Cholamandalam Financial Holdings Limited (CHOLAHLDNG) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Q3 FY '22 Earnings Conference Call of Cholamandalam Financial Holdings Limited, hosted by DAM Capital Advisors Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Pritesh Bumb from DAM Capital Advisors. Thank you, and over to you, sir.

Thank you, Margaret. Good morning. On behalf of DAM Capital, I would like to welcome you to the Q3 FY '20 Earnings Conference Call of Cholamandalam Financial Holdings Limited. We will discuss the financial and operating performance of the company and its subsidiaries. From the management team, we have with us today Mr. Sridharan Rangarajan, Director, Cholamandalam Financial Holdings; Mr. Ganesh N., Manager and CFO to Cholamandalam Financial Holdings. Mr. Suryanarayanan. V, Managing Director, Chola MS General Insurance; Mr. Venugopalan S., CFO, Cholamandalam MS General Insurance. I would like -- now like to hand over the call to Mr. Sridharan for his opening remarks. Thank you.

Thank you. So good morning, and happy to see that the COVID is receding throughout India, and we hope to see this trend continue and we are all behind this challenging situation once and for all. We have with us Mr. Suryanarayanan, our MD for Chola MS, Venugopalan, our CFO, for Cholamandalam MS; and Mr. Ganesh, CFO of Chola Financial Holding. I'll just make a quick remark, and then we'll open up for question and answers. As usual, I think the company has Chola Finance, NBFC subsidiary, and joint venture with Chola MS and Chola MS Risk Services. NBFC and Chola MS just reports under IndAS, while Chola Insurance reports under IRDA, but they provide the data for us under IndAS for consolidation. I come to the stand-alone performance of Chola Financial Holdings. The total income for the quarter is INR 2.27 crores as against INR 2.37 crores in the corresponding quarter of the prior year. Loss after tax for the quarter ended December '21 is INR 1.3 crores as against INR 3.48 crores in the corresponding quarter of the prior year. The consolidated financial results consists of Chola Investment and Finance and Chola MS General Insurance as well as Chola MS Risk Services. The total income for the quarter ended December '21, increased marginally by 2% to INR 3,727 crores, while the profit after tax increased by 19% to INR 543 crores. Cholamandalam Investment Finance Company had several positives, like pent-up demand, good monsoon, uptrend in economic indicators like tax collection, power consumption, vehicle registration, highway toll collection and e-waybill. This has led to a sharp recovery in CIFCL's disbursements and collections during Q3 FY '22. Disbursements went up by 32% compared to last year's Q3 FY '21. PAT for the quarter ended December '21 is INR 524 crores compared to INR 409 crores in the corresponding quarter of the prior year, registering a 28% growth. Assets under management marginally increased by 4%, that is INR 79,161 crores as at December '21 as compared to INR 75,813 crores as of December '20. CIFCL's assets quality as of December '21, represented by Stage 3 stood at 5.85% with a provision coverage of 38.8%, as against 6.16% as at the end of September '21 with a provision coverage of 36.45%. Total provision currently carried against the overall book is at 4% against a normal provision level of 1.75% carried prior to COVID-19 pandemic, representing more than twice the normal pre-COVID provision coverage level. As per RBI norm based on circular dated November 12, 2021, GNPA percentage and an NPA percentage as of December '21 is 8.53% and 5.76%, respectively. We carry INR 746 crores of higher provision under IndAS over the IRA. The capital adequacy ratio as at Q3 FY '22 is at 19.8%, against the regulatory requirement of 15%. I will now move to Cholamandalam MS General Insurance Company. I'm presenting the numbers as per I-GAAP. Please refer to Page 47 of the presentation, which was posted. Chola MS registered a gross return premium of INR 1,320 crores in Q3 FY '22, an increase of 13.1% over the corresponding quarter of the prior year, driven by increased contribution from new channels and growth in commercial as well as SME segment. On YTD basis, GWP is at INR 3,442 crores, showing an increase of 10.4% over the last year. The company maintained its leadership position in Motor LOB in Tamil Nadu, Chattisgarh, and targeting to reach #1 position in AP and Telangana. You would note that the YTD profit before tax is INR 82 crores. This YTD performance is after providing for write-off of deferred acquisition costs as per IRDA advise would be INR 375 crores. We also have COVID impact of INR 135 crores, which is offset by the benefits from frequency. Hence, in a way, exceptional impact of INR 375 crores. This means our normal profit would have been INR 457 crores instead of the INR 82 crores as we reported now. We would like to clarify that INR 375 crores is arrived after considering the proportionate write-off of opening DAC, amount plus the new business DAC cost, which is assuming that we write off the new business costs in the new model, less had we followed our earlier model, how much we would have charged the P&L. So that is how the INR 375 crores is arrived at. Since there are a lot of one-offs, this time, we feel it is important to talk about what would be our sustainable profit before tax for this year. To arrive at this, we consider the following: How much of opening DAC, less normal charge-off from that would impact the full year P&L. This is an important element. The second element is COVID impact, and the third element is the frequency benefit. We feel all put together, along with our expectation for Q4, we expect a sustainable profit before tax for this year would be in the range of INR 350 crores. Solvency is at 1.86x as of December end, after considering the disallowance of about [ INR 166 crores ] of tax paid towards contingent liabilities as per IRDA circular. This has an impact of 0.19x solvency, which means we did consider 1.86 plus 0.19. But since the INR 106 crores needs to be considered less in the calculation, the net is 1.86. Cholamandalam MS Risk Service is a small but niche company, reporting a profit after tax of INR 2.26 crores for the quarter against INR 3.56 crores in the corresponding quarter of the prior year. With this opening remark, I open up for Q&A. Thank you.

[Operator Instructions] The first question is from the line of Arjun Narayan from Spark Capital.

Congrats for a great set of numbers and a very detailed presentation. I would like to understand the noncore health ratios have increased from 58.4% in 3Q '21 to almost 65% in Q3 '22. Our health loss ratios pre-COVID used to be sub-50 percentage. So is there any significant change in the mix? What is happening within the portfolio? And where do you expect this loss ratios to settle as more and more of non-COVID claims which were not getting reported, or the surgeries would have got postponed in the last 2 years that come and hit. Where do you expect the loss ratio to settle [indiscernible].

See, certainly, the indemnity health claims incidents have been reducing. And I can add with the benefit of the data that we have seen in January and to date, that the impact of third wave on indemnity claims has only been marginal. So to that extent, it is unlikely to impact loss ratios in a big way. Having said that, medical inflation, which is running at about 10% to 12%, is something that the industry is living with and which will push the health claims ratios going forward. Almost all players have approached the regulator to permit a onetime correction in the health prices. We do expect that the regulator will respond to the request of the industry quite favorably. So this is where we see. And [ the value ], you talked about the health loss ratio moving from the corresponding quarter to now. Definitely, our proportion of indemnity business has been going up. It is also a function of the attachment business versus the indemnity business. As we see a jump on the increase in the indemnity business, we will see a sympathetic moment in the loss ratios, which are definitely higher in the indemnity side. And you talked about the elective surgeries, yes. But then I should say that even in the last 4 months, people have chosen to take up the elective surgeries, which they had deferred in perhaps until the -- until September of this year. So to an extent, the Q3 numbers factor in the elective surgeries and deferred, and also [ dengue ], which had its impact on Q3, is not expected at least for the next 6 months. You will not have similar hospitalization claims coming in, in the next 6 months. So we would tend to think that our Q3 loss ratios, which are there in health and PA at about 71.23 -- Q3, 71%, and ex-COVID is at about 65% is by and large sustainable.

Sir, if you can give a breakup of what is the mix between indemnity and the benefit base and the health book?

If we look at our -- in Q3, in fact, our indemnity to benefit businesses, on the retail side at about 93% to -- 7% -- 93% indemnity and 7% benefit. And if you are to look at the bundled business, there, it would be actually the opposite, would be about 80% benefit and then 20% will be the indemnity. So on a blended basis, we -- at this point in time, we are at about at a year-end level somewhere around close to about 40-60; 40% would be the indemnity side and 60% is the bundled side, attachment bundled.

Sir, just 1 question. We reported that the number of customers, live customers, data. So that has seen a sharp increase from YTD '21 to '22. Now what product is [indiscernible] products here [indiscernible] or it is an attachment or a bite-sized health product, just to understand what is driving this number of customers growth?

I think our market share in 2-wheelers has been rising consistently, which will be there even in the number of customers in the motor side somewhere in the presentation. We now have a market share of close to about 15% on a blended basis on new 2-wheelers that are sold within the country, which varies between different manufacturers and OEMs quite differently. And this is what is driving the number of customers to much larger levels.

[Operator Instructions] The next question is from the line of Devansh Nigotia from SIMPL.

Just a couple of questions. 1 is in case of if you can just elaborate a bit more on the motor insurance, the market share gains that you have seen, is it largely in 2-wheelers or it is happening in the passenger vehicles as well? And what are -- what is driving this market share gain? Where are these market share gains coming from?

Yes. See, in Motor, we presently have a market share of about 4.9% there. And over the last 30 months-plus, what we have been trying to do is to actually change the mix of the business. Earlier, we had -- we were overweighted on commercial vehicles. And the change that has been coming up steadily is the changing mix towards 2-wheelers and cars. Cars now is presently at about 23% roughly. And we are -- this is a YTD number. And cars is at 29% and 2-wheelers is at about 23%. And tractors and other miscellaneous is at about 7%. So we are now talking of noncommercial vehicle mix being placed to somewhere at about 59% and 41% is the commercial vehicle business. So this is a change. And there is a change -- 36 months back, we were actually -- we didn't have much of a presence in 2-wheelers, and even our presence in cars was lower. So the -- what has come in is the 2-wheeler and cars and with the reduction in the share of commercial vehicles.

Sir, lastly, if you can elaborate what is driving the market share gains? As in what are we really competing on with the competitor that is helping us gain, let's say, in case of 2-wheelers, we have just became 15% of the market share where we were probably not present. So largely strategically, what are we doing? If you can just throw some light on those soft points, that would be helpful.

Yes. We have now present -- we're talking of the 2-wheeler space, we are now present in almost all the major OEM tie-ups. One big driver in the current year was the entry into the tie-up with Hero. And from January, we have got into the tie-up with TVS Motors as well. Besides the conventional [ ICE ] engine 2-wheelers, we now also have 8% market share in electric 2-wheelers, where our market share in the top 5, 6 EV 2-wheeler manufacturers is fairly well and growing well. The reason for success in pushing up the numbers, even in these OEM tie-ups, is our presence across the country through our Chola Insurance Express outlets. Two-wheeler is a business, which is well penetrated into the country and not just the domain of the urban and Tier-1 markets. Our presence in these tier 2, tier 3 markets means our speed to market in having the relationship build on the customer transacting and business building has been faster. So which is what has helped us with the growth. On the car side, we got into the OEM relationship with Renault, Nissan, which has helped us grow the numbers. And even in cars, we have been stepping up our presence and volumes in types like Hyundai. Toyota is one program that we've been around for well over 10 years now. Maruti is something where we entered sometime in July '20, and that is also something which has been growing. And in the used vehicles, we have been very [ on track ] from our CAE businesses in the semi-urban markets.

Okay. Sir, that's really helpful. In case of the deferred acquisition balance, so probably in the last quarter or before that, it was INR 320 crores. And now you have highlighted it's around INR 375 crores. So if you can elaborate what has changed here?

On the deferred acquisition cost on the opening balance of INR 326 crores, what we are left with for the Q4 is only INR 54 crores. So we have been, as per the IRDA direction, we have additionally amortized INR 27 crores in the Q3 relating to the volume business part of it. So what we are left is only INR 54 crores.

Just to add to that, I think your question is why last time you said INR 326 crores, now you are saying INR 375 crores. The INR 326 crores is the opening balance, no change in it. INR 375 crores includes the current year [ fresh ] acquisition. So hence, together is INR 375 crores.

Okay. Okay. So just to reclarify the numbers. In June, this exception was INR 63 crores, September, INR 100 crores, and December INR 82 crores. Is that the right amortization quarterly?

So you're talking about INR 63 crores, INR 100 crores, and INR 82 crores?

Yes.

Yes. Overall, the opening bag has been amortized over the period basis. That comes to around INR 272 crores -- INR 245 crores out of the INR 326 crores [ provided apart ]. We additionally amortized INR 27 crores. So we have taken INR 272 crores into the books, and what is remaining is INR 54 crores.

Okay. Okay. Okay. And in case of the OpEx, operating expense, even if I adjust it for the one-off, they are slightly elevated and have been on a very higher end when we compare it with our competitors. So where exactly these expenses are happening? Is that ad-related or distribution-related? Also segmentally, which segment are these OpEx at a higher level? Is it health or motor or other business? So directionally, what is -- how is this number is shaping up? So let's say, if I adjust it for the INR 82 crores this quarter, that number is INR 380 crores. The run rate used to be around INR 270 crores to INR 280 crores, and business growth has not increased in the similar rate. So if you can just throw some light?

I think, very broadly, what has to be understood from a comparative purposes, is that Chola MS is primarily a retail insurance company. So we do not participate heavily in group health business. We are not there in crop insurance business. Nor are we there in the government health businesses. Why I'm saying these are that these 3 lines of businesses do not have any sourcing acquisition costs. So there are competitors who participate in these businesses, and therefore, have an advantage in terms of the cost structure that they put out. Our business in the commercial lines is growing. But still, it would be only about 17% of the total pie. And as that grows, it will provide the balance in terms of the expense structure. So this is the structural business-led explanation, one. Second is from our -- still this is actually the cost structure that we are talking of is the total of the sourcing costs as well as the expenses of management. There have been investments in technology that have been happening to get ourselves upgraded on the technology platforms, revamp of websites, investments into other related technological requirements. And the final reason that I would place is still, our proportion of long-term business to the total premium is also fairly large. You would have noticed even what we have been saying is that, we do write a considerable portion of drilling business. We do write the long-term PA, and we also write the benefit products in long term, which are long term -- in health, which are long term. So all these mean that in the new dispensation, our cost absorption [indiscernible] even though the benefit by way of earned premium will flow in over the years. Anything, Venu, that you would like to add?

We are also growing in the 2-wheeler, which is also on the long-term value [indiscernible].

Yes. So -- but as over our long-term premium, the premium received in advance has also been growing, in subsequent years, as they roll back into the top line, that associated cost benefit will also trickle into the P&L, because we have absorbed the cost already. So that is that 1 advantage that will flow.

The next question is from the line of Prateek Poddar from Nippon India Mutual Funds.

Very elaborate presentation. Just a couple of questions. One is just for your business model to appreciate this point on -- as you talked about the mix of long-term business is high versus total premium, what would be the sustainable expense ratio in the near term? And how should we think about it in the medium term?

I think your expense ratio, you are talking of 41.6% for the current year, which is a combination of the various factors that I just explained. I would tend to think that over a period, in the medium term, this could come down to about 37% or so, is where we would more likely be because we would still have long-term businesses coming in. So while the curtain effect will be there, the roll-in will happen from the PRA, but we will still be doing fresh business and adding to the line. So that component would be there. I would see that at a more stable level at about 37% or so.

And also similar commentary on loss ratio, sir? Where do you see loss ratio? Is this level what we disclosed in quarter 3 to be sustainable? Or -- and I'm saying quarter 3 and not quarter 1 and 2. Or do you believe there is -- this can further increase as the economy organizes?

Quarter 3, if you were to look at, by and large, we see the motor OD loss ratios at an elevated level and more in line with industry and the present market situation assets. Health claims, we talked earlier in the call, as to what has been shaping the loss ratios there. The 1 key element for that will have a large bearing on Chola MS and the entire industry for future would be as to how the motor third-party loss ratios shape up. A key element to that is obviously the pricing element. All of us know that there has been no change in prices that has happened since April '19. In fact, it was from June '19. There was an election [indiscernible] election then. And in long-term policy, there has been no change since October 2018. So it's more than 3.5 years since there has been any correction. That is going to have a significant bearing on how the loss ratios in PP shape up. Medical inflation in accident injury claims of motor third party and a continuous rise in minimum wages as well as salary levels, which would apply in case of death claims will have that inflationary impact. And this needs to be corrected by way of a price correction. The industry has represented regularly and continuously both individually and through the council. We really hope that the regulator will come out with an announcement as to price correction sooner than later. But that can have a bearing on the overall loss ratios for the industry itself.

Understood. And sir, this quarter, we have disclosed motor TPL ratio of about 64%. With this pricing element not being there, is this sustainable, or this goes back slightly upwards? In a sense, I'm saying that if pricing doesn't come up -- come back or there is no price revision, which is due since last 2, 3 years, I agree, how should I think about the sustainable level over there?

Prateek, see, even in earlier calls that we have said that lockdown benefit, as far as the current year is concerned, we have taken it over a period. We have not really taken the benefit in 1 shot in May or June when the lockdown was there. To that extent, this 64.13% includes the benefit that has come in and will probably sustain for the Q4. But thereafter, there will be the ones that wears off, you will have a jump back to claims to earlier levels. And that is where it becomes necessary that the price correction happens.

Also just to add, the 2-wheeler mix going up will help sustain this at a good level.

That will help moderate to a larger extent, because definitely, the TP loss ratios in cars or 2-wheelers are better than in commercial vehicles. And the changing mix should help moderate the TP loss ratios, but the larger impact is absolutely on their price.

Congratulations again for achieving such high market shares in such a short period of time in motor 2-wheelers. Just 1 more question. Would you look to cap this non-commercial to commercial mix? Because next year, mostly CVs will have a very strong growth, right? So I just wanted your thoughts as to how should I look at the sustainable mix on the motor side?

I talked about 59% non-CV market share that is there presently. Since the engine of growth will run strongly, and anyway, in the current year, we have had issues of microchip shortage and consumer demand and two-wheelers are holding the growth itself down across the industry. I would tend to place the shift perhaps in favor of CV as nothing more than a 2% to 3% from current levels. Yes, we do have our financial channels, which are still with us, and they can come back with the higher volumes. But I would still think that 59 non-CV may, at best, drop to about 56%, but nothing more than that.

Very well, sir. Sir, on TA, this quarter, we have underperformed industry growth. Anything to read into it? Or is it mostly because of investment bank channel?

Really, the financial business-led channel, which provides the PA attachment business, that has been generally plan down for most insurers. -- anyone who is strong on the bancassurance front, you will find that the volumes have been under pressure there on PA. So which is where we are facing that issue as well. But we are adding news and we are clearly hopeful that we should be able to get back to our normal growth levels pretty soon.

Really helpful. So sir, last question, any thoughts on IndAS that as a channel. Like our capital channel has done very well on a YTD basis, on a year-on-year -- when I compare it year-on-year. But the industry [ much later ], there has been a decline. So how should I think about revival of this channel?

I think it is largely the bank's own present situation in terms of its growth, focus, NPA management, and a whole lot of other things. Presently, their market share with us is at about 10% of our top line. We don't see any significant change in that over the years.

Sure. And when does the partnership get renewed, sir? Or it comes up for renewal with IndusInd Bank?

If I remember right, it is due sometime in October '23.

The next question is from the line of Kashyap Pujara from Broadview Research.

[indiscernible].

Sorry to interrupt you, Mr. Pujara. Your voice is not clear. It's breaking up. [Technical Difficulty] The next question is from the line of Sanketh Godha from Spark Capital.

Sir, you said that in medium term, the OpEx ratio will improve from probably 41% or 45% -- 41%-plus [ through to 37 ] percentage. So sir, I just wanted to understand what are the levers which can lead to this improvement? Is it fairly to assume that your contribution of long term to total mix might come off and therefore, this will improve? Or there are internal operating leverage stories, which we can play out in the favor of implementing the ratio, sir?

Thanks, Sanketh. I did say earlier that this is a ratio, which is a combination of several factors. As we keep stepping up on our commercial lines business, where sourcing and the operating costs are lower, it will provide the balance. So that is 1 element. You would have seen that even over the last 1, 2 years, this proportion has been going up, which will continue to grow. It is also reflected in Page 48 of the deck, where we are looking at the growth in the fire and other commercial lines of business, where you are seeing a growth that is faster and higher than the industry, both in the fire and other commercial loans. That is 1 clear pointer to look at it, which is a key element, which will bring the overall cost structure down. And we know that this 41.17%, what is reflected here is a combination of 2 things. One is the changeover plus the new one. You are absorbing the prior year cost, plus you are changing over to a new regime, where you are expensing upfront. So that itself is bound to bring reduction. So that is the second element. The third element is that of reasons. We had an overall top line that was more or less sort of routed to somewhere around INR 4,400 crores over the last 2 years. This year, yes, we are going to break out for certain from that level. The overall fixed cost absorption capabilities definitely will get better on the OpEx front. So whatever salary increases of last 2 years and general OpEx has also caused this push up to 41.6% on a similar top line. So as this goes past, you are going to have the fixed cost absorption benefit that is also going to trickle down. These are some elements, which we believe will help tone down to about 37%. And then that will be our first level target, but we are hopeful that we should be able to do slightly better than that as well.

Got it, sir. But sir, sir, when you said the prior year cost has been absorbed, but the INR 320 crores of opening, that cost is routed to shareholder accounts not routed through policyholders' account, when we calculate our OpEx ratio -- when we calculate our combined ratio, so that benefit will not get -- I mean, that benefit or the gain is not there in the 41.7 percentage, right, sir?

Yes, you are right, Sanketh. But there is a 2 portion to the opening deck. So there is an element of commission, which is routed through the Schedule 3. So to that extent, it is included.

Okay. Okay, sir. Sir, 1 more thing. I just wanted to understand that out of the INR 375 crores of exceptional, which is new extra DAC, which you're recognizing and opening DAC. So if I do a back calculation, then the new business DAC or cost associated with new long-term policies is closer to INR 103 crores in 9 months FY '21 -- '22. So I just wanted to understand, what is the commensurate business you write -- when you spend INR 103 crores to write new long-term policies?

Yes. The new long-term policies, as our MD said about that, clearly fall into the 4 segments. One is about the dwelling business, which we are writing as a part of that. Second is about the personal accident cover. And the third is the health business, which we write on a long term and accident cases as well as the motor long-term policies. These are all the 4 elements that is coming as a long-term new business cost.

Right. And what would be, as a percentage of the total INR 3,000 -- total premium that you write in 9 months? I mean I just wanted to understand the indicator level, how much long-term contribution to our total premium in GWP what we write?

Yes. We feel -- see, the question is about the motor business is not coming as a part of the [ VLP ]. Whereas in the case of other long term, it is part of the long term, but it is not coming as earnings. That's the difference in terms of that. So we need to segregate between the nonmotor and the motor separately from the point of view of the percentage of long term. When we talked about the long term...

Sanketh, to give you some idea on the numbers. Long-term business booked in the first 9 months is about INR 478 crores in motor alone, which is not part of it. Because IRDA mandates that these remain as premium received in advance, and they roll in to premium in subsequent periods over the 4 years in case of 2-wheelers and 2 years in case of cars. Besides, after reported top line, I do not have the numbers readily now, but I can safely say that at least 10% of that premium would be the long-term numbers. Clear?

So that same premium is dwelling, PI and health put together, right?

Yes, yes, yes.

Okay. Got it. Got it. Perfect. And finally, sir, just wanted to understand the -- or if you can do for clarity of other investors also. This seeding, what you have done with respect to home dwelling, what is the impact on cost? And what is the impact on the revenue? Because if you have seeded to an extended period, then you would have got reinsurance commissions also. So net impact, I mean, we know that extra cost was around INR 27.5 crores. So what is the like equivalent income, which got recognized in the current quarter, sir?

Yes. [ Sanketh ], the additional session made was INR 66 crores, which is part of the reduction indemnity. Our additional compensation on the home dwelling. On that, we have recognized RE commission of INR 50 crores in Q3. We have taken the INR 27 crores as a part of that, which we disclosed as a part of it as a cost, which is part of the opening that we additionally amortized in Q3, which will not come in Q4.

Got it, sir. Sir, one final data keeping question. Can you disclose NWP and NEP number for third quarter or for 9 months FY '22?

Fine. We will start giving it in the future.

Yes, actually, it's not there in the deck. So...

We'll give it in the future. Okay?

Otherwise, I'll take this number offline, if you don't have it handy right now with you, sir.

Okay.

Yes. And this is again, a little harping on Prateek's question on the motor TP loss ratio finally. If we assume the motor type doesn't happen, worst case scenario, then given the mix is in the favor of 2-wheelers, do we believe that the Motor TP loss ratios could be potentially as high as 80-odd percentage? Or because before -- when CV was a little higher, we were around 90% plus. And then we saw an improvement over mid-80s with 2-wheeler contribution going up. And in the worst case scenario, given the wage inflation and then also assuming no price hike -- can the worst-case scenario assume that motor TP loss ratio in '23 can go back to 80% kind of level, sir?

So we don't see it going up to 83%. But what I'm trying to say is that it is -- it cannot be settled at 64%. So that was the point that I was trying to convey. We are in the process of looking at the way, the frequency of accidents have been shaping up over the years. Presently, the actuarial team is working on what would be the right estimate for the current year. And I'm sure we should be able to share our perspective on the same in subsequent calls.

[Operator Instructions] The next question is from the line of Devansh Nigotia from SIMPL.

Sir, you mentioned INR 164 crore towards contingent liability. If you could just help us understand what is it regarding?

Taxation.

So the contingent liability, as we said in the earlier calls, also consists of the tax litigation with the department. So contingent liabilities, we have paid tax in protest around INR 166 crores. That is the element that we have been asked to disallow in the solvency by the regulators. And accordingly, we have disallowed those portions. The element on the impact is 0.19x. We are at 1.9x. Otherwise, it would have been more by most 0.2. That's one part. And as far as the issue is concerned, we are all confident about the -- all the 3 issues. IBNR as well as foreign insurance, and we have been able to get a favorable decision across the country also. So we are waiting for the time to get that cleared. In the meantime, the question is about the taxes paid against those 3 tax litigation, which has been conservatively taken for the purpose of solvency.

So has that been adjusted from the net worth as well or it's only for the solvency calculation?

It's only for the solvency. It is disclosed in the continual liability in the notes account on a gross basis. What is tax paid has been disallowed for the purpose of solvency.

Okay. So it has not been adjusted in the net worth, okay.

As we have said in the past, while the regulator is certainly sympathetic and has actually written both to CBDT and to the Department of Financial Services in favor of all the players in the southern part of the country. As a measure of abundant caution, they have instructed that these be knocked out for the purposes of solvency computation. So these, to reiterate, are issues, which are implemented by the tax department only in the southern part of the country and not so much in the other parts. So to that extent, it is a differential treatment that has been meted out.

Okay. Sir, just if you could just elaborate a bit more on what is it regarding? And what is our protest? What was the conflict and how did they arrive at this amount? It would be really helpful.

Yes. So put it in a nutshell, see, we made this -- we talked about motor third-party. We make these provisioning. It is not that these are reported claims. The claims get reported over a period of time, anywhere ranging between -- until they have the tail up till a minimum of 6, 7 years. We make a provision now. So department has taken a view that this provisioning should be disallowed and tax is to be remitted. And this is a view taken only by the department in this part of the country and not elsewhere. So to that extent, there is -- we have contested it, and the regulator is also in support of the same. So this is 1 major item. The second 1 is we know that reinsurance is very much a part of the insurance business. Reinsurers provide capital. And the remittance that you make to the reinsurers, they have been disallowed. Notwithstanding the fact that there are very clear double taxation avoidance agreements between the countries with whom the reinsurance -- where the reinsurers are domiciled. So this, again, is an issue that is unique only to this part of the country. So these are the 2 larger issues where the players from this part of the country have been contesting. [indiscernible]

The next question is from the line of Prateek Poddar from Nippon India Mutual Fund.

Couple of questions. One is, can you just talk about the DHFL channel, which is now with Piramal. How are talks progressing over there? That's question number one. Should I...

Yes, you can -- I will answer them together. You can -- yes.

Okay. Second is average duration of investment book. And last question, sir, you called out for higher -- within OpEx, you called out for higher tech investments. Just wanted to understand if you can call out for the absolute amount and the sustainability of the same?

The first 1 on the DHFL part, our corporate agency with them subsists. And we are in discussions with them. While business hasn't commenced as yet, we are still hopeful that we should be able to resume our business, because the corporate agency is still subsisting. So that is -- so to speak, it has not been terminated or taken away. So that is where the hope lies. The second one, on the investment relating to technology, over the last 18 months, we've been continuously investing on various aspects of it. On our entire journeys -- customer journeys relating to health have been revamped. We have invested in RPAs. We have invested on our websites to provide the transacting experience. We have invested in our core ERP platform, where we are transitioning into a cloud-enabled platform. And we are also, in fact, engaged presently in getting into data analytics. So these spends will certainly be there. And our volume growth, which is largely retail, is all supported by setting up middleware platforms, which provides the transacting ease and convenience to our various channels. So as a retail business, yes, we have been doing a little more on all of this. We have also invested in an [ AI-based ] claims estimation, which should get rolled out pretty shortly.

How much is the investment, sir, over here, if you get called that out. The first 9 months and sustainability, will you invest even the next year the same amount?

Mr. Poddar, I think we will share once we get to a mature state, because we want to do -- this is a 3-year program. We want to continue that, and then we'll get back to you.

And lastly, the average duration of the investment book?

What's the question? Accretion of...

Average duration, sir. Duration of the investment, if you have it handy.

Yes. So duration, we are running at currently at about 3.4%. And of course, these are -- we will be taking opportunities as they come up in the market. We should be -- for instance, we did have the spike in the 10-year rates. So we are carrying a fair amount of liquid investments by way of bank deposits, which is presently at about 10% to 11% of the total book and is therefore available to seize any opportunity as rates spike to get into a higher yield regime. So that is something that we will do. But even for the longer term, I don't see the duration shifting beyond 3.7%, 3.8%, which would still be reasonable given the fact that we have a fairly large TP book.

Okay. And sir, 1 structural question from a future group perspective, today, most of the motor business, at least on new vehicle sales, originated at the dealers' end. The way business model is being evolved at least when the electric vehicle side is -- originates, the dealer just takes care of the delivery, whereas the acquisition is done in a D2C way. So from that perspective, how should I think about your growth or what are your thoughts over there?

Here, of course, you might be aware that the regulator has put out a draft motor insurance service provider guidelines, which is calling for some change in the way the motor dealer businesses operate, but these are large thoughts. We will wait to see as to how the operating structure changes in the industry. But as of now, even you talk to the OEMs, you talk to the retail brokers, who run these -- who manage these dealerships, they are confident that this structure will run in its present form for some time.

The next question is from the line of Ameya Karambelkar from Kotak Investments.

Considering the different dynamics within the motor OD, TP and health industry, going forward, on a more normalized basis, how should we look at the overall combined ratio and ROE going forward? I mean, your aspirations or your thoughts on that would be useful.

So earlier in the call, Sridharan did mention about the impact of the various onetime elements that have hit the P&L of the current year. So we would tend to think that if we were to unclog all these onetime elements out of the P&L, on a steady-state basis, we expect that the COR would have been roughly around 103% for the current year, so which is where we are. And so this gives you an idea of the state of the industry presently. We do believe that our focus continuing on the retail side and with the kind of OpEx and expense structure improvement that we are looking at, we certainly see an improvement from this 103% as we go along. Certainly, directionally, yes. But if you were to ask whether you will be a 99% COR or 100% COR, right, it is going to be a little tough. Given the various elements in the industry, the kind of discounting that is prevalent, the motor OD loss ratios, the way they have been shaping up. But what we see is directional improvement from this 103% COR. And with the investment book continuing to grow strongly, the overall profitability should improve, and that should impact the ROE quite positively.

Perfect. That's very helpful.

I think the current ROE is about 15% on [indiscernible] if you readjust whatever we are doing on a OADT basis.

As there no further questions from the participants, I now hand the conference over to Mr. Pritesh Bumb for closing comments. Mr. Pritesh Bumb, we cannot hear you.

Sorry. Thank you for the opportunity from the management. Stay safe.

Thank you. I think we -- thank you. We feel that most of our challenges are behind us. I think we went through some tough times in the last couple of years, both due to COVID as well as due to other challenges. I think we are having a very positive outlook going forward and look forward to meeting you again in a quarter. Thank you.

Thanks, everyone. Thank you.

Thank you. On behalf of DAM Capital Advisors Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.