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

Ladies and gentlemen, good day, and welcome to Cholamandalam Finance Holdings Q4 and FY '24 Earnings Conference Call hosted by DAM Capital Advisors Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Parth Jariwala from DAM Capital Advisors. Thank you, and over to you, sir.

Good morning, everyone, and welcome to Q4 FY '24 Earnings Call of Cholamandalam Financial Holdings Limited. From the management side, we have Mr. Sridharan Rangarajan, Non-Executive Director, Cholamandalam Financial Holdings Limited; Mr. N. Ganesh, Manager and Chief Financial Officer of Cholamandalam Financial Holdings; Mr. V. Suryanarayanan, Managing Director, Cholamandalam MS General Insurance; Mr. S. Venugopalan, Chief Financial Officer, Cholamandalam MS General Insurance. I will now hand over the call to management to discuss FY '24 earnings call, and give their brief comments post which we can open for question and answer. Over to you, sir.

Sure, thank you. Good morning and I hope all of you are doing well and your family is in good health. I have pleasure to talk to you in the Q4 earnings call. Both the companies, Chola MS as well as Cholamandalam Finance, have done exceeding the well. Today, I have with me Mr. Suryanarayanan, MD of Chola MS General Insurance; and Mr. Venugopalan, CFO for Chola MS General Insurance; and our CFO, Mr. Ganesh. So since there is a wide coverage as far as Cholamandalam Investment and Finance Company, you would have already attended the calls as well, we will clearly focus this call to Chola MS General Insurance and I request Suryanarayanan to give you the opening commentary about the business, and then we will open up for the Q&A. Thank you.

Thank you, Sridhar. Good morning to all of you for joining the call and I shall now proceed to give an overview of performance of Chola MS General for the quarter and the year. In quarter 4, Chola MS recorded a gross direct premium of INR 2,007 crores, with a growth rate of 13.6% as against the multi-line insurers growth of 10.9%. The full year premium was at INR 7,533 crores, which is a growth rate of 22.4% as against the multi-line insurers growth of 14.2%. The company has grown across all its channels. For the quarter ended March in its captive channel's business from sister company and the insurance express outlets GWP grew by about 21.5% apart from growth in other channels. In the financial year, Chola MS recorded a crop insurance premium of INR 465 crores, which constitutes about 6.2% of the topline, with growth in commercial and [ hotlines ]. The composition of motor in the overall premium has reduced to 65.9% from 70.6% in the previous year. In Motor Insurance, with a gross premium of INR 4,964 crores for the year, Chola MS is getting stronger in the private car segments across both new and used vehicles. The company underwrote over 100,000 electric vehicles in the year across categories. The company, excluding crop, has 26.5% of its premium from rural markets. The expense of management for Chola MS for the year was at 32.64% as against 35.79% in the previous year, a reduction of 3.15%. The claims ratio for the year was 73.7% against 71.2% in the previous year. The impact of the natural catastrophic events for the year in value terms was about INR 55 crores which rendered the overall claims ratio higher by 1.08%. Besides, the nat cat claims also impacted the reinsurance commission earnings. The company continues to be prudent in its reserving for motor third-party claims. The combined ratio for the year was at 109.9% which includes the impact of 1.08% by way of nat cat events. The Investment portfolio corpus as at the end of the year was at INR 16,501 crores with an investment income of INR 1,116 crores. With no exposure to stressed assets, recoveries from the fully provided exposures in Reliance Capital, IL&FS would be recognized on cash basis as and when it happens. Profit before tax in quarter 4 was INR 91 crores, and for the full year, was at INR 444 crores as against INR 264 crores in the corresponding period. The return on equity for the year progressed to 14.25% as against 9.64% in the previous year. The company during the quarter was acknowledged as the best mid-sized non-life insurer by Mint Publication. We'll now be happy to take any questions that you may have.

[Operator Instructions] The first question is from the line of Atul Mehra from Motilal Oswal Asset Management.

Sir, recently, there was this SEBI discussion paper around investment holding companies where they are talking about the proposed call option mechanism for more appropriate price discovery. So is the goal...

Sorry, you are not audible, sir. Could you please -- yes, this better, yes. That's better now, yes.

Yes. So basically, I was saying that recently, there was a SEBI discussion paper around investment holding companies for certain better price discovery of investment holding companies. They are proposing call option mechanism and so on and so forth. So I just want to check if the core of the management doing anything in terms of to make sure that, that it is better in terms of underlying value created for the entity Chola Financial Holdings and there is a better price discovery that is coming about. So any comments or anything that you can talk about on behalf of the Board or the management?

So honestly, your line is not that audible, but I think I guessed your question and probably answer. In case this is not, then please let me know. So as Cholamandalam Financial Holdings, probably you are looking at an option for it, the underlying subsidiary, to be listed or potential value creation is probably the underlying question that you're looking for. Is that correct?

Yes, sir.

Right. So I think we have been telling all the while is that we feel that at an appropriate time, either when the statute forces us or at an appropriate time, we will be more than happy to look at this. But for the capital required for the insurance business, both the partners are committed to provide and would continue to support that initiative. That is the position that we are holding from the beginning, and we will continue to hold this.

Right. But is there any timeline to it, sir?

There is no timeline as such.

Next question is from the line of Sanketh Godha from Avendus Spark.

Sir, I just want to understand your growth strategy for next year. Sir, for the current year, we did cross INR 470-odd crores, but we naturally slowed down a bit on -- in motor in the current year, especially in the second half of the year. So just wanted to how you will look at growth next year, which line segments you will grow, whether we can see a growth in crop to grow better than INR 470 crores what you have done in the current year? And any revisiting of this strategy with respect to commercial lines, especially fire and marine given we are largely limited to our JV partner exposures there and not being other than the banca relationships. So just wanted to understand what is your growth aspiration next year? And which products will drive the growth, especially motor, crop and commercial lines? That's my first question, sir.

Thanks, Sanketh. All of you are perhaps aware that the last 2 years, Chola MS has been growing faster than the industry, I think 27.2% in '22/'23 and now 22.4% in '23/'24. So the company is committed to growing higher than the industry growth, multi-line players growth for '24/'25 as well. And then, yes, so to talk about crop, last year, marked our reentry into the crop segment, where we had a cluster in Maharashtra, which gave us about INR 465 crores. The company will continue to pursue opportunities in the other states. In fact, Tamil Nadu went down last week, and then we do have both Andhra and Telangana coming into the program this year, the crop program. Company will participate in some of these and seek to expand its crop business. Coming to commercial lines, fire and marine, even last year, we grew higher than industry. And it is a fact that we have been stepping up our presence in the corporate business segment. For the Japanese and Korean segment is a smaller segment out of the overall commercial business, but that's a segment where the business is quite stable and sustainable. So we have secured higher reinsurance capacities during the year, and we should be stepping up growth even in the Indian commercial business. So this is also in a bid to diversify and de-risk the concentration in the motor segment. I talked about as to how the motor composition has shrunk to about just around 65%. Our medium-term goal would be to move it down to about 60%. Having said that, we will continue to grow in motor, growing the crop position part that I talked about. In Motor, our focus will continue to be in the cars and in the commercial vehicle segment. In quarter 4, we did grow higher than the industry in motor. We have in H2 of last year we have balanced our expenses of management of control with the growth. And we have been able to fairly ensure that we are able to grow while maintaining the expenses of management and control. 3.15% reduction in expense of management is quite substantive given the size of the company. So to summarize, yes, the growth will also come from health, where the proportion of both indemnity and benefit the overall volume is twice. So overall, if you are to broadly look at, we should be looking at, at least 1.35x of industry growth for next year and with at least a 1% shift away from motor into the other lines.

Perfect, sir. Perfect. Perfect. Sir, basically, can I safely say that a crop, which is INR 465 crores or INR 470-odd crores, can potentially become -- given you're okay to take exposure to 3 new states, maybe if you continue to hold these states in Maharashtra -- districts in Maharashtra, then is it safe to assume that we will be around INR 600 crores, INR 700 crores in the current year?

See, Maharashtra will continue for 2 more years, '24/'25 and '25/'26. So if there is no further insurance penetration, farmer coverage area under coverage, one can reasonably assume that the INR 465 crores would be impact. But in terms of proportion, given the growth in other lines, I would tend to think that crop could come down to about 5% of the overall volumes.

Okay. Got it, sir. And my next question is on EOM. Naturally, you partially answered that question, but just wanted to understand that whether it will be largely product mix change, which will drive the EOM improvement? Or you believe there are internal operating efficiencies, which can still play out -- if you want to give a broader breakup how much operating efficiencies and how much product mix can contribute to the EOM improvement road map?

Obviously, EOM reduction is a combination of the product mix, the channel mix is -- sometimes even geography mix. And of course, the efficiencies that the scale of business can bring in. So naturally, we are seeing the benefits of scale. So even from where we were a couple of years back to the current level of INR 7,500 crores, we have seen the benefits of scale from with respect to pure operating expenses. We expect that to continue. On the product mix, definitely, yes. So we have a higher level of commercial business can mean and contribute to a reduction of EOM as we go along. So that is something that we would want to look at.

Got it, sir. And the third question which I had is that your CAR is 109.9% and your loss ratio is 73.7%. So from a data keeping point of view, if cat events were not there or India was limited to one cat event, which is generally the case instead of 3, then this CAR, how much you are expecting a normalized thing to play out? And then also you spoke about the initial remarks that reinsurance commissions also had a negative impact on the CAR in the current year. So if things normalize, especially in '24, this 109.9% combined improvement in loss ratio and along with the EOM roadmap, what you have, what is a more realistic number what we can expect it to be in '25 and '26, sir?

Yes. So I did say that the cat events even without the impact of the reinsurance commission reduction that it had was about 108.8%. So that one -- so that is the combined ratio for the year ended March '24. I do agree that some cat event of some order and scale will happen through the year, even in the coming year, one can reasonably expect that. But with the EOM reduction and the other efficiencies that can come about, the business team is fairly confident that we should be looking at, at least 1% to 1.5% reduction in combined ratio from the current level. That, I mean, if it is 109.9%, one can expect about 1.5% at least a reduction from that level.

And can we expect a similar trend to continue from 2 years point of view, sir?

See, the insurance industry is fast changing. So you have new regulations coming in. So one has to really understand the effect of the regulations and the changes that come about. So one can reasonably expect that given our track record, we will pursue the path of both growth and efficiency when it comes to operating while staying conservative in our motor third-party reselling. So we do know that our reserving levels are conservative as compared to other players in the market and which has an effect on combined ratio, given our motor dominance and given the effect of at least actually if one were to peg it to market levels, our combined ratio would probably be 3% to 4% lower. But we want to stay prudent and conservative when it comes to motor third party reserve.

Got it, sir. And last one on health insurance, can you give the breakup or contribution of benefit-based -- long-term benefit base to the total premium?

Our long-term business in relation to total business still stays at about 8.8% of the total top line, and this would include the health benefit, the personal accident as well as the dwelling business that we write. So we continue to absorb the cost upfront, which is also baked into the combined ratios that we report. One can say that the regulator is fairly considering the absorption of these costs over the life of the policy. So if that were to materialize, the industry is awaiting a market circular from the regulator on this. If that materializes, you will find a substantive jump in the profitability per se -- the reported profits even from the current year. And when it comes to the health indemnity benefit, we are excluding personal accident. We have about 44% of the business coming in from the benefit segments with the balance coming in from the indemnity.

[Operator Instructions] Next question is from the line of Devansh Nigotia from Safe Enterprise.

Sir, in case of crop insurance, I think we have incurred a loss of almost INR 20 crores, INR 25 crores for this quarter. So if you look at outlook in terms of its revenue contribution and what should be PBT contribution for FY '25. And we mentioned that we have some stop loss over year, we are reinsuring it. And I think we have some visibility of 5% underwriting profit. So if you can just re-clarify on that as well. So that will be helpful.

Venu, can you take that?

Yes. Crop insurance for the financial year '23/'24, we did a premium of INR 465 crores. The loss ratio has been estimated at 100%. You all know that the scheme itself is operating 80% to 110% corridor. So we are taking care of the 10% in the soil part of it. That is why it is the estimated loss ratio has been around 100%. Naturally, if it is 100% loss ratio, the underwriting loss is -- the CAR will be much more than the 110%. So this is an estimation. We need to estimate the element of how the Rabi season will go up as a part of that. We expect that the loss ratios will come down from the 100% level when it finally estimated some -- finalized from the point of final LR. The margins in crop is much lesser as you all know that depending on the last year, it was a drought year. Going forward in '24/'25, we can expect betterment in terms of that if the monsoons are good. These are all purely dependent on the monsoons. We are looking at -- we went into that from the point of view of 2 part, only the 80%-110% corridor, which gives us a lesser level of shocks to us in terms of that. Secondly, we have also looked at from the point of the EOM that we have been telling about that in the earlier quarter's call also. So that is actually helping us from the point of view of fulfilling to the EOM limits. That is also a second part of the story. And we are looking at additional states as Suri has said about that. That may also help us in the EOM percentage. So as far as the solvency is concerned, it has already been built into that. So the -- there is no disallowance from the point of view of the recoverable from the crops point of view, that luckily we have got every amount that was due from the Kharif season. This is from the crop point of view.

To add to what Venu has said, when it comes to the crop claims ratio provisioning, we have been conservative in providing at 100% of the earnings. And I can say now with confidence the hindsight of almost 45 days into the next quarter, that the actual results are turning out better and we could well possibly see some reversal of provisioning in the coming quarter.

Sir, but I think we did mention that over here, we have a kind of reinsurance arrangement, which gives us visibility of underwriting profits of, I think, around 5%. So I'm just trying to understand what has changed here? Because what -- I think what you mentioned was that we were underwriting this business with an expected combined ratio of 105% and then the reinsurance arrangement allows us to, at the end, make a 5% underwriting profit. I mean has anything changed over there? Or because when we started underwriting we had like a clear visibility on the profits over year. And another thing is that for FY '24, the segment underwriting loss is INR 63 crores for crop based on our -- so can you just reclarify on that number as well? And from underwriting profit -- from claims to underwriting, there should not be much different because this is just B2B and you just participate in a tender with no employee cost or distribution expense. So why is there in between claim ratio to -- flowing from claims to underwriting profit and loss.