The financial conglomerate’s long-suffering insurance arms are rebounding. But is that enough to justify a valuation that’s relied heavily on its stellar lending business?
For years, investors saw the financial conglomerate’s underperforming life and general insurance subsidiaries because its flagship lending arm, Bajaj Finance, delivered spectacular returns. Now the insurance businesses are pulling their weight. But will it set up a valuation re-rating that could justify the stock’s premium multiple.
Trading around current levels, Bajaj Finserv commands premium valuations that have historically rested on Bajaj Finance contributing roughly 78% of sum-of-the-parts value, per HDFC Securities. If the insurance businesses continue improving, that mix could shift dramatically. “With the flagship NBFC business already commanding sector leadership, we believe that the potential turnaround in the insurance businesses is likely to drive an incremental re-rating for BJFIN (SOTP contribution likely to improve by 500bps),” HDFC notes, maintaining a buy rating with a 2,510 rupee target price.
The Life Insurance Uptick
Bajaj Allianz Life’s transformation centers on product mix and margin discipline. Total annualized premium equivalent surged 26.2% year-on-year in the third quarter, according to Nuvama, with the composition shifting decisively toward higher-margin products. “Individual APE product mix shifted in favour of Protection/Annuity products (share in mix rose 200bp/550bp YoY to 9%/11%),” Nuvama observes, explaining the sharp margin expansion.
Management “recalibrated agency commission rates, aligning the strategy towards bottom-line-led growth,” says Nuvama. In plain English: Bajaj Allianz stopped chasing topline growth at any cost and started focusing on profitable business. The nine-month performance validates this pivot—VNB margins reached 16.4%, up from 10.8% a year earlier, despite a 2% decline in APE during the first half, HDFC Securities reports.
The company faces headwinds from goods and services tax changes affecting the sector. Management expects to “mitigate ~325bp of the 450bp GST impact by Q4FY26 with the residual ~125bp becoming part of the new base from April 1,” according to Nuvama. HDFC Securities notes the company has managed better than feared: “We were positively surprised with VNB margins due to lower impact of GST disallowance (Q3FY26:230bps, Q2FY26:223bps) (~450bps drag full year guidance).”
That resilience prompted HDFC to revise “FY26E VNB margin estimates upward to ~17.8%.” For context, the stock trades partly on the assumption that life insurance contributes about 10% of sum-of-the-parts value. Sustained margin improvement could boost that contribution materially.
General Insurance Struggles Amid Industry Woes
The general insurance picture is murkier. Bajaj Allianz General Insurance posted gross written premium growth of 11.5% to 73.9 billion rupees, driven by motor and government health segments growing 24.9% and 13.1% respectively, Nuvama reports. Yet profitability remains elusive.
“Elevated expenses (+29.3% YoY) at BAGIC resulted in widened underwriting losses to INR1,370mn versus INR430mn in Q3FY25,” notes Nuvama, even though the loss ratio improved 260 basis points. The combined ratio—the key profitability metric—fell 320 basis points to 97.9%, tantalizingly close to the 100% breakeven threshold but still unprofitable on an underwriting basis.
Motor own-damage insurance is the culprit. Loss ratios for motor OD surged to 74.7%, up 920 basis points year-on-year. “Management highlighted that elevated motor OD loss ratios are an industry-wide issue, driven by pricing pressure and the GST impact on insured declared values,” Nuvama explains. Management “guides towards maintaining a combined ratio close to 100% with expectations of a cyclical correction in elevated motor OD loss ratios at an industry level.”
HDFC Securities strikes a more optimistic tone, noting nine-month profitability came in “slightly ahead of estimates on the back of higher realized capital gains and favourable TP loss ratio.” The brokerage highlights that loss ratios stood at 74.1% for the nine months versus 78.2% a year earlier, “mainly in Motor TP and crop businesses.”
Here’s the silver lining: profit after tax grew 7% year-on-year for the nine months, supported by investment income of 6.7 billion rupees in the third quarter alone—up 15.6% annually, per Nuvama. General insurance companies earn substantial returns on their float, cushioning underwriting losses. As long as combined ratios hover near 100% and investment income remains robust, BAGIC can deliver acceptable returns.
The NBFC Anchor Holds Steady
The non-banking finance company delivered 22% asset growth despite a challenging third quarter that saw profit decline 6% year-on-year.
The profit drop stems from “accelerated provisioning of INR 14bn (0.3% of gross advances), given the implementation of minimum LGD floor across businesses,” HDFC Securities explains. Strip out this one-off, and “operating performance remained steady with AUM growth of 22% YoY, steady NIMs (~9%), marginal normalization in credit costs (1.92%), and robust profitability (RoE of 19.6%).”
Management guided credit costs in FY27 to sub-1.8%, offering comfort that asset quality normalization continues. “While BAF’s credit costs normalization has been protracted compared to historical trends, overall profitability is likely to remain best-in-class along with healthy loan growth, driving premium valuation vs. peers,” HDFC notes, valuing the standalone NBFC at 1,070 rupees based on 4.5 times September 2027 adjusted book value.
The Sum Greater Than Parts
Both Nuvama and HDFC Securities employ sum-of-the-parts valuations, reflecting Bajaj Finserv’s structure as a holding company. Nuvama values Bajaj Finance at 950 rupees current market price, Bajaj Allianz Life at 1.5 times FY27 price-to-embedded value, and Bajaj Allianz General at 24 times FY27 earnings, arriving at a 2,300 rupee target with a buy rating.
HDFC’s 2,510 rupee target implies roughly 18% upside, predicated on the insurance businesses driving that 500 basis point increase in SOTP contribution. The math is straightforward: if life insurance margins sustain at 17-18% and general insurance combined ratios stabilize near 100%, these businesses deserve higher multiples, lifting the consolidated valuation.
At current valuations, with both brokerages offering double-digit upside targets and buy ratings, the risk-reward tilts favorably. Bajaj Finserv is finally becoming the diversified financial powerhouse it always aspired to be—and hopefully should translate into returns for investors.
