changes which have come into the industry and if I have to list them, I think first and foremost, the IRDA had done a tremendous job of actually releasing the use and file where you don't have to go to the regulator for product sign-offs. I think that was a big boon which helped a lot of us be nimble and launch a lot of products on the non-traditional side.
With the Disturb and ULIP and some other products, we don't have to go to the regulator. That helped us improve our turnaround time and helped us innovate faster than what we would have normally done. Also, the industry is grappling with a lot of things at the same time.
Having said all that, I think one could probably look forward to continuing our 15% CAGR, which is what the industry has been hovering around for the last many years. I think a 10% to 15% CAGR would continue with respect to all that as we grow as an economy, as we try to become the third largest economy in the world. I think affordability, customer per capita is all growing.
So, I think insurance will continue to grow and capital markets have always been quite active in the last many years. This year, of course, has been a choppy ride. So, the transition from Unit Link products to traditional products, traditional products back to Unit Link, all that will play out.
But I would say, yeah, a 12% to 15% growth rate for the industry would still be something that all of us would be able to get there as an industry, I'm saying.
Govindraj Ethiraj: Mahesh, thank you so much for joining me.
Mahesh Balasubramaniam: Pleasure talking to you and thanks for having me on your podcast.
