Ladies and gentlemen, good day, welcome to the Chola Financial Holdings Q1 FY 2024 investors conference call, hosted by Axis Capital Limited. As a reminder, all participant lines will be in the listen-only mode, there will be an opportunity for you to ask questions after the presentation concludes. Should you need assistance during the conference call, please signal an operator by pressing star, then zero on your touchtone phone. Please note that this conference is being recorded. I now hand the conference over to Mr. Praveen Agarwal. Thank you, over to you, Mr. Agarwal.
Yeah. Thank you, Rishi. Good evening, everyone, and welcome to this earnings call. From Cholamandalam Financial Holdings, we have Mr. Sridharan Rangarajan, he's the Director, and Mr. N. Ganesh, is the CFO. From Chola MS General Insurance, we have Mr. V. Suryanarayanan, he's the MD, and Mr. S. Venugopalan, the CFO of the company. I'll request Mr. Sridharan to take us through the key highlights of the results, post which we'll open the floor for Q&A. Over to you, sir.
Yeah. Thank you. Good evening, all. I have with me, and my colleagues, Suryanarayanan, MD of Chola MS General Insurance, Venugopalan, CFO of Chola MS General Insurance, and Ganesh, CFO for Chola Financial Holdings. I'd like to have a very brief comment, and I request, you know, Suri to make the comment relating to insurance. Consolidated total income of Chola Financial Holdings for the quarter, June 2023, increased by 44% to INR 5,715 crore, while the profit after tax increased by 36% to INR 792 crore. Chola General Insurance also has done fabulously well. Overall, I feel that I think, both the companies have done well. With that, opening remark, I request, Suryanarayanan to make a remark relating to insurance, and then we'll open up for question- and- answer.
Thank you, Sridhar. Good evening to each one of you. I shall now proceed to give you a brief overview of the performance of Chola MS General Insurance for Q1. In the quarter, Chola MS recorded a gross direct premium of INR 1,681 crore, with a growth rate of 30.3%, as against the multi-line insurers growth of 16.5%. This growth has helped Chola MS to enhance its market share to 2.95% amongst multi-line insurers. The growth was across all lines of business, with growth rates of 15.4% in Fire, 35.3% in Motor, 31.4% in Health, and 17% in Personal Accident. The company grew across all its channels.
In its captive channels, business from the sister company and the Insurance Express outlets grew by over 27%. Bancassurance business grew by over 15% and growth of 11% from other channels, including new channel acquisition partners, helped attain the strong growth. The EOM, the much-discussed subject in the general insurance industry these days, for Chola MS was 33.9% in Q1, as against 37.16% in corresponding quarter of previous year, implying a reduction of 3.27%. Chola MS has won a cluster in crop insurance in the state of Maharashtra, with a premium potential of about INR 500 crore per annum. This business is a three-year tender, and one can reasonably expect this to continue for the subsequent two years as well.
As premium recognition happens in subsequent quarters, this should help lower the EOM for Chola MS and gradually help converge to the regulatory limits as defined in the glide path. The claims ratio for the quarter was at 74.5%, as against 72% in corresponding quarter of previous year, an increase contributed by 1.34% from cyclone natural event claims. The combined ratio for the quarter was at 112.9, and without the effect of the cyclone and natural catastrophic event claims, it was at about 111.6, as against 114.9% in the corresponding quarter of the previous year. Chola MS investment portfolio corpus as at June, was at INR 15,150 crore plus, and with an investment income of about INR 263 crore for the quarter.
With no exposure to stressed assets, recoveries from the fully provided exposures in IL&FS and Reliance Capital would be recognized on cash basis as and when it happens. The PBT for the quarter was INR 88 crore, as against INR 51 crore in the corresponding quarter. The return on equity for the quarter, annualized, has progressed to 11.76%. We'll now be happy to take any questions that you may have.
Thank you very much. We will now begin the question-and-answer session. Anyone who wishes to ask a question may press star and 1 on their touchtone telephone. If you wish to remove yourself from the question queue, you may press star and 2. Participants are requested to use handsets while asking a question. Ladies and gentlemen, we will wait for a moment while the queue assembles. The first question comes from the line of Devansh Nigotia of Simpl. Please go ahead, sir.
Yeah. Thanks for the opportunity. Congratulations on decent set of numbers. Just a couple of questions. One is, if, if we look at, you know, our commission and OpEx on a combined basis, the denominator of net written premium. We see that it has been trending downwards for the last three, four quarters. Is it related to? Are we seeing some signs of competitive intensity moderating in Motor, or is it related to something else? Some thoughts, if you can share here.
Yeah, a good question. Very clearly, the business has been taking a close look at the various portfolios across its various verticals and recalibrating the sourcing cost together with the underlying fundamentals of the business. The business has taken drastic steps of curbing and reducing sourcing costs in some panels, which is begun to show results. The business expects this to continue as we go along.
We mentioned that we are again trying to build a CV book. Is it the sourcing cost in two-wheeler and passenger vehicles, which were at an elevated levels, and now we are trying to change our business mix from there, which will help us, gain in terms of, you know, better operating expense ratio? Is that the understanding?
Yeah, that is one of the factors in play, with, generally, TP premium price increase not happening, and on the backdrop of just a 4% increase last year. Locking oneself into a much longer-term exposure for five years in two-wheelers has its own implications, so business has taken a careful look at that.
Okay. When we look at, you know, we've been mentioning for some time that we are trying to build crop again, but even in this quarter, there has not been any business from crop insurance. Some thoughts if you can share.
The crop season begins, the kharif season begins in July. As I mentioned in my opening remarks, we were not in the crop business. This year, we have entered the crop business. We have won a cluster, and as I mentioned earlier, we should see the booking of business in Q2, and maybe largely it will be in Q2. Some volumes could come in Q3.
What is the kind of business mix that we are targeting for crop over the next one, two years?
Yeah, that we don't expect this to be anywhere, beyond, 7%-8%.
Okay. Is, is it likely to do with, the, to comply with EOM or we are looking at, high profitability over here? Any expected combined ratio that you're expecting from this business?
Think, the, in the current year, most of the crop tenders, the states have adopted a loss- corridor model of 80% to 110%. Which means that under, under the model, any claim ratio in excess of 110, the state will step in. The insurers have taken their own reinsurance arrangements for covers beyond the loss ratio of a certain level. Which has sort of made the game a little more predictable than it was a few years back.
Okay. In case of Group Health and Fire insurance, there has been step up in losses, underwriting losses. What, how would you describe what is it related to? Is it pricing or sourcing cost or, I mean, if you can just help us understand?
Chola MS continues to adopt a very, cautious, stance with respect to Group Health. Even if you notice from the industry numbers or our own numbers, while industry has grown in Group Health quite significantly, the multi-line players have grown Group Health. Private sector has grown by about INR 2,350 crore. Our Group Health hasn't grown as much. We have just grown very marginally, so we continue to adopt a cautious stance there.
With the CIFC looking to, you know, do a QIP of INR 4,000 crore, I mean, how are we looking to participate in that? Since at balance sheet level, we don't have that kind of funds. Can that even lead to dilution, if at all, in CIFC?
What is the INR 1,000 crore you are talking about? Can you repeat?
CIFC is looking to raise funds, right? They mentioned, -
Yeah. Yeah.
They're looking to do a QIP. Considering looking at our balance sheet, I mean, will we participate in it? But at the balance sheet level, we don't have that kind of cash. Some thoughts, if you can share, whether we are looking to participate or not.
Yeah, so the process is on. I think, first of all, CIFC will get the shareholders approval, and then we will take a call with that. I think last time we did participate, and we are also thinking about that. I think we will take a call. The board will consider this soon, and we'll take a call and decide about that.
Okay. I have a couple of questions. I'll get back to you next.
Thank you. Participants, if you have a question, please press star and one now. I repeat, if you have a question, please press star and one at this time. While we're waiting for the queue, Mr. Agarwal, would you like to ask a few questions?
Yeah. Thanks, Rishi. Sir, we had 2 queries. One was regarding the price increase across products. Can you share some thoughts? How has been the price increase across various products that may have helped us during the quarter?
See, and if you have to look at the first, the commercial and property lines, when it comes to general, premium price realization, the market, Chola MS, we have seen a decline in average premium realization of anywhere between 7%-9%, depending on the occupancies and the risk profiles, the location, and whether there was a claim in the previous year and so on and so forth. While that is a story in the Fire, actually, we are now seeing the pricing improvement in the Motor. There is a lot more responsible behavior I am seeing from many players, and as a responsible insurer, Chola MS has also enhanced its prices. To the immediate effect that we see is that some volume drop is also seen.
While our growth, as I mentioned in the start, as Motor is 35, you will find that the growth in subsequent months within the quarter in June was much lower. As I say, see, even in the month of July, it is lower. It is a direct effect of the price corrections that we have effected in the market. We are quite happy with that. In Health, again, of course, these are not prices that will change on a month-to-month basis. But the general tendency that we are seeing is that claims ratios are on the increase across with medical inflation and also, the general nature of health claim frauds that we see in the marketplace.
Chola MS will also be evaluating one other price correction as a sequel to the one that we had last year.
Okay, okay. In terms of the new channel contribution, which product is more successful in the new channels that you have generated?
See, I mentioned about the growth rates in various lines of business. We are growing in Fire, we are growing in Motor, in Health, and again, you will find that our mix of categories within Motor is also presented. You will see that there is growth in cars. That is, that is largely because of the OEM tires that we have gotten, so it's more a position there where we have grown. We are seeing a secular growth across lines. It is not that we are growing just in any particular line as such.
Okay, okay. Lastly, from my side, sir, any progress or any thoughts that you have garnered from the regulator regarding the composite licenses?
So-
No, composite license, actually, as per the, you know, it requires the Insurance Act amendment, which was there in the earlier draft version of the proposal. I don't think that that has been in the new proposal. Also with the monsoon session starting, it is not in the offering there for, for clearing any of the instruments. Majority of that, you know, is a smaller level of changes in the Insuarnce Act. Composite license is not there in the draft, final draft version, which we have seen.
Okay. Okay, thanks.
Thank you. We have a question from the line of Sanket Gora from Spark Capital.
Yeah, thank you for the opportunity. Sir, when, when I see your Motor mix, it seems to have drastically changed, not in favor of two-wheelers. In, in the last year, for the full year, it was almost 20% of the business was two-wheelers. Now, now it is just 16. When you said that in June and July, the growth has moderated or price correction has been done, that, that should I assume, is largely because of your change in stance with respect to two-wheeler business?
I wouldn't think of it that way. We would like to stay in that business, but ultimately the economic results should make sense. That is what, what would drive the ultimate mix. Though we are seeing a reduction from 19.6 to 16.3, 19.6 was last year's full number, Q1 is 16.3. A good amount of premium anyway will come up during the festive seasons. The two-wheeler sales itself has been down, as we all know, in Q1, and that story continues in July. In season it does go up. Anyway, the long-term component of the premium that we had written in previous years will all start adding up in the subsequent quarters.
In my view, I would tend to look at it as a more static position, of around 19-20 is what I, I would tend to think that it would settle ultimately.
Sir, you are fairly confident that two-wheeler will be more like a 19%-20% of the total mix, even for the entire FY 2024. That's, that's the way I need to understand, right, sir?
At this point in time, that's how I think of it in the current situation.
Got it, sir. Sir, the reason why I was asking this question is that, if you look at your loss ratio trajectory in Motor rolling business, it improved, it improved from 76% in 1st quarter, FY 2023, to almost 70%, 72%, and you ended the year with 71.7. Now it is back to 75. If you again look at the mix, then the car contribution, which was 35, 36, it has increased to 42. Which means that a higher loss ratio product, typically, which I believe is cars, has increased, and that led to increase in the Motor vehicle loss ratio. Just wanted to understand that it is largely because of car.
The second reason I just wanted to check why you tend to choose to do more cars relatively. Is it more industry-led growth or you are consciously making it effort to grow the car piece?
A couple of points out here. See, even if you were to look at the last year's numbers, Q1 was 75.8, and then it improved as the year went along to 71.7. In the industry, we have always seen the trend where the labs are elevated in Q1, and then they taper down towards Q2, Q3, and then you will see some hardening again in Q4. This is a trend that even if you were to look at numbers of competition and for the industry in general, that is the trend that you would see. That is something that we expect to happen even in the current year. Let me also say that we are seeing traces of it in the... even as we go along.
We are now having this discussion in month two of the quarter. I can say that the trend is quite visible even presently. The, the next question is that the cars, our growth, I've mentioned this even in some of the past calls. We get our car business across all three segments. The new segment, which has its pluses and minuses, the financial segment, which again, has its own advantage, and third is the agency segment, which is the older vehicle segment. Chola MS has a strong presence across all three. We have added to OEM partners to an extent that pan- India has been opened up by Maruti for us, this will bring in some new weekly business. Chola MS will be committed to looking at the inherent profitability per se.
The financial business, growth in the financial business is staggered as well, because the price point pressure at the financial point is much, much different and much better as compared to what you get in the agency business or perhaps in the new- vehicle business. These are several factors at play, which ultimately shape the overall strategy in terms of getting stronger in any particular subcategory.
But, but, sir, just, just asking the point, if, if I look my-- look your banker contribution, compared to the last year, for-
It looks like the, his line is disconnected. Let me just.
The, the banker led to the car-led growth. Is it that we have taken a conscious decision to slow down our long-term policies growth in banker, and, and that's the reason why the contribution is lower, and, and it is compensated by car growth? Is, is the way I need to look it, or, or, or, or, how do I read the numbers, basically?
It, banker, our, good volume comes in from our sister company-
Hello?
which is not... Hello, am I audible, please?
Mr. Gora, can you hear us?
Hello, sir. Hello.
Mr. Gora, can you hear everybody?
Yes.
Oh, great.
Yeah. If you look at our, we have presented our growth across the captive channels, bancassurance , and that part. Our growth in our own business, across our own sister company, you will find that there is a strong growth there. Which is where we get a good part of the Motor business, and that includes cars. When I say cars, there is also the used- car market there.
From your side, sir.
Sorry? Audible to hear?
Mr. Sanket Gora, can you hear everybody?
No, no, I think there's a problem.
Eh?
Sir, please continue. We can all hear you.
Please, what Sury is speaking, are you able to hear him?
Others are able to hear Sanket.
Oh, okay.
Then maybe you'll have to relog in and come back.
Come back?
Yeah. Probably we go to the next question and then come back. Yeah.
Sure, sir. Participants, if you have a question, please press star and one. Participants, if you have a question, please press star and one. Participants, if you have a question, please press star and one. We have a question from the line of Pratik Poddar of Nippon India Mutual Fund. Please go ahead, sir.
Yeah, hi. Sir, just one question. You know, with crop being 8% of your GWP as you decided for, how should we think about loss ratios from an overall company's perspective, especially given the fact that, you know, EOM rules are there and you need to go towards 30%?
Yeah, look, I mentioned that, the scheme operates in a corridor of 80% to 110%, just as most state governments have taken up that.
Sorry to interrupt, sir. I understand that. My question was on the overall loss ratio.
Therefore, you will have a loss ratio of a minimum of 80%. That is the best that one can look at, and that's the cap. We would tend to believe that a crop can reasonably operate somewhere in the 90s. 90%-95% is what one can reasonably expect, and that is what we would probably start factoring in even when we start presenting the numbers.
Got it. Got it. Sorry, maybe I'm wrong, but sequentially, we have seen, you know, a sharp jump in the OpEx ratio overall. How should we think about overall OpEx ratios in the next one, two qua, one, two years or the medium- term?
There is a, you know, if you are talking about the EOM percentage to GWP or NWP?
Sorry.
Are you talking-
See, I mentioned, Pratik, in the beginning of the call that actually on the EOM, as compared to corresponding quarter, we have had a 3.27% reduction. Our numbers, EOM, for the current quarter was 33.9. By EOM, we mean our total expenditure in relation to the premium, the top- line. This is now for the quarter was at 33.9, and I had also mentioned that as we start recognizing the crop premium and given the business mix, you will possibly start seeing this ratio going down.
This gets compensated in the sense by elevated loss ratios, right? Because you just mentioned that, loss ratios in the crop will be closer to 90%-95%.
That is an expectation that we would like to carry. Yes, if it turns out to be 80, 80 at the lower end, yes, that can be a positive. On the other hand, if it turns out to the other end, yes, it can be adverse.
How should we think about the combined ratios? What are your thoughts on how, how would you look to what is the normal band in which you would look to operate this business in?
I think I had even mentioned in the previous call that we would like to probably converge to a level of about 107, though the two events, so what has happened in Q1, the cyclone and in Q2, July, whatever we had by way of the northern floods. There will be a setback, but then we still hope that we will get somewhere closer to that by end of the year.
Got it, sir. Thanks.
Thank you. Participants, if you have a question, please press star and one on your phone. Participants, if you have a question, please press star and one. Participants, if you have a question, please press star and one at this time. Sir, we have a question from the line of Devansh Nigotia from Simpl. Please go ahead, sir.
Yes. Also, thanks for the follow-up. I just wanted to understand, in terms of Motor TP, you know, when we look at our historical claim ratios, before 2019, they were really elevated at that time, and they used to be upwards of 95%. Now even, you know, after COVID, everything is normalized, and still our claim ratios are, you know, 73%-74%. What is helping that, the claim ratios to stay at such low levels, and with pricing being almost flattish for last two years?
What we are clearly, while severity is definitely going up, with minimum wage increase levels and medical inflation, what Chola MS as well as the industry is generally seeing is some frequency benefit, pan out going by the way the claims have developed over a period. We do, apart from our own experience, we do have compare notes with the loss ratios of competition as well. Still we find that our loss ratios compares in terms of thing, it is slightly higher and elevated than what we see in relation to the numbers of competition. Which only makes us feel comfortable that we are still on the right path when it comes to the reserves.
I mean, is it that there were benefits of the, that we had provided in, during COVID in FY 2021, 2022, and the benefit of reversals we are seeing right now in our current claim ratios? Is that the understanding? These claim ratios might step up further going forward.
We have maintained that for price corrections in Motor TP is essential for long-term survival of Motor business in the country itself. It is really unfortunate that we have not got this increase, and it's been rather sedate until now. It is required. I think it will start casting pressures. While 77% are what we have provided or what we are carrying, it is sustainable for this year. If you are to look at a combined ratio of this, that it will, it will come under pressure as we move along. There is a sourcing cost now, even for TP. There is an operating running expense for TP, it will be difficult to run beyond this.
Okay. Sir, I mean, my question was more specifically on reversals and the benefit of that. Is it that those benefits will stay only till this year? Is that what you are trying to say, or? I'm still not able to understand.
The benefits will accrue only when, the, the Motor Vehicles Act, which was made into, into effective from April 22, that gets recognized. The industry, together has, filed a petition with the Supreme Court, on appeal against several high court orders. As that gets, clarified by Supreme Court, the industry itself will see some relief on this.
Okay. Basically, there are some conflict with the states, a few state decisions like Tamil Nadu and, or with the decision which came from the Motor Vehicle Act.
Yes.
Any expected date when, when will the outcome will come from Supreme Court on this?
Yeah, it is that the. We will have to wait to see. The case is listed for hearing, but we don't know how when it'll actually be taken up and how many rounds it will go before a final decision is out. How many hearings will happen, we are not too sure.
Got it. Thanks a lot. Thank you, sir.
Thank you. Participants, if you have a question, please press star and one. We have a question from the line of Pratik Poddar from Nippon India Mutual Fund.
Hello, am I audible?
Yes, sir, please go ahead.
You mentioned that you are planning for one more price correction this year on the Health side. Is it possible for you to quantify?
No, the actuaries are working at it. The business team, underwriting team, or actuaries are working at it. I think, there are multiple ways of approaching the situation, whether you take one, the big increase once in three years and then live with it, or where you move along with the kind of inflation, that you see.
Right.
One would tend to believe that the latter is more palatable even to customers. Nobody likes to get a serious jolt, of a sudden sharp jump. That is the thinking, so let's see how it pans out. Maybe by the time that we have the next call, I should have some more details.
Got it. Thanks.
Thank you. Do you have any other questions, Mr. Poddar?
No, I'm done. Thank you.
Thank you. Participants, if you have a question, please press star and one at this time. We have a question from the line of Ajox Frederick from Sundaram Mutual Fund. Please go ahead, sir.
Hi, sir. Thanks for the opportunity. Just one clarification. The 107% combined you're talking about, are you assuming a Motor third-party price hike?
See, the draft exposure was out about six to eight weeks back. Industry has represented. We'll have to wait to see if anything comes out of it. The industry has asked clearly for a correction upwards, in especially in both, actually, industry has asked both for upward and downward corrections for various categories.
Okay. Basically, you are expecting a price hike, that's how I should read it, right?
Oh, we have to wait and see.
Okay. This 107%, which we are, targeting, we are, we are not factoring that in, right?
At this point, no.
Okay. All right. That's it from me. Thanks.
Thank you. Participants, if you have a question, please press star and 1. As there are no further, further questions, I would now like to hand the conference over to the management for the closing comments.
Yeah, thanks, everyone. It's been a quarter of good performance from Chola MS. We certainly hope to carry this forward and carry this momentum as we go into the subsequent quarters. Thank you, everyone.
Thank you. On behalf of Axis Capital Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.