Good morning, ladies and gentlemen. I'm Kritika, moderator for the conference call. Welcome to Cholamandalam Financial Holdings Limited Q1 FY23 earnings conference call hosted by DAM Capital Advisors Limited. As a reminder, all participant lines will be in the listen-only mode, and there will be an opportunity for you to ask questions after the presentation concludes. Should you need any assistance during the conference call, please signal an operator by pressing star then zero on your touchtone telephone. Please note this conference is recorded. I would now like to hand over the floor to Mr. Pritesh. Thank you and over to you, sir.
Thank you, Kritika. Hi, good morning, everyone. On behalf of DAM Capital, I would like to welcome the management of Cholamandalam Financial Holdings Limited. Today we have with us Mr. Sridharan Rangarajan, Director, and Mr. N. Ganesh, Manager and CFO of Cholamandalam Financial Holdings, along with Mr. V. Suryanarayanan, MD, and Mr. S. Venugopalan, CFO of Cholamandalam MS General Insurance. Now, without further ado, we'll hand over the call to Mr. Sridharan for his opening remarks. Thank you and over to you, sir.
Thank you. Good morning to all of you. Hope you are all safe. In this call we have with us V. Suryanarayanan, our MD, S. Venugopalan, CFO of the company, N. Ganesh, CFO for the Cholamandalam Financial Holdings Limited. As you all know that Cholamandalam Financial Holdings Limited consists of the consolidated results of Cholamandalam Investment and Finance Company Limited, Cholamandalam MS General Insurance, and also Cholamandalam MS Risk Services Limited. There's a wide coverage about Cholamandalam Investment and Finance Company Limited. You would have gone through their investment presentation to you as well. You would have participated in their call. I would directly get into Cholamandalam MS General Insurance with the opening remark, and then we'll open up for the Q&A.
Cholamandalam MS General Insurance registered a growth of INR 1,474 crore in Q2 of FY23, an increase of 21% over the previous year, driven by growth across channel and partners. The company continues to have a dominant presence in motor segment and is strategically diversifying across the motor ecosystem. In Q2, the industry grew by 8.7% and private sector players grew by 12.5%. In the first half, industry grew by 14.7% and the private sector players grew by 20.8%. Cholamandalam MS General Insurance grew by 30.2%. In motor, Cholamandalam MS improved the market share from 5% - 5.3%. In PA, the market share grew from 2.7% - 4%. In the fire business, the growth is about 43%.
In the first half, motor, representing 66.5% of the portfolio, grew by 25.6%. Commercial represented 16.4% of portfolio, grew by 43%. Health, accident, and travel represented 17.1%, grew by 38%. Within motor, two-wheeler and PC share has gone from 21% - 35%, and commercial AC has come down to 36% from 40%. Volumes from new channels, new verticals, OEM and financial channels had a very good growth. The company's long-term policies growth was more, and as per IRDA direction, the company needed to upfront absorb the full cost for all the long-term policies. However, the UPR adjustment over the long-term creating an embedded value balance sheet.
Hello?
Long-term. Yes. The long-term premium over.
Please go ahead.
The long-term premium over GWP was 12% in H1 compared to 8.4% the same period last year. The solvency ratio as of September 2022 is 2.13 as against 1.77 the same period last year. With that opening remark, I think I would like to open up for Q&A. Thank you all for your participation.
Thank you, sir. Ladies and gentlemen, we will now begin the question and answer session. Anyone who wishes to ask a question, please press star and one and wait for your turn to ask a question. If you would like to withdraw your request, you may do so by pressing star and one again. Participants are requested to ask two questions in the initial round and may join the queue for further questions. I repeat, ladies and gentlemen, if you have a question, please press star and one on your telephone keypad. First question comes from Avinash Singh from Emkay Global. Please go ahead.
Yeah, hi. Good morning. My question is on Chola MS Insurance. The first question would be, you know, if you can provide some kind of, you know, the right path on the expense, the commission, non-claims cost basically over the second half and over the next year, because this is something, I mean, of course, we have the reason, but like, I mean, upwards of 40%, this is slightly on the higher side if we compare versus peer, even adjustable business mix. That's number one. Second, you know, a number of changes happening on the crop insurance side, with regard to the scheme structuring different schemes, do you have a kind of a rethink or you're changing the strategy as far as crop insurance business is concerned? These are my two questions. Thank you.
Good morning. Thanks, Avinash, for raising these questions, one on EOM and next on crop. I will take crop insurance first. Chola MS was participating in crop insurance until 2018/19, and took a pause from that line only because of the operating environment in that line of business, the related cash flows and its impact on solvency, et cetera. We do expect some changes in the program, crop insurance program. Earlier, in the last 2-3 weeks or so, the government has unveiled a slightly modified program and its intent to roll out. We would be looking at that pretty closely. Based on the exact contour of the program that is unveiled, the board would evaluate its re-entry into that segment.
That is on the crop part. The second is on the expense of management overall front. You would have noticed from page 52, where we are giving the breakup of COR. Overall, while the claims ratio is more or less remained at about 72.3% and 72.4% between Q1 and Q2, you will find that there is a 2.5% reduction largely in the EOM related costs. This is the shift that has happened from Q1 to Q2. We are confident that we will be able to glide down that path as we go along into subsequent quarters. As I had mentioned before, the suffering absorption is also casting its impact.
Our long-term business continues to be strong, as Mr. Sridharan has mentioned, which means that while the cost push from fresh business acquired will be there, but we will be earning incrementally higher in the subsequent quarters and in the subsequent year, which should help us bring down the overall cost level as we go along.
Okay. Thank you. Just a quick follow-up. On the motor side, I mean, on the motor OD and TP, I mean, yeah, I mean, in terms of claims ratio, on quarter-on-quarter basis, there are some slight improvement. In overall sales, you know, for the first half, the claims ratio is upward of 75-odd%, it appears to be staying higher. I mean, do you see sort of an industry environment improving, allowing this to improve, or you think that at 75% claims ratio you are, I mean, satisfied, I mean, you can operate?
The first on the industry part, the overall motor OD loss ratios remain elevated for almost all players in the industry. For Chola MS, as we have indicated in page 54, our ODLRs have come down by about 5% from Q1. We were at 75.8-70.5%. The company is working on multiple initiatives to keep this under check. A combination of initiatives of geography segment and all of that. This is on the motor OD side. On the TP side, it is more or less at around 76.5-77%. These small variations on a quarter-to-quarter level is largely driven by the product categories that we emphasize on.
For the current year, I can safely say that it's unlikely that there will be any major shift in this loss ratio in the TP side. We generally do an evaluation at the end of the year, taking into account the full year's experience, taking into account the price movements, the frequency developments and all of that, and determine the loss ratio together with the appointed actuary. As I have said before, the motor TP loss ratios toning down it can happen on a larger front as the Motor Vehicles (Amendment) Act provisions get implemented strictly by courts. We are probably at the cusp of the first implementation. The time limitation that was imposed by the MV Act of six months from date of accident has just come into force.
This quarter would probably tell us as to how the courts are viewing and implementing this particular provision of MV Act. That can be a big pointer to the way the loss ratios shape for us and for the entire industry.
Okay. Thank you.
Thank you, sir. Next question comes from Devansh Nigotia from SIMPL. Please go ahead.
Yeah, sure. Thanks for the opportunity. Just couple of questions. One is, in our presentation we mentioned in Q2 FY2023, there were a few one-offs, like INR 47 crore of inflation-linked motor TP provision.
Mm-hmm.
Two others. I'll just one on one I'll ask on them. This inflation-linked motor TP provision, is it in claims or operating expenses and what is it regarding?
Yeah. Venu, you can answer that question.
Yeah. Here we wanted to explain for the profitability movement here, what is, you know, provided in the first and last one. One is about INR 47 crore in the Q2 part of it, towards inflation-linked motor TP provisioning. As you know that, there is a TP price increase. There is an inflation. On an annual inflation, the claims will go up on the TP side. So, we are highlighting here that we have provided for the inflation in the TP ULR that has been vetted by the actuary, that amounts to INR 47 crores that has been part of the NIC on the TP side. The second is on the sourcing cost. As we explained earlier, there are two components of the absorption of the acquisition cost. One is the growth based and second is the long-term policies growth.
We have segregated this and said that because we are one of the top growers in the industry in H1 2022- 2023 and that growth, absorption of the acquisition cost is INR 28 crores and the long-term policy’s growth, a fresh long-term policy that has been acquired, that part is INR 47 crores. These both put together has been absorbed in the acquisition cost.
These are on an incremental basis of current Q2 with the corresponding Q2 of the previous year. And to add to what Venu had said, on the inflation linked to Motor TP, see this is an actuarial assumption. Whether this actual inflation bears out to the full level as envisaged, we would know only over a period of time. And if you were to look at this incremental provisioning translates to something around about four and a half percent on the COR. This we believe with the provisioning that is required and time will determine as to whether it will get unwound or will remain.
Okay. Just few basic questions relating to the long-term policy business. We highlighted that the long-term policies are for bundled credit link personal accident and health policies. This is largely the policy for benefit-based health insurance which are sold by with the property loan through our banker channel. This is the right understanding?
Yeah. That is one large segment through which these attachment products happen.
Okay, let's say we've mentioned that it is 12% of our business mix.
Yeah.
These long-term policies. If I look at health, part of our portfolio, health insurance, our mix is roughly around 8% on a net premium basis. Personal accident as a percentage of our portfolio is almost 5%. When we say that this is 12% of our mix, the long-term policies, are we trying to refer to the total mix for personal accident and health insurance over here? Is that the right understanding?
Also, dwelling is also.
Dwelling is-
Yeah. Dwelling is also there.
Health, yeah.
The three segments: health, long-term policies, PA long-term policies, and home dwelling, which is part of the property. That also a long-term policy.
All right. Some part of the mix is fire insurance. Is that the right understanding?
Yeah. Yes, yes.
What it means is that there is basically, including fire, personal accident and health mix is 17%. Of that 17%, 12% of our mix is towards the long-term policies. Is that the right understanding?
Yeah. The three segments only. You know, what we are saying is 12% of our things on the overall business mix is long-term premium, which is embedded into the GWP. The three parts, fire, health and PA.
Okay. Basically 60% of the mix in these businesses are long term and remaining 35%-40% are short term in nature. Now to come again, let's say, what, how long term are these policies? And what is the kind of OpEx which is front-loaded? When you say long term, what will be the average duration of these policies for each of the segments?
As we have mentioned before in earlier calls, dwellings would invariably have a weighted tenure of anywhere between 7-8 years. The PA would be anywhere between 3-4 years. The health could be up to three years.
For these, the premium is recognized over the 3-4 year period or seven year period in case of dwelling while our commission structures are front-loaded in our P&L.
Yes, you are right.
Okay.
That's correct.
When I look at the numbers and the operating expenses, the change in our operating expenses has actually happened from December 2021. Where our run rate used to be around INR 280 crores before December 2021, and that run rate became INR 380-400 crores for the last four quarters. Basically there's a INR 100 crore delta on a quarterly basis in the last four quarters itself in comparison to YOY, if I compare it, the operating expenses number. When I look at the mix for these businesses, definitely even the revenue amount has not increased by INR 400 crores for these businesses, while our operating expenses itself has increased by INR 400 crores, when I'm comparing it YOY.
I'm still trying to understand where is the delta coming from? Just to put some numbers, fire mix for last four quarters is INR 150 crores for the total portfolio of the revenue that we recognized. The health part of the portfolio is INR 304 crores for net premium. Personal accident is around INR 182 crores. 180 plus 300 is 480, plus 150. INR 650 crores is just the revenue that we recognized, while the delta in operating expenses we are saying is of INR 400 crores. I'm not able to understand when we say that these operating expenses have increased. The numbers somehow, sir, it doesn't add up. If you are able to understand where I'm coming from? It looks like that the operating expenses have also stepped up from other parts of the business.
Corresponding. Uh, so- The core spending absorbed the earlier proportion. Line to line may not be there. Yeah, Venu, you can explain the-
Yeah. The numbers you have given, actually, you know, we are not fully following. What we have seen as a part of that is you have compared the previous year quarters versus the current year quarter in terms of the earnings and the, you know, acquisition cost plus expenses. Please note that in the previous year, 2021, 2022, as per the IRDA order, we had to absorb the opening prepaid expenses to the extent of INR 326 crores, which is already in 2021, 2022 is forming part of that as the expenses. In the current year, the incremental premium that has been, you know, as we said, that is fully absorbed towards the long term. As well as for the non-embedded premium, like, you know, motor. There are two components of the long-term premium.
One is the motor, which is not forming part of the premium. That is also fully absorbed in the acquisition cost in the current year. As well as the normal growth part of it and also the embedded long term. There are three elements into that. When the acquisition cost comes to as a part of that, there are three elements. One is the long term, which is embedded into the GWP. That is nothing but the dwelling, health and PA. Second component is the long-term premium of the motor, which is also part of your acquisition cost absorption. Third is the growth part of it.
Okay.
I don't know whether it is comparable to the previous year. There are aberrations in terms of the absorption of the one-time cost also in the previous year.
Which was taken over the four quarters.
Yes.
Okay. If I have to
When it come to the numbers, then I think we can go offline and discuss about that. Basically, because we need to see the numbers point of view from the previous year and current year, we can explain you. In principle, what we are saying is the, you know, the three elements of the cost that has been absorbed in the current year.
Okay, sir, I will take that offline with you. I will contact our company secretary.
Sorry to interrupt.
Then we are look-
Sorry to interrupt, sir. Can you please join the queue for the further questions?
Sure, I'll join that.
Thank you, sir. Ladies and gentlemen, if you have a question, please press star and one on your telephone keypad. Participants are restricted to ask two questions in the initial round and may join the queue for further questions. We are having a question from Ravi Purohit from Securities Investment Management Private Limited. Please go ahead.
Yeah, hi. Thanks for taking my question. Just a follow-up. I will probably rephrase my question, as compared to what Devansh had mentioned earlier. You know, when we analyze our general insurance business over a longer period of time, there have been times in the past where our ROEs were fairly good, where we, you know, when we, you know, prior to, let's say, prior to COVID and prior to before we had to make this IRDA adjustment on our expenses, right?
You know, last year in pretty much every con call that we had mentioned on Q3, Q4, Q2, that, you know, our true profit is about INR 350 crore pre-tax or INR 380 crores pre-tax, and these are one-time adjustments that we are making this year because of the IRDA norms and all that. In this sense we have kind of anchored and kind of communicated that the true business profitability of the general insurance business is about INR 350-400 crores pre-tax profit, right? Now, this year again we have a lot of these one-off provisions and adjustments.
I was just trying to understand what really is the true ROE of our business or, you know, long-term return on equity that we as a business are underwriting when we are kind of, you know, underwriting policies. Whether the ROEs that we reported in the past were correct, painting a correct picture, or what we are reporting now is painting a correct picture, you know. If you could just kind of, you know, give us a little insight into what are we thinking in terms of, you know, when it comes to return on equity on our business.
Yeah. If you look at page 49, I'm sure you are drawing reference to the 9.32% and 40.95% of 2020 and 2021. You have to bear in mind that those are return on net worth prior to the implementation of the IRDA order.
Yeah.
Those numbers are return on net worth is not stated. Earlier, the company was observing the cost structure in line with the earnings pattern. Now we are doing an upfront absorption. That is where it renders the comparison different from the earlier numbers of FY 2020 or FY 2021. That is first clarification. Second is, at the end of H1, we are saying that the annualized is about 3.6%. We have mentioned in earlier call that, at the current state, that we are looking at as sustainable, and we have also had a look at the combined ratios of competitors. We would tend to think that in the short to medium term, your return on net worth of anywhere up to 13.5%-14% is what is possible in the near short term to medium term.
Right.
Just to add that there is no one-off this year. I just want to restate that point is that last year we had this because we were taking the hit for the prior year long-term policies cost absorption, opening balance. Whereas this year is becoming a normal practice. There is no one-off this year. Just want to clarify that point.
Yes. Is it safe to assume that-
You are saying that, you know, we were talking about profit before tax of INR 5,400 crore, which we talked earlier, which I think we are still, you know, on course to that.
Okay. You would expect that the company has the, you know, the capacity to be making a INR 400 crore sustainable profit on a pre-tax basis even in the current year, given that the first half it's kind of not been able to achieve that.
Yeah. I mean, I think, let's give this H2, and then probably that will give us far more strength to comment on that. Let's give one more half for us to get to a firm footing on that.
Okay. This is one understanding. You know, when you mentioned that, you know, earlier we were booking our expenses, you know, commensurate to the revenue that we were booking on our P&L, right? When this IRDA change happened, now we are booking the entire expense up front, whereas the revenue kind of gets, you know, come over a period of time. Let's say if is there something like, you know, if we were to, like, say, you know, under IFRS, for example, or, you know. I'm just trying to kind of, you know, understand that, you know, from a cash flow point of view, for example, right? Or from a non-normalized ROE understanding from point of view, you know, how should we kind of analyze the numbers in that context, right?
When does this kind of adjustment go away, or we'll have to kind of continue to live with this adjustment and therefore the reported ROE will continue to be lower, whereas the true business ROE is probably higher because of, you know, upfronting of expenses. If you could just kind of enlighten us a little bit on that.
The two parts. First is, in an IFRS context, the expense would get absorbed, linked to the earnings over a period. Which means that the kind of ROE that we reported in FY 2020 or 2021 would be straightaway back. That's the first clarification.
Okay.
Second is, as Mr. Sridharan Rangarajan had mentioned, what we are having is today the value in the balance sheet.
Mm-hmm.
There are the cost structures, and we know that all these long-term businesses are COR positive.
Mm-hmm.
You know, the cost is all absorbed upfront.
Right.
These do support a very good Loss Ratios.
Mm-hmm.
An indication of which is there even in the kind of loss ratios that were put out on the personal accident front and all of that.
Okay.
These are sitting as values in the balance sheet to be unfolded.
Mm-hmm.
There are two ways by which the value will unfold. One is over a period of time when they convert into earnings and there are no claims against or a low claims ratio against this, so it unfolds into the P&L.
Okay.
The other is actually if you were to do any reinsurance structures, which many players in the competition have done. That is something which is a possibility, which is for the board as to whether we would want to adopt any such structures which brings out the embedded value right into the P&L of the respective periods. This is a decision of the board. You will find that if you were to compare the overall business retention levels of Chola MS with that of competition.
Mm-hmm.
You would find that our overall level is fairly higher.
Right.
It's therefore a choice of whether you want to cede all premium back to reinsurers, recognize the commission and manage your COR, or whether you would want it to unfold over a period of time. That's a critical choice that the board would make.
Correct. From a business analyst point of view, we should like, you know, it should be fairly clear to us that the economics are superior than what they are getting reported because of this.
That is what Suri mentioned. There is an embedded value which is sitting here.
Okay. Fair point, sir. Sir, last question. You know, I think this must have been asked fairly few times in the past as well, in terms of, you know, the Chola Holdings has a very large holding value in CIFC, and you have MS Insurance. So as a holding company it does not really fully reflect or recognize the true value of the assets that it owns. So any plans or any thought process on kind of, you know, unlocking this value?
I think as we have been communicating is that, as investors, you know, you could see, the current value that Cholamandalam Financial Holdings represents, has to have two compartments. One is an insurance value and then there is an NBFC value with the whole core discount.
Yes.
Whichever way each one would attribute, you know, by better communicating the results of insurance business and its prospects is one way of bringing an appreciation to the investor community and thereby giving a full value to that. The other models are not at this point in time explored. We would continue to communicate the best possible appreciation of the business prospects that the insurance business has got. NBFC is well covered, so one can bring in some of the parts. We don't want to come into the valuation methodology. We leave it to the respective investors to take that into account.
Absolutely. Thank you so much for your time. I really appreciate you taking your time out and explaining the nitty-gritties of the insurance business. Really helps us a lot. Thank you.
Thank you.
Thank you, sir. Ladies and gentlemen, if you have a question, please press star and one on your telephone keypad. I repeat, if you have a question, please press star and one on your telephone keypad. We will wait for a moment while the question queue assembles. We are having a question from Sanket Godha, from Spark Capital. Please go ahead.
Thank you for the opportunity. Sir, if I look at the loss ratios, I clearly see in case of health the loss ratios have deteriorated compared to what we have reported in Q1. So sir just wanted to understand what led to that number. Because from 55% it has come to 71%. So that's the question number one. Second question which I have is with respect to motor. Probably you alluded to that point but just asking it again. Say in fourth quarter we had a motor OD loss ratio at 83%, which improved to 76% in first quarter FY 2023, and now it is closer to 71% in second quarter.
Yeah.
If I look at the trend, it is like a 5-6% delta improvement every quarter. It is fair to assume that what is leading to this improvement. By end of the year, current 73, what we expect that number to play out. That's on the loss ratio. I have a question on few other numbers, but it will be useful if you can explain this please.
Yeah. Thanks, Sanket Godha. On motor loss ratios, OD, yes, we have been seeing this improvement coming in. It's largely due to the portfolio mix choices that the company has made in terms of emphasis on certain product categories and de-emphasis on certain product categories. I would tend to think that from here on, given the competitiveness in the market and the related pricing effects, the maximum that it can go down from the 70.5% level is perhaps by another 2%-2.5%. We are not going to see that 62% or 57% that we have seen in the earlier periods. That's unlikely.
Okay.
That's the clarity on the motor OD part. On the health loss ratios, yes, Q2 we did have a higher health loss ratio, primarily coming in from our business with the public sector banks. In some of our products, we have effected a price revision in the quarter three, which should help us tone down our loss ratios as we go along.
Okay. Got it, sir. Is it also because of the fact that in health the mix has moved in favor of indemnity over benefit-based? Is that reason to some extent we can attribute it, sir? Or you can tell me the indemnity contribution compared to 1Q in the current quarter. That will be also good.
We are stepping up our indemnity proportion. I have even mentioned it in earlier calls that the loss ratio will tend to move up. Presently 39%, 61%. Still indemnity is at about 39%, and the benefit would be at about 61%. The company would aim to reach a 50/50 level. Yes, I think there were largely one-time losses that we had during this quarter arising from some of these and then the general monsoon-related fever and such situations.
Yeah.
This should improve in Q3. I can say that now that I have the benefit of the month of October before me, we are already seeing that trend there.
Got it, sir. Another question on if I look at just pure OpEx from a ratio point of view, maybe not in absolute rupees growth, it has improved from 39.4% in Q1 from the types of commission costs I understand. It has improved from 39.4% - 36.4%.
Yeah.
It's a 300 basis points improvement, which is an improving trend. Just wanted to understand whether this number on sequential basis will improve. If a loss ratio hold up at 72%, around 72% for the rest of the subsequent quarters-
Mm.
Can we see this 112 combined to go back to less than 110 kind of a number by fourth quarter? Or what you believe this number will be in FY23 and probably you want to achieve in FY24, sir?
Sanket, you should understand that the first quarter our growth was 43% on the backdrop of COVID environment. Q2 growth was 20%.
Yeah.
Naturally, when that growth moderates from 40% - 20%, it brings down the upfront absorption cost element. While H1 is 30%, yeah, the 40% - 20%. I suppose that we would be more or less near this growth rate even as we go along. The numbers for October are out in the market. We have grown in line with the industry at about 17% in the month of October.
Right.
That change in growth rate will definitely bring down that loss ratio. That is one. Second is that retail businesses grow more in H2, and our retention levels are higher. When I do my COR computation on the basis of net written premium, naturally, the COR and the cost absorption ability when you measure it against the NWP will be better as we go along. Which is really the scale benefit that is coming through.
Okay.
Which is where I said that the 2.5% over in COR is largely only from the expense front, with loss ratios being the same. We do see possibilities of this reducing further as we go along in Q3 and Q4.
Got it, sir. Sir, as we move into FY 2024, when we will get NEP benefit of the long-term profit what you have written in current year.
Yeah.
Probably with the better denominator, the loss ratios should improve better than 70% to what you are reporting today.
Mm.
How confident you are that in FY2024 against 110 kind of a number by exit quarter of the current year, whether we can see that number to play out to 107. We just wanted to understand the thought process of better NEP realization and probably loss ratio delta improvement will drive the combined to be better in 2024 going ahead, sir.
I agree with you. Directionally, I think we should be working towards that number.
Okay. Got it, sir. The last housekeeping question. If you can tell us the advance premium number for September, sir, that would be great.
You know, our long-term premium that we are carrying forward, which is largely relating to the motor piece as of September is about INR 1,330 crores.
INR 330. INR 1,330 crores. Okay.
March it was, INR 1,198. INR 1,198 in March, so now it is, INR 1,030.
Got it, sir. Maybe final one if I can squeeze in. Sir, the investment leverage is 6.6x today.
Yeah.
Motor Vehicles Act benefit coming in.
Mm.
I don't know. Assuming that improvement in loss ratio in motor TP doesn't spill into higher competition in OD, means I'm making that base assumption. Hope industry remains same and it doesn't happen in that way. What do you think the improvement in loss ratio and leverage to come up and therefore the ROE, how it will get reflected? That's the final one, sir.
Yeah. As I said earlier, in our portfolio, the TP loss ratio is a large determinant of the overall loss ratio, given the weight of the TP earnings.
Right.
I talked about how we are, in fact, built in an inflation-linked additional provisioning of about INR 47 crores, which number was very similar even in Q1.
Right.
I had also mentioned that that translates to about 4% of the COR.
Oh.
We would really expect some benefit to flow from the Motor Vehicles Act. That implementation is what is going to give us a benefit over the long term and plus any possible future price increases. We know that price increases have been fairly low over the last three years, especially in the commercial vehicle space, where Chola MS has been having a 40%-45% market share. Of our composition, not market share. Of our composition, 45%.
Yes, sir.
As that improves, that loss ratio can also come down because it will blunt at least our inflation assumptions that we make within the company.
Got it. Perfect. Any view on leverage, how it will play out with M&A?
See, we are in a free market where every day we see changes happening, in terms of price discounts and then, and all of that. Therefore, yes, that we believe that the kind of business mix that we are driving, we should see a toning down of the LRs as we go along. That's the intent.
Got it, sir. Perfect. Yeah, that is from my side. Thank you. Thank you for the response.
Thank you, sir. We are having a follow-up question from Devansh Nigotia from SIMPL. Please go ahead.
Yes, sir. Thanks for giving the follow-up opportunity. In case of motor TP, when we look at the loss ratios, not only for us but even for other players in the industry, they are significantly below pre-COVID levels. There was a frequency level settlement in courts were very slow. Where do you see that in comparison to pre-COVID level, where they are right now? What do we expect it to be going forward?
Yeah, in fact, our compromise settlements actually peaked during the COVID period. We were able to take advantage of the non-functioning of tribunals and courts during that period, because compromise settlements mean the victims and beneficiaries get the money faster. We were able to take advantage. Therefore, to an extent, blunt the kind of inflation that you would normally see in a court award. That effort continues, and I'm sure we should be able to step up. Company continues to have a fairly large proportion of compromise settlements, which, on average, varies between 78%-80% of all TP claims get settled on a compromise settlement basis over fairly large periods of time.
Okay. Where I'm coming from is that motor TP claims ratio used to be upwards of 100%, three years back, before March 2019. There is a business mix change that we have tilted towards PV and two-wheeler. Considering the current pricing-
Yes. In a way, we have got into two-wheelers in a big way from 2018, 2019 and with the long-term two-wheelers, long-term cars also coming into play, naturally the insured base gets bigger. The level of uninsured vehicles in two-wheelers definitely has slid down from the earlier levels to the current situation. That I don't think we have still taken the full benefit of that development because we would like to see the way our own portfolio evolve. We are a fairly newcomer in the two-wheeler space, so we would wait for our actuaries would wait for actually the actual development and look at our experience.
Okay. If over next 2-3 years, what is the kind of claim ratios in motor TP we believe are normalized, considering normalized level of court settlements in terms of the frequency?
It is very difficult to predict a TP loss ratio because there are so many moving parts there. One is the price itself.
Mm-hmm.
We have no idea as to how the government will view the price. That is one. Second, there are court decisions. This particular business is determined, the loss ratios are determined by the kind of decisions that courts take. These are two large variables. The only given element is that.
Mm-hmm.
Yes, as the insured population increases, we can clearly expect a frequency reduction. That is the only given positive element. Of course, the thrust that companies provide to compromise settlement to reduce the severity levels.
Okay. Sir, can you come again on the frequency of court settlements, where they are right now and, I'm just little doubt on that comment.
No, what I was saying was that the frequency of claims, even as per IRDA publication and what competition you see, is that has been reducing over a period of time.
Okay. What's the logic-
That is the first element. Compromise settlements, it depends on the strategy of the company, and Chola MS has always been committed and been following an aggressive compromise settlement stance in the marketplace. More time actually.
Sir, can you please join the queue for further questions?
Yeah, I'll join.
Thank you, sir. We are having a question from Deepak Sonawane from Haitong Securities. Please go ahead.
Yeah, thank you, sir, for the opportunity. I have a single question on a long-term premium. In the previous call in Q1 that we guided for, let's say in FY 2023, we'll be achieving around 8.5% of our GWP will be long-term premium. By H1 itself, we achieved 12%. What will be the next, I mean, for H2, what will be the guidance for the long-term premium? I'm saying non-motor TP long-term premium.
See, we look at it more from an opportunity and whether the business is economically profitable without getting blinded by an accounting year consideration. That is what we are looking at. If there is that opportunity to get a profitable business, which will be profitable over its life of two years, three years, eight years, we would continue to go for it. I think that has been the broader philosophy. We will find that even in Q2, it is at about 11-11.5% or so. That is where we would want to be. We don't want to be driven just by the accounting period considerations.
Okay, sir. Thank you, sir.
Thank you, sir. Next question comes from Mr. Pritesh from DAM Capital. Please go ahead, sir.
Hi, sir. Sir, our share in the CV composition has been coming down. Last quarter also, I think we mentioned or two, three quarters, we've been mentioning that it is bottomed and will come back to 50% and higher. Despite growth happening in the system, we've not seen the improvement happening. Any case there why we will be losing a little bit of share there in terms of insurance?
CV is actually there is a wider spectrum. You have the small tonnages, the medium intermediate category and the heavy tonnages. Chola MS was particularly strong in the heavy tonnage categories by virtue of its market presence and channel relationships. Now, this particular segment is seeing heavy premium discounting, and therefore, the LRs are quite high there. This will have to correspond with the kind of LR reduction that we are seeing and what we have demonstrated over the last six months.
Correct. When do you feel or see that this heavy discounting which is happening on the premium side could end, or is the case that it'll continue for next few quarters?
Deepak, your guess is as good as mine.
Basically, any plans to diversify from the heavy category by more tie-ups into the medium category type of vehicles so that the ratio improves?
No, it's not that we have not been in the other categories. It's only that the weight has, like, shifted and reduced from the heavy category. We have been a full-fledged player across segments, all segments.
In fact, the tractor and the construction equipment, there's a considerable growth. Commercial vehicle also, there's different tonnages, and within that favorable tonnages, we are growing.
Got it. Is it fair to assume that because the two-wheeler and passenger vehicle share is up, our loss ratios also have, you know, increased pre-COVID and, you know, from last one or two quarters? Is that a fair sense or that is not related itself?
Certainly, especially in cars, we can say that generally the loss ratios are higher.
That's the reason we see that the share being up and the loss ratios being up as well.
Yeah.
Got it. Okay. That is all, sir. Thank you.
Thank you, sir. Now, I hand off the floor to the management for closing comments.
Yeah, I think, thanks a lot for your participation. I think, the key message is that I think growth is there. We have been growing, better than the market, and we'll continue this path. Lots of prior year issues have been addressed. The investment issues have also been addressed. I think we have communicated that our growth path will continue and we see a better mix coming up, the end of the year.
Solvency.
The solvency is substantially improved and will continue this growth path. We'll start seeing better results to come in the years to come. Thank you.
Thank you, sir. Ladies and gentlemen, this concludes your conference for today. Thank you for your participation and for using the conference call service. You may disconnect your lines now. Thank you and have a pleasant day.