Ladies and gentlemen, good day, and welcome to Go Digit General Insurance Limited results call hosted by ICICI Securities. As a reminder, all participant lines will be in listen-only mode, and 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 telephone. Please note that this conference is being recorded. I now hand the conference over to ICICI Securities. Thank you.
Good evening, over to you. For the Q2 FY 2025 results conference call of Go Digit General Insurance Limited. We will start the call with opening remarks from the f ollowing which there will be an opportunity to ask questions. I now hand over the call to Chairman, Mr. Kamesh Goyal. Thank you, and over to you, sir.
We'll try and cover each of the areas in detail so that everyone who has joined the call gets a perspective of what has happened in this quarter. Then, as in the past, we'll be happy to answer any questions that you may have. I'm on slide four, serial number. This is, as you know, the standard slide we have. We have given the H1 numbers here. We crossed INR 5,000 crore premium, growth of about 18% in H1. We'll cover quarter-wise data. Market share in motor is 6.2%, overall, 3.3%. Number of claims, number of partners, customers, all of them are increasing. AUM has crossed now INR 18,500 crores.
Annual policy issuance continues to be minuscule, and the customer satisfaction score continues to be high for the motor claims as well as for other claims. If we go to the next slide, I think here, if we look at quarter-by-quarter performance, we have grown by about 14% in quarter two, and I'll talk about the industry numbers a bit later. The net new premiums have also grown. Net retention ratio, everything is in place. I think there are two points which one need to look at here. One is the loss ratio has gone up by 5.5%, which has then increased the combined ratio by about 3.4%.
So I think if you look at our loss ratio, increase of 5.5%, I think, 2% of these losses are coming due to the floods in quarter two. Last year, you would recall that our industry and Digit's also had seen a lot of Nat Cat events, but all those claims had actually come in quarter three. Quarter two last year actually had no Nat Cat claims, so this 2% difference is actually coming in from that. The second is, last year our motor TP loss ratio was about 56%. This year, our motor TP loss ratio is 66%. Now, what has happened here? If you look at it, last year, whatever claims reserve release we had in the entire year, 57% of that reserve release had actually happened in the second quarter.
Basically, last year's second quarter was an outlier in terms of the claims, TP claims, reserve release. If we normalize our TP claims reserve release and remove the Nat Cat, which there was no, then our loss ratio actually would have been the same, and this is also visible later in the deck, if you see our line-wise business, health, where you would recall we had a last two quarters, we have actually seen a reduction in our loss ratio, prior reserves reduced. Overall, loss ratios have actually continuously reduced across all lines of business, but outlier in terms of reserve release in quarter two last year and a 2% loss ratio coming in due to Nat Cat or due to floods has actually affected the loss ratio. Overall, the expense ratio has actually gone down.
So this is actually the point I wanted to bring across here. If you also look at our net at H1, our ROE is about 6%, not normalized. And despite increase in combined ratio in quarter two, our actually profit has gone up three times. Now, obviously, our investment income has not increased by three times during the same quarter. So one another point I wanted to actually say is that the way this combined ratio is calculated under IGAAP, this is not a true reflection of the profitability. So this is the point I wanted to really make on this slide. Our solvency ratio has increased to 2.18%, which I think is good. And as you know, the minimum required is 1.5%.
Now, when we go to the next slide, and if you look at the growth in detail, and here again, I'll focus more on quarter two. In motor only, industry has grown by 6%. We have grown by 14%. In TP, industry has grown by 6%, we have grown by 2%. If you remember, in quarter one, in TP, there was actually no increase. In fact, we had a negative growth. So TP, we are seeing improvement. In Health, Fire and PA, we have grown by 7%, while industry has grown by 3%. And here again, like last quarter, in the employer-employee group health space, we have actually de-grown by minus 3%. And the fire, we have de-grown by minus 7%, industry is minus 11%.
In our case, there was one large account we had added last year, in the tender account, where due to pricing, we lost the business. That is why this discount is there. If you remove that from the base, that even in fire, we have actually grown, compared to the industry. So overall, in a very tough quarter of growth for industry at 2%, we have actually grown by 14%. So the growth rate was actually in a very difficult quarter, has been good. Now, I also wanted to say that, in employer-employee have shown, and spoken about de-growth. And two points I would, maybe like to make here. In employer-employee, de-growth is happening, and it comes at a lower expense ratio.
Our segment for attachment business or credit link business has actually grown by more than 100% during this period. So what it does is that in Indian accounting, the benefit of a lower loss ratio in health because you are de-growing on group health will happen over a period of time. The expenses on the attachment products hit you immediately. And here again, the earning of this premium will actually happen over the next two years. So when you are in this situation where a low expense business is actually de-growing and a higher expense business is growing a lot, it impacts your expense ratio immediately, but the benefit of lower claims ratio will actually flow over a period of time.
And that is also, I think, one has to keep in mind, in terms of how the expenses are moving. The second point I would want to add is about the TP business, because as you know, it is a very important line of business for us. Last year, in the first half, we had actually a market share in TP business of 7.1%. Since we realized that the premiums are not increasing, we have started cutting some business. So our market share in Q3 last year was 6.3%. So H1 was 7.1%, Q3 it went to 6.3%. In Q4, it actually went down to 5.7%. So overall, we had, for the full year, a market share of 6.5%. H1 was 7.1%, H2 was 6.4% or 6.5%.
Now, when we started the year, the Q4 market share in TP was 5.7%. We reached 6.2% market share. So market share increased, but we still had a de-growth in business. In Q2, our TP market share has gone to 6.9%, and we have seen a bit of a growth. Now, in H1 and H2, our growth is a 6% market share. I am not giving any guidance here, but if you look at growth in Q1, our market share was 6.2%, Q2, 6.9%, H1 is 6.6%. Last year, H2, market share was 6%. So, and why this was possible is when we reduced the business where these credits that we are not getting the requisite ROE, then we started finding in segments where we can grow the business.
As I explained, we started seeing really the results of that. So that is really the perspective I wanted to bring in, that though we grew from 2% to 14%, but in terms of directionally, especially employer-employee, which constitutes a big proportion of our business and TP, especially in TP, what the base effect will be in H2. I'll cover about EOM in a bit more detail later, as we published that we have received a show cause notice. We'll cover that in a bit more detail later, but this is what I wanted to bring in.
The second aspect, in this slide, slide six, is if you look at, there is a continuous increase, in the, mix towards, TP business, which is now, I would say, stable at about 31%. TP has gone down in H1, but, in, Q2, we are actually seeing, also a bit of a drop, compared to last year. But compared to Q1, TP proportion has increased, and OD business also is stable more at 23%. So let's move to the next slide, which is slide seven. I think this is, the combined ratio, and as I've, explained already on the loss ratio, now let me explain a bit on the, expense ratio. Expense ratio has reduced by 2.2%.
This is despite the fact that our employer-employee business has actually de-grown, which comes with a lower expense. Our non-employer-employee business, which is attachment business, which comes with a higher expense ratio, has substantially increased. Despite that, we have reduced the EOM. Now, when we look at the market and you can look at the results of, say, the large, maybe amongst the largest private companies, in both quarters, in Q1 and Q2, their expense of management have actually increased over last year. In case of ICICI, in both the quarters, we have actually seen roughly about 2.8% reduction in expense of management compared to GWP. So even on expenses, whatever we have discussed in the past about the glide path, et cetera, I think we are on a good track.
Now, last year, if I give you exactly what happened on the EOM front. So, we filed for forbearance application with IRDAI in March - in May 2023. In June, IRDAI sought additional information. June, we submitted the response. In July, IRDAI sought a detailed business plan. August 2023, we shared a detailed business plan. December 2023, we submitted updates on the EOM plans for 2024, based on first half performance. Now, October 28, so from December 2023 to October 18, there is no further correspondence with IRDAI. Now, IRDAI has issued a show cause notice to a lot of companies. Since we are listed, we obviously have to publish it.
Now, when we look at the glide path, which we had shared with IRDAI last year, which is 2023, 2024, we have actually done slightly better than what we had shown in the glide path. IRDAI obviously has no visibility to the expenses of management for second half. So I would again say that IRDAI is, and this is our intent, this is our interpretation, assessment, that IRDAI obviously is serious about reviewing. They've issued show cause notices, and they want to understand where we are in H2 and how do we improve in the half. As I explained, and I would request all the analysts, that even for the larger companies, please look at their EOM, you will actually see an increasing trend. I would expect, if this trend continues, even the biggest of these companies to exceed this 30% EOM limit.
And at this stage, we feel that we would be able to follow through at this stage on our glide path. As of now, based on where we are today, 18 months into the glide path, we feel that we'll be able to achieve on the expenses of management. So that is what I really wanted to cover in this slide on expenses, because claims I have covered earlier. So I think this slide is also very important for two reasons. One is that you can actually see that in this quarter also, we have added in the first half about INR 1,659 crores in terms of AUM, and this is coming from the business surplus.
If you look at our capital gains in this quarter or in the first half, this quarter, our capital gains is INR 10 crores. This is essentially IPO proceeds. Some of the IPOs we had applied for reverse allotment, and we sold, so we booked these gains. In the first half, we still have a capital loss. If you compare our profit in this quarter coming into capital gains, this is less than 3%. In the first half capital, we actually have a capital gain capital loss. You can compare this result with any general insurance company and see what is the capital gains contributing as a percentage of investment income, and you will see an increasing trend. So here I just wanted to again emphasize that our business model is about higher retention, higher leverage.
As of now, our investment yield is coming in purely from fixed income, in fact, actually having a capital loss. So the quality of our earnings and dependence of our earnings on the stock market is the least it is in the entire general insurance industry, and maybe that is a point, which I would say that, I personally has never really explained it in the way we are doing. Since capital markets now in the last two, three weeks have been a bit nervous, you can imagine, and I'm not looking for it. You can imagine if markets fall by 10%, what it will do to the quality of earnings for everyone else. On the fixed income side, our duration is five years, and you'll see in the next slide, our quality. I'll speak about the fixed income in detail.
If interest rates go down, we are actually sitting in a very, very good situation. And this is something really important. So I've covered claims, I've covered expenses, I'm now covering the third piece of investment. I wanted to emphasize the quality of investment earnings. But having capital gains in a very bullish stock market, and fortunately, markets have been very bullish, especially in the last two and a half, three years. We know the cycles come and across the world in two thousand, in two thousand and eight, euro crisis of two thousand and twelve, thirteen, you can actually look across that the true PNC of non-life companies, dependence on capital gains is as high as it is for some insurance non-life companies in India. Now, I think this slide is important.
Here we have made one change based on the feedback we have received from some of you. But last time we used to show AT1 bonds, which by nature of being quasi-equity, they were actually rated in AA segment. So some people had asked us that why you are investing in AA rated bonds. So I just wanted to say here again, that if you look at our investment in terms of percentage or proportion, equity is 2.4%, sovereign is 40%, triple A and equivalent is 40%. AT1 bonds is constituting about 10.8%. Now, in AT1 bonds, if we look at, the total investment is INR 1,945 crores.
Out of INR 1,945 crores, 67% of total is with SBI AT1 bonds, 27% of AT1 bonds is coming in from Canara Bank, and 6% is actually coming in from HDFC. Now, why this opportunity came in AT1 bonds and why we look at it? As you know, in mutual funds last year, some changes were made in terms of calculation of duration for AT1 bonds, and AT1 bonds, by definition, then became unattractive from mutual funds. The yields for AT1 bonds had actually gone up when they were issued at about 8.2%, 8.3%. When we looked at this, we felt it is a good opportunity, and we actually invested in AT1 bonds.
Our investment portfolio also is not geared towards double A, it's actually towards triple A, sovereign bonds and AT1 bonds, and other bonds are really, really less. And even there, you can double A and equivalent is still 5.6%, double A minus is 0.6%. So this is, I really wanted to speak on the investment. Just to recap, investment, we are talking about quality of investment income, least dependent on capital gains. In fact, we have a capital loss in H1. Compare this with any other large multi-line company in India. Look around and see across the world, through insurance companies, different non-life companies, so high on capital gains as we are seeing in some of these companies.
Our bond portfolio is absolutely good, and within the bond portfolio, what was actually being shown in double A rated is actually AT1 bonds, and I will be explaining, SBI is 67%, Canara at 27%, and, HDFC Bank at 6%. Now, moving on to the loss ratios. I think, results will come out, for the entire industry as we go along. Our sense is that, on the loss ratio, we should continue to be amongst the best in class, and in the top quartile in almost all lines of business. Last time I had said that in group health, we are seeing very aggressive competition. Every quarter, you will see companies which gain market share in group health. So grow group health business and employer employee aggressively, the loss ratios are actually increasing.
If you look at Digit's, in Q2, we were at 86%. In Q1, we have actually moved group by about, I think, 83% or so, 84%. In Q2, we have actually gone down to 81%. And you link it with what I said earlier, our high growth in attachment products is still not showing fully because it will get earned over a period of next one to two years. So higher loss ratios are 54%. We got some flood claims, especially in Gujarat, during the flood in Baroda. In general, we had one excess claim of flood. So in general, the opinion is actually quite less, and overall, our loss ratios continues to be good.
I've already explained in TP from 56 to 67, and while in last year's Q2, 37% of the yearly reserves were actually in Q2. This year, we don't foresee, and again, it's not a guidance. We don't foresee that releases which we had in the first two quarters, that are releases in Q3 or Q4, if the trend continues of claims, would actually be lesser. There's no reason for us to believe that. Let's go further. I think you know this, so I'll only say that our focus on APIs continue, two-third policies continue, despite growing number of policies, because with increasing APIs, we are getting more and more APIs, and it is issuing more and more policies.
So even in the first half, if you look at here, we have added 270 APIs, new APIs in six months, which I think is a decent number. So that really is this. Now, this is, let's see the IFRS. As usual, as you know, last year we had published audited IFRS results. I would also mention that every company, especially large ones, should publish IFRS results, because this gives you much better idea on profitability compared to the IFRS. Because as I explained earlier in IFRS, the impact of, say, employed, employee, non-employed, employee, companies which do upfront high reinsurance and with the reinsurance commission now show a lower loss, expense ratio. All these gets actually normalized in IFRS.
You can actually see, in IFRS, the first half, what are audited, or unaudited, results, what the are we in the overall, result is. Last year, 2023, 2024, we had not prepared IFRS results in the first half. We had started preparing this Q2, Q3. So you'll actually be able to see the Q3 results, when you see next quarter. We'll be able to see the current quarter also, movement in IFRS. When we enter here, our statutory auditors for IFRS will also be auditing the IFRS balance sheet. So we have 100% readiness to move to IFRS.
I may say that there are some companies we believe don't want to move to IFRS and by telling the regulators that they are not ready and they will not be ready, they will actually push the IFRS to this. Personally, for me, this is a signal that some of these companies who are seeing this, their results in IFRS might not be as good as what they are telling people in form. So this is what I ideally wanted to say on the IFRS. All these triangles are old ones, so would not really cover that. But we obviously publish all these triangles also at the end of the financial year, after the audit. So I think I've taken 50%, almost 60% of the time.
I will hand it over back to the moderator, and, we'll be happy to answer any questions that you may have. Thank you.
Thank you very much. We will now begin the question and answer session. Anyone who wishes to ask a question may press star then one on their touchtone phone. If you wish to remove yourself from the question queue, you may press star and two. Participants may press - Ladies and gentlemen, we will wait for a moment while the question queue assembles. The first question is from the line of Mahek from Emkay Global. Please go ahead.
Yeah. Hi, sir. Thank you for taking my questions. So my first question would be on the net retention ratio. So just wanted to understand why is there a dip in the net retention ratio? And the second thing was, can you just repeat what comment you gave on the reserve release?
Comment on the reserve release. Actually, this year, and I would not be able to say it here, so you'll have to excuse me for that. If you've seen our miscellaneous portfolio and in some health, we have started working on some new product lines. And in some new product lines, we have two of our major partners. We have actually opened up a reinsurance line so that we can develop these products in line with our partner, our main product for the longer period. But here again, I would say, if you look at our overall retention, it continues to be significantly higher than everyone else in the multi-line sector.
On the reserve release, what I mentioned was, if you look at last year, in terms of the TP, reserve release, we basically said if you are releasing hundred rupees in a year, it is not 25- 25- 25% each quarter last year. Last year in quarter two, we released 37% of our reserves, which means more than a 25 or 23 was normalized. It is almost one and a half times our reserves. So the profile, because of that, Q2 actually became an outlier. And because of this, the TPA loss ratio this year seems higher. If we normalize the reserve release, then actually on the TPA claims, there is. It's not that our portfolio inherently has a higher loss ratio. It is just because of this outlier, very high reserve release in quarter two of last year.
This is what I meant by reserve release.
Sir, in H2, are you expecting any reserve release in H2 for the motor TP results?
As I said, we don't want to give guidance. Every quarter, if you see, we have been having reserve release. What I mentioned was that in the last two quarters, whatever trend we have seen, we have no reason to believe that this trend will not continue for the rest of quarters in reserve release. At times, in principle, we don't give guidance. Sitting here as of now, reserve release will continue until, unless suddenly, you know, more claims starts coming in or something which we don't expect. So that trend should continue in the next two quarters.
Got it. Got it, sir. Thank you so much for the explanation.
Thank you.
Thank you. The next question is from the line of Supratim Datta, from Ambit Capital. Please go ahead.
Can you have to maybe closer to the microphone?
Can you hear me better now?
Yes, better now.
Yeah. So, sir, what I was asking is on the health insurance side, so if you want to understand within the group health business, what proportion of your group health business is now attachment products versus employer-employee products? Because you're down this quarter versus what it was last year, similar quarter, that will help you understand, you know, how things have moved here. And, you know, other question over here is, you know, which are the banks or, you know, partners that you are selling this product to? And, you know, is it an attachment with a loan or attachment with, you know, credit cards? Because frankly, what we are seeing is on the lending side, there is a slowdown, you know, things are slowing down. So just want to understand, you know, how things can play out.
Or if you have added newer partners here, if you could give us some clarity on how this, how we should think about growth in this going forward? That would be helpful. Now, moving to motor side of the business. Now, you know, if you look at the commentary, you know, from peers who have reported or, you know, some of the auto OEMs, it suggests that, you know, second half, the volumes are going to be muted. Now, in this scenario, you know, how do you look at, you know, growth in the second half? Or, you know, how you are thinking of what steps you are taking to drive growth in the second half, if you could give some color on that. And then what happens to the glide path that you know, of EOM, if, you know, the demand remains weak.
Then despite that, you know, could we still get to our target, you know, within the time frame set? Or, you know, we would have to revisit that. You know, if you could give some color on these three points, that would be very helpful.
Thanks, Supratim. On the attachment products, I think this corporate agency information is public. I obviously don't want to share names of the companies, et cetera, simply because, you know, this is, this can only harm us rather than help. Some of the biggest banks we have started working with, we sell it with loans, we also sell it with credit cards. Now, again, in terms of, without giving an exact proportion, our employer-employee business grew by 3.3%, in this quarter, while the growth in attachment business was 110%. You can actually see that this business is growing nicely. Now, if the group health pricing, employer-employee pricing improves, then this, this can again change.
But it will come at a price for us, employer-employee, where we should not be making big losses. We should try, we will try and achieve a minimum. If this growth which we are seeing in non-employer employees continues, it will continue for two reasons. This year, the first half has been a bit difficult on personal loan segment and microfinance, et cetera. We do a lot of business with them. Now, things are getting normalized, and our sense is that H2 will be very good or better, significantly better than what some of these partners have in H1. We are also launching some new partnerships. So the proportion can change because we might end up getting more employer-employee businesses pricing strikes.
So instead of looking at proportion, I would say that the growth rate in non-employer-employee attachment products will continue to be strong. Now, when we look at motor business, I think I explained in detail on the TP side, and I as to what the base is for last year and how we have started seeing increase in our market share on TP. And in H2, our base is last year base is only 6% market share. We are actually finishing H1 this year with a market share of 6.6. So TP, all things being equal, where the market is, we definitely should grow in the second half. Again, as I'm saying, all things being equal as to where we are.
On the OD side, the new vehicle pace was muted, and that is why if you look at, we grew in motor OD by 14% in Q2 and industry grew by 6%. So our growth rate in OD is in quarter as well as in the first half, has been two times of industry. Now, we obviously also have a very good base in, new vehicles, in, in the old vehicle renewals coming in from last year. So new vehicles continue to be, sluggish for pace. Again, I think there's no guidance, but you can see that we have been growing, faster than the industry on the OD side. So TP and OD together, you can actually then see what could happen on the motor.
On EOM, as I explained, we had a three-year glide path with deeper deadlines from December after submitting the completed business plan and updating the H1 performance in 2023, 2024. We haven't heard from regulator anything. They obviously have no visibility to what has happened with us on the expenses on 2024, 2025. Last year, we did slightly better than the glide path we had shown. Based on where we are today, we feel that we will be able to achieve the glide path over three years. And as I also said, please to look at expense ratio, EOM of some of the larger companies, their EOMs are going up, our EOMs are actually reducing.
I had also said in the past that EOM is more a function of the line of business mix rather than actual EOM, because for each product line, the expense ratios are more or less similar to EOM. Now, as we know that this year, especially, the way accounts are prepared for commissions and management expenses have become a lot more transparent. If you look at quarter one, at the 7.5%, our admin expense ratios are the industry's best. So you can actually very well see that when it comes to our own expenses, despite being new and despite having lesser scale, these are the best in class in terms of our admin expense ratio. The EOM is actually coming in from our product mix. It's not due to our inefficiency.
If it was our inefficiency, we are already the best in class despite having a lower scale. So this is maybe a point, an additional point I can add about EOM in terms of our admin expenses.
... That's been helpful. Now, I have just one follow-up. You know, so again, you are, you know, one of the best, and, you know, on the official, it can be seen that your scale, you are, you are better than some of the larger players. But then the question is that, you know, can this improve further, or has it come to a level where, you know, it will remain at a similar level, you know, state? So, you know, if, if you put just some color on that.
Everything can improve. For example, I used to sleep seven hours four years back. Nowadays, I sleep nine hours a day. So I never used to go to gym before. I at least pass by it now, even if I don't go inside. So everything can improve. I'm saying this intentionally, because I don't want to give any sort of a guidance, because, if you keep looking at admin expenses, they should get coming down each year.
Yeah.
On a serious note, if I may add, I have seen this across, having the benefit or the disadvantage of working in some companies, that because of expenses, companies stop investing in tech. Then over a period of two, three, four years, then it catches up with you, and then you have to over-invest in technology. We at Digit have been over-investing in technology. We have seen a massive benefit. API is just one of those examples. Now, transparency on admin expenses is a clear example of what it can do. So I think all of us are here very, very conscious of the fact that in trying to save 0.4%-0.5% on admin expenses, we would never under-invest in technology. So that is what I wanted to say from a philosophy perspective.
As I said earlier, we don't give this sort of a guidance, not because we don't want to, it's just that we don't know what will happen. TP market share is a great example, that last year we significantly reduced our market share because we didn't see the profit. From 7.2% in quarter two of last year, in fourth quarter, we had gone down to 6.7%, and now it is way back. Market conditions change, things change, and we want to keep that, flexibility open with us. We never say we will never do this. We never say we'll always do this. If we see an opportunity, we act, and if we have to do lesser business or cut something, we'll cut it.
In such a difficult market, for industry to grow by 2%, you can actually see we grew by 14%. If you had asked me this, in, say, July, in quarter two, probably would industry only grow by 2% and we'll grow 14%, I would have said chances are, first, I don't count that industry will only grow by 2%, and secondly, to me, it looked very high. But as things developed, I think it developed in a decent way, I would say.
Okay, sir. That's helpful. Thank you.
Thank you.
Thank you. The next question is from the line of Uday Pai from Investec India. Please go ahead.
Hello. Thank you for the opportunity. I just had two questions. Firstly, so over the last four, five quarters, your share, so the absolute amount of reinsurance actually has increased. So I just wanted some color on what kind of mix is that within that book and some color on profitability of that book, A to B share. And secondly, since we are seeing some kind of change in various strategies, more pricing, et cetera, how do you envisage the strategic book mix and profitability of the book? If you can give some color on that. Thank you.
So let me answer the first question first. So basically, if you see when we felt that the profitability is depressed in case of TP business, we kept on reducing market share. At the same time, we started working more and more granular selection, which we could steer the TP portfolio according to what we thought the opportunity is. We obviously never say no to anybody, obviously, we never consciously do any loss-making business, but because there was no historical high, we had to do this. So based on what we have done, we now you can see we felt comfortable now to increase market share from Q4 to Q1, and from Q1 to Q2, it has increased.
And as I said, simply because last year's base in H1 is only 6% and this year's H2, and this year's H1 is we have started at 6.6. All things being equal, we should actually see some growth. On the reinsurance side, I think I would say there are two things. One is that the cedants we work with over a period of time, now five, six years, we've developed a decent relationship. And we have also started exploring both on the direct side and at times on the side, what's called reinsurance. And this is there is one particular line of business which we started this year, which we didn't have earlier. Just due to confidentiality reasons, I don't really want to get into you know, that level of details.
So overall, our underwriting philosophy, whether we write inward or directly, that philosophy is the same. And I may add here that flat rating basically means you are rating for each individual risk. So flat rating in your reinsurance or your direct business from an underwriting pricing perspective, there's actually no difference. You see every risk, and then you accept it or you don't accept it. While another type of reinsurance, which is much bigger, is treaties where you basically give us a capacity within certain guidelines, and the insurance company can within that framework keep giving you the business. So facultative is every single business. So our underwriting philosophy, whether it is direct or inward facultative, which actually stays the same.
Sure, sir. Thank you.
Thank you.
Thank you. Next question is from the line of Sanketh Godha from Avendus Spark. Please go ahead.
Yeah, thank you for the opportunity. When we need to improve our combined to continue to deliver, making-
Sorry, voice is not too audible. If you can be closer to the mic.
Is it better?
Yes, now better.
Yeah. I was just asking, to improve our ROE to mid-teen in the coming quarter, we need to improve our combined ratio, maybe by three hundred basis points, maybe the last year also by 300 basis points. So this quarter from this time, given that we are already best in class in loss ratio, we are already best in class in the expense ratio. So the only lever left over for is the commission cost. So naturally, then is it fair to say that the next leg of growth will be predominantly come from the segments where the commission cost is meaningfully very low, and that will be the next leg of growth, and that will be the trajectory of improving combined overall.
And then if this is the case, then what is the target, what you have to achieve, that's my question. The second question was that, maybe a little to the previous question, last question. If you can give the mix, whether the fire segment of the reinsurance and overall GWP has declined, whether it has come more from non-motor, non-fire business in the inward business to reinsurance, whether it is group or government health or just better understanding of the business will be helpful. Whether it's particularly, it will be sustainable going ahead. Lastly, the benefit that what you have done, just want to understand if nature, whether it's long-term or short-term in nature.
If it is long-term in nature, given the regulatory recognition is going to change with respect to long-term benefit-based plan, whether it will have a big impact on EOM or not. These are the three questions I have.
Thank you, Sanket. So let me start with the last question. When we look at attachment business, as a percentage of GWP, this would actually be the lowest for us. So I think, if there is a negative impact of this, our sense is that companies which drive substantial business from their captive banks, which captive basically means to the promoter banks, they will actually suffer the most. So this is something which from a competitive perspective, should actually improve our position. That is, I think, the first point I wanted to make. The second, I think, is, if you look at the reinsurance question you asked, as I mentioned earlier, that we have started a new line of business.
Even on property, we have not, without checking into too much detail, because I don't honestly know this also, I don't have the numbers in front of me. Our reinsurance business on inward strategic business on property has also grown, and that was start in also in the second quarter. So we feel that with the sort of market pressure, pricing market is seeing, in April, the insurance will have to act on the pricing, otherwise, it would, they will end up with a lot of losses. And here again, I think, we might not have grown in inward reinsurance business as much as we wanted, but we are still growing over last year, and we have a new line of business. So that is the second point.
On the third, actually, Sanket and I think you would know this better than I do, that the combined ratio definition as per IRDAI actually has no direct reflection on the profitability. The profitability is more driven around net earned premium, net expense ratio, and net claims ratio. Now, on the net earned premium basis, even in quarter two, our combined ratio, despite what I said on CPE and what I said on net claims, despite that, our net earned premium combined ratio has actually improved over last year. So this combined ratio, unfortunately, the way it is presented, has no direct correlation to the profitability, and I think that is something which is published change.
And second also, as I said, is in a lot of cases, companies which have lower retention, and this is visible in their accounts, they book a lot of upfront commission, reinsurance commission ratios, long, more than two years, three years, complex products, which gives them a net advantage on the net basis, which is not visible. It will not happen in case of IFRS. So, did I answer your question, Sanket?
Yes, mostly answered. My only point was whether you are at zero combined with the. Just wondering, given this kind of expense and loss we have, whether the cost is the only place where we see this, even if I look at from the underwriting point of view, or any point of view, to increase the overall profitability from underwriting or something?
I understand. Understood. So Sanjay, I'll say two things here. One is, if you see in H1, without generalizing our ROE has been 6%. On Indian accounting, on the entire year, if you have a ROE which is slightly more than 10%, and I'm just giving an arithmetic equation, no guidance. We actually will hit a profit of about INR 400 crores.
Correct.
The idea is, and this is what actually shows, even at a combined of 108.7, arithmetically, if we hit an ROE of slightly more than 10, say 10.4, and I'm doing a rough calculation here, we'll actually hit a profitability of INR 400 crores. A combined ratio, the way the definition is in this, it is not the right way of profitability. Otherwise, our combined ratio has increased by 3.5%, and our profit has gone up three times, while our investment income has not gone up three times. This is a misleading number. Personally, if you ask me, I don't look at this number at all, because neither in I...
For us, this combined ratio, I've not seen in any country, and I've had the benefit of working in about twenty-six countries, this definition of combined ratio, because it does not reflect the true accounting or true profitability of the company.
Got you. And lastly, your leverage is at 4.7x, which actually came off because of the capital raise. So what is the leverage you call it to work?
So here again, I think, Sanjay, quickly, because we are not generating profit every quarter, I sense it by end of, say, thirty-first March 2026, so next financial year, I think the leverage will increase to something like five times. Now, the way we look at it is not from a leverage perspective, we will look at it from a solvency perspective. So idea is that we would want to keep a solvency margin, say, around 210%. I'm giving you an ideal scenario. Take the equity allocation to 10% of assets, so that in a down market also, solvency ratio is above 175%. So that is how we will look at it. Secondly, if you look at now our net worth in IGAAP is also about INR 6,800 crores.
I think regulations allow you to raise Tier 1 capital up to 25% of the net worth. Now, if I just roll forward this by two years, and again, no guidance, under normal circumstances, suppose our net worth hits INR 5,000 crore and we have today INR 350 crores of Tier 1 bonds, we can actually raise another INR 900 crore Tier 1 bonds to basically to enhance our solvency. So from a capital structure, I think we are in a very decent place. We have all this space to grow the business, to also change our risk allocation, and even after two years or three years, if we need capital, we can actually always raise a decent amount of capital from NCD, because we have not done this previously.
Obviously, there are other things which you can also do for better capital efficiency. But as of now, we don't really have to artificially do anything to either enhance our leverage or reduce our leverage or increase our solvency and things like that. We have all valid tools in place, and to focus on growing the business as much as we can.
Okay, that, those were my questions. Thank you very much.
Thank you so much, Sanjay.
Thank you. The next question is from the line of Dipanjan Ghosh from Citibank. Please go ahead.
Hi, good evening, sir. Just two questions. First, you know, going back to the group employed business, just wanted to get some color on how this is shifting, let's say, between larger corporates and smaller corporates. And in line with that, if you can give a qualitative understanding on how the claims ratios have been behaving in each of these two buckets, YOY or for 1 H. And next is what is the mostly channel for, let's say, how does the business channel differ, let's say, between when you put large corporate, which would be more direct, versus smaller corporate, how does the profitability really shape up, in this system? The second question is more on the motor business.
Second question, if you can shift the split between two-wheelers, threes, and CVs, and also how that has been, let's say, YOY. And lastly, going back to one question which has been asked a few times in the call on your strategy regarding inward reinsurance. So we know the numbers for Q1 and H1, but get some color on whether you plan to increase that going ahead over the next twelve to eighteen months. And if so, you know, you already mentioned a few products, new product types of partnerships, which is kind of shift. Are there more in the pipeline and how faster and how quickly they'll be shipped?
So, thanks, Manjunath, for the questions. Let me start on the inward facultative reinsurance, because as I said earlier and explained, it is a case-to-case. So very difficult for us to say that, how the business is, because it also depends upon what other insurers who write facultative business are doing. And there are other non-direct companies also in India which have started writing more facultative business. And we are seeing, you know, companies wanting to write that. Very difficult for me to give a number or answer directionally. I think this will be more visible on a quarter by quarter basis only. In April, I think it's the reinsurers substantially changed their TPs. Then this opportunity for all direct companies to write and collaborate with each other to inward facultative business would substantially increase.
I may also add that, Government of India, as well as IRDAI Chairman, are very keen that, Indian reinsurance capacity should actually increase and more business should be done. They are also wanting to encourage companies to retain more and more business within India. Hopefully directionally, actually, with the support from IRDAI and also from Government of India, we feel that opportunity to do this business on the inward facultative side should actually increase. I think on the employer-employee, our mix is slowly changing towards smaller groups. Focusing on smaller groups means groups of employees less than five thousand or twenty-five hundred, but in H1, as you know, that in April you have a lot of big renewals of large companies, so H1 is always skewed.
So if you compare this H1 with the last year's H1 , we are actually seeing that, our mix is moving more towards smaller groups, rather than bigger groups. Smaller groups actually come from retail brokers and agents. While, big groups, are more focused either direct or they come through large brokers. So that is what it is. I would say in terms of profitability this year, if I speak about specifically, what we have seen is that especially in the first half, competition was actually, first quarter, competition was severe on price on the larger groups. So our core conversion ratios was much lower on the, larger groups compared to the smaller groups. But these things can change because, business returned in April, May.
For large groups, the loss ratios will actually start showing by already, but by November it will become like a trend, and then some companies, when they will see that the losses are increasing on large groups, then in January, where we see again good renewals of large companies, things could actually change, so this is, I would say, significantly more dynamic, but I personally feel that if you look at fire, you look at motor, you look, look at group health, the loss, the pricing competition is really increasing. Group health is the first one where the loss starts emerging and the trends starts emerging very, very fast.
We have started seeing some early, very early trend, wherein if you look at August and September, a lot of companies, private companies, which actually were quite growing very aggressively. Suddenly we have seen in September that the growth rate has come down, and this is really visible in the segment-wise numbers which are published. In motor, I would again say, based on our new car sales, how our market share is moving in CPX, et cetera, this again moves a bit dynamically. All three are in the thirties for us and the private car, I think since last year, this is now our biggest segment within motors. So, this is what the common I can say. So I answer your question?
Yeah. Thank you and on the-
Thank you so much.
Thank you. The next question is from the line of Jayant Kharote from Jefferies Group. Please go ahead.
Thank you for the opportunity and congrats, guys, on the claims side, comments on, on his side as well. Slightly broader question, little vertical, but larger industry issue. We are hearing the show cause notices, going out to a lot of players, maybe in double digits it seems. So, it's, and correct me if I'm wrong, if EOMs are supposed to be brought down and EOMs are like next, but the two options that we have is, of course, doing more writing or more retention. And second is doing a bit more on the group, low commission with excellent commissioning, whether it was group health or some of the other commercial lines.
The problem or probably what I want to hear from you is now, since we are a homegrown company going to go along the lines of them. We are seeing at the same time, and who says they aren't seeing. Like in group health, we've been seeing for the past six months. So how do you solve this puzzle, Kamesh? Because even if we were to wait a bit to get the pricing right, you know, the irrationality might continue because everybody's trying to, you know, finish the sort of end before the finishing line in six quarters. I don't know if I'm putting the question correctly, but just trying to understand how do you think it will play out eventually?
So basically, Jayant, your voice was cracking, but let me say-
But what you are saying that in EOM, if every company is trying to meet the EOM guidelines and because of that they start writing business which is not that profitable, how will this play out eventually? Is that your question?
Yes, and the fact that we have only six quarters, right, for to complete the EOM, so there would be a rush or this high competitive intensity for the next six quarters.
So I think, Jayant, I would say there are two ways to look at it. And this year, as you look at the business growth rate has not been good. Which basically means that EOM, almost every single player will actually go up. I already said earlier that larger companies, amongst the largest, they have actually seen an increase in EOM this quarter, this half, slightly industry growth. Others who have seen lesser growth, they would have seen even increase in EOM. Now, companies which have become aggressive in group health, employer-employee business to make up for the EOM, will actually see a very bad outcome on their loss ratio. So the profitability will suffer. So eventually, all of this has to balance itself out.
Secondly, my sense is that regulators will realize, and that is my sense, that, after EOM has come, their expense ratios have actually gone up rather than going down. And, this is happening because instead of having a this is my personal opinion, not Digit's. This is happening because everyone is trying to develop business in, low commission, which is group health, government health, and trying to write more of that business and increasing commission on the retail side. Now, this is leading to a situation where growth rate has gone down and expense ratios are going up. So I personally feel that, this is something which regulators, because they are very serious about it, they will look at the results for twenty-four, twenty-five, and then see as to what is to be done.
Sanketh has spoken about the change which is happening from first of October. If actually that happens, any company which has even 10% of the premium coming in from attachment or even 5% coming in from overall attachment business, their expense ratio are going through the roof. So with these guidelines, I have a sense, and I have not done a calculation, but I have a sense that almost every company, barring maybe one or two, would actually see EOM limit, limit being reached. So we have to really see how this year plays out and then what the regulator intends to do. However, from a Digit side, last year we were on a decent path on our glide path.
This year we have reduced our expense ratios compared to first half of last year, and we are hopeful that we will continue on this trend even on the second half. So our aim is to stick to the glide path, and we'll be able to give you better idea to everyone, maybe after first quarter. But as of now, we feel that we should be able to stick to the glide path this year also.
Thank you, Kamesh. That was very elaborate. If I could just add one last question: As an industry, are there any representations being made to the regulator for extending the EOM timelines?
Honestly, Jayant, I don't know about that. And, my sense is regulator at this stage, wouldn't probably do this. They would want to see what is happening this year and, what each company is doing. My sense is, and this again, is assessment, is they are looking at more company by company. And, but as of now, we haven't seen. I think it is. That's what I heard, and again, I have no inside knowledge. I've heard this, that on this accounting change from first of October, there are some companies, which have, pushed hard. I think, standalone health insurance companies, some multiline companies have, requested IRDAI to postpone the date. I think this is what I heard from, from my industry sources. I have no internal information to inform this.
Great. Great. Thank you, Kamesh, as always, for your insights on this, and congrats on the claims, especially again on the great job over there. Thank you.
Thank you so much, Jayant. Thank you. We can take one more question.
Sure.
Because I have another call starting in five minutes, so.
Sure. The last question is from the line of Nischint Chawathe from Kotak Institutional Equities. Please go ahead.
Hi. Thanks so much for taking my question. You know, this is actually on the IFRS part. You know, on the discounting as, you know, impact in IFRS, you know, as and when it is implemented, you know, how do you think the industry, you know, does it get translated into higher payouts? Or does it get translated into tariffs, or how does it play out?
Nischint, I actually can't really talk about the industry, because the challenge we have is that even very established companies are not publishing IFRS results. What we hear is that most of them want this IFRS implementation to be postponed, and I think we hear that it has been postponed by a year already. Very difficult for me to comment on what this will do, because I don't know their IFRS results. My sense is, for a lot of companies, IFRS results will be worse than Indian accounting results... simply because a lot of them are taking upfront a lot of credit for the reinsurance commission. In their case, and that is why my sense is they don't want to publish IFRS results.
I can definitely speak about Digit that this discounting of reserves will not be seen as from a perspective increasing commission. So I think philosophically, that is definitely. I can say it. My CEO is sitting next to me, and she's nodding and saying, "Absolutely.
Because if you're going to price a product, I mean, it'll be very, conceptually based on an ROE, you know, then probably, you know, some review that happens, you know, dynamics and, you know, will kind of mean that kind of goes on to the distributor or customer.
My sense is margins will not simply because, as I said, IFRS results for most companies will be worse than Indian accounting. When the results look worse, how do you increase the commission? I would say that, and I will be very transparent here. When we were in the IPO, I was meeting one of, like, a very reputed mutual fund in India. I think the person asked me that about IFRS results and this, so will you publish the IFRS results? After listening. Actually, I can say it again now. ICICI Securities has also organized a call. They and Morgan Stanley were lead bankers. We had proposed to SEBI to include both IFRS and Indian accounting results in the DRHP.
I think they said, "No, it will confuse the retail investors." But as soon as we got listed, and we published our last year results, you can actually see that in May, it was late May, because IPO, we got listed on twenty-third May, if I remember, and our results came in the first quarter of June or second quarter of June. We have actually published audited IFRS results, and after that, every quarter we are giving IFRS results. From next quarter, we'll start giving quarter on quarter. My request in a way for people like you, Nischint, and I think there are some of the most reputed insurance analysts on this call, is to ask insurance companies to publish IFRS results, even if unaudited. We will publish our audited results.
Please push them to that, you know, I think, if I can speak in Hindi. So on a lighter note, I just wanted to say this. It's Friday evening. Our office is actually on a lane which has all the pubs, so I think we can't be difficult to see this on a Friday. Thanks, everyone, for joining. Nischint, I hope I have answered your question.
Yes, yes. Thank you very much and, you know, happy Diwali to you.
Thank you. Thanks a lot, Nischint. Happy Diwali to everyone, and thanks a lot for joining. Have a good weekend, have a great Diwali season, and we'll connect again in January. Thank you so much.
Thank you so much, sir. That's all the closing comments, I hope. On behalf of ICICI Securities, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.