Go Digit General Insurance Limited (GODIGIT) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Go Digit General Insurance Limited Results Call hosted by ICICI Securities. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to ICICI Securities.

Good evening, ladies and gentlemen. On behalf of ICICI Securities, we welcome you for the Q2 FY '25 Results Conference Call of Go Digit General Insurance Limited. We will start the call with opening remarks from the management following which, there will be an opportunity to ask questions. I now hand over the call to the Chairman, Mr. Kamesh Goyal. Thank you, and over to you, sir.

[Audio Gap] and we'll try and cover each of the areas in detail so that you can -- everyone who's joined the call gets a perspective of what has happened in this quarter. And then as in the past, we'll be happy to answer any questions that you may have. So I'm on Slide 4, serial number. This is, as you know, the standard slide that we have. We have given the H1 numbers here. So we crossed INR 5,000 crores premium, growth of about 18% in H1. We'll cover quarter-wise later. Market share in motor 6.2%, overall 8.3%. Number of claims, number of partners, customers, all of them are increasing. AUM has crossed now INR 18,500 crores. Manual Policy Insurance continues to be minuscule and the customer satisfaction score continues to be high across 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, it has grown by about 14% in quarter 2, and I'll talk about the industry numbers a bit later. The net earned premium has also grown. Net retention ratio, everything is in place. I think there are 2 points which one needs 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 flood in quarter 2. Last year, you would recall that our industry and Digit also has seen a lot of NAT CAT events. But all those claims have actually come in quarter 3. Quarter 2 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. Now if you look at it last year, whatever claims TP reserve release we had in the entire year, 37% of that reserve release had actually happened in the second quarter. So basically, last year's second quarter was an outlier in terms of the claims -- TP claims reserve release. If we normalize the TP claims reserve release and we move for the NAT CAT, which there was no claim, our loss ratio actually would have been the same. And this is also was even later in the deck, if you see line-wise business, health, where you would recall we had the last 2 quarters, we have actually been seeing reduction in our loss ratio, fire, it has reduced. So overall, loss ratios have actually continuously reduced across all lines of business, but outlier in terms of reserve release in quarter 2 last year, and 2% loss ratio coming in due to NAT CAT or due to flood has actually impacted 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 H1, our ROE is about 6%, not normalized. And despite increase in combined ratio in quarter 2, our actual profit has gone up 3x. Now obviously our investment income has not increased by 3x during the same quarter. So one another point I wanted to actually state 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 the 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 2. In Motor OD, 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 1, in TP, there was actually no increase, in fact, we had a negative growth. So TP, we are seeing a better trend. In the Health, Fire and PA, we have grown by 7%, while industry has grown by 3%. And here, again, like last quarter the employer/employee group health space, we have actually degrown by minus 3%. And fire, we have degrown by minus 7%, industry is minus 11%. In our case, there was one large account we added last year in the tender account where due to pricing, we lost the tender. 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 has actually in a very difficult quarter has been good. Now I also wanted to say that non-employer/employee fund, I've spoken about degrowth. And two points I would maybe like to make here. In non-employer/employee, the degrowth is happening, and it comes at a lower expense ratio. Our segment for attachment business, our credit link business has actually grown by more than 100% during this period. So what it does is that in the Indian accounting, the benefit of a lower loss ratio in health because we are degrowing on group health, it 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 2 years. So when you are in the situation where a low expense business is actually degrowing and the higher expense business is growing a lot, it impacts the expense ratio immediately but the benefit of a 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 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%, overall 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 degrowth 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 base is a 6% market share. I'm not giving any guidance there. But if you look at both 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 that 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. And as I explained, we have started seeing really the results of that. So that was 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 proportion of our business and TP, especially in TP, what the base effect will be in H2. I'll cover both in a bit more detail later as we published that we have received a show cause notice. I'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 6 is if you look at there's a continuous increase in the mix towards our TP business which is now, I would say, stable at about 21%. TP has gone down in H1. But in Q2, we have actually seen 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 7. 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. So 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 the attachment business, it comes with a higher expense ratio, has substantially increased. Despite that, we have reduced our AUM. 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 the last year. In case of Digit, in 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 right path, et cetera, I think we are on good track. Now last year, if I give you exactly what happened on the AUM front. So we filed for forbearance application with IRDA in May '23. In June, IRDA sought additional information, June, we submitted the response. In July, IRDA sought a detailed business plan, August '23, we shared a detailed business plan. December '23, we submitted updates on the AUM plan for 2024 based on first half performance. Now October 28, so from December 23 to October 18, there has been no further correspondence with IRDA. Now IRDA has issued this show cause notice to a lot of companies since we are listed, we obviously had to publish it. Now when we look at the glide path, which we have shared with IRDA last year, which is '23-'24, we have actually done slightly better than what we had shown in the glide path. IRDA obviously has no visibility into the expenses of management of second half. So I would again say that IRDA -- and this is our intent. This is our interpretation assessment that IRDA obviously is serious about AUM, they have issued show cause notices and they want to understand where we are in H2 and how do we intend to stay in that path. And I'm going to explain, and I will request all the analysts that even for the larger companies, please look at their AUM, you will actually see an increasing trend. I would expect that this time continues even the biggest of these companies to exceed this 30% AUM limit. And at this stage, we feel that we would be able to follow through at this stage on a right path. As of now, based on where we are today 18 months to the right part we feel that we will be able to achieve on the expense of management. So that is what I really wanted to cover in this slide on expenses because claims I had covered earlier. Now 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 we have added about INR 1659 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 resource 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 from capital gains, this is less than 3%. In the first half, capital -- we actually have a capital loss. We 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. But here, I just wanted to again emphasize that our business model is about high retention, higher leverage. As of now, our investment yields coming in purely from fixed income, in fact actually having a capital loss. So the quality of our earnings and dependent 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 have never really explained it in the way we are doing. Since capital markets now in the last 2, 3 weeks have been a bit nervous you can imagine, and I'm not spoken for it, you can imagine if markets drop by 10%, what it can do to the quality of earnings for everyone else. On the fixed income side, our duration is 5 years, and you'll see in the next slide, our quality I'll speak about fixed income in detail. Interest rates, if go down, we are actually sitting in a very, very good situation. And this is something really important. So I have covered claims, I have covered expenses, I'm now covering the third piece of investment, and I wanted to emphasize the quality of investment earnings. Because having capital gains in a very bullish stock market and fortunately, markets have been very bullish, especially in the last 2.5, 3 years, we know the cycles come. And across the world in 2000, in 2008, euro crisis of 2012-'13, you can actually look across that true P&C or non-life companies dependent on the capital gains is as high as it is for some insurance nonlife 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 that last time we used to show 81 bonds, which by nature 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%, AAA 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. And out of INR 1,945 crores, 67% or 2/3rd is with SBI AT1 bonds, 27% of AT1 bonds is coming in from Canara Banks and 6% is actually coming in from HDFC. Now why this opportunity came in AT1 bonds and why we took it is 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 yield for AT1 bonds had actually gone up when they were issued at about 8.2%, 8.3%. And when we looked at this, we felt there is a good opportunity, and we actually invested in AT1 bonds. So our investment portfolio also is not geared towards AA, it's actually towards AAA, sovereign bonds and AT1 bonds and other bonds are really, really less. And even there, we have AA equivalent is still 5.6%, AA minus is 0.6%. So this is I really wanted to speak on the investment. So just to recap, investment, we're 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, do insurance companies depend non-life companies so high on capital gain as we have seen in some of these companies. Our bond portfolio is absolutely good. And within the bond portfolio, what was actually being shown in AA-rated is actually AT1 bonds. And I've already explained SBI is 67%, Canara 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 have seen very aggressive competition. every quarter, you will see companies which gained market share in group health. Our group health business employer/employee aggressively, the loss ratios are actually increasing. If you look at Digit, in Q2, we were at 86%, in Q1, we have actually moved to 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 1 to 2 years. So prior loss ratios, our 54%, we got some fire claims, especially in Gujarat during the flood in Baroda. Engineering, we had one NAT CAT claim of flood, but Engineering, earned premium is actually quite less. And overall, our loss ratio continues to be good. I've already explained in TP from 56% to 67%. And why in last year Q2, 37% of the yearly reserves were actually in Q2. This year, we don't foresee, and again, it's not our guidance, we don't foresee that the releases which we had in the first 2 quarters that our releases in Q3 or Q4; if the trend continues, claims would actually be lesser. So there's no reason for us to believe that. Let's go further. I think as you know this, so I'll only say that our four APIs continue. 2/3 policies continue despite growing number of policies because with increasing APIs, we are adding more and more APIs than 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 6 months, which I think is a decent number. So that really is this. Now this is -- sorry, let's see the IFRS. So 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 a much better idea on profitability compared to the IGAAP because as I explained earlier in IGAAP, the impact of, say, employer/employer, non-employer/employee, companies which do upfront high reinsurance and book the reinsurance commission now show a lower loss expense ratio. All these gets actually normalized in IFRS. And you can actually see in IFRS, the first half, what our audited or unaudited results of the ROE in the overall resulted in. Last year, '23-'24, we have not prepared IFRS results in the first half. We have started preparing this from Q3. So we'll actually be able to see the Q3 results when you see next quarter that you'll be able to see the quarter-on-quarter also moment in IFRS. When we end the year, our statutory auditors for IGAAP will also be auditing the IFRS balance sheet. So we have 100% readiness to move to IFRS. I may 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 have actually pushed the IFRS to this. Personally for me, this is a signal that for some of these companies who are seeing this, the results in IFRS might not be as good as what they are telling people informally. But this is what I really wanted to say on the IFRS. All these triangles are old ones, so I would not really cover that, but we'll obviously publish all these triangles also at the end of the financial year after the audit. So I think I have taken 50% -- almost 50% 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.

[Operator Instructions] The first question is from the line of Mahesh from Emkay Global.

Sir, my first question would be on the net retention ratio. So I just wanted to understand why is there a dip in the net retention ratio. And second thing was, can you just repeat what commentary you gave on the reserve release?

Comment on the reserve release. So actually this year, and I would not be able to share the details. You will 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 some major partners, we have actually opened up a reinsurance line so that we can develop these products in line with our partnership with our reinsurers 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 multiline sector. Now, on the reserve release, what I mentioned was that if you look at last year in terms of our TP claim reserve release, we basically said that we are releasing INR 100 in a year. It is not 25%, 25%, 25% each quarter last year. Last year, in quarter 2, we released 37% of our reserves, which means more than 23% was normalized, we released almost 1.5x our reserves. So the total, because of that Q2 actually became outlier. And because of this, the TP loss ratio this year seems higher. If we normalize the reserve release, then actually on the TP 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 2 of last year. This is what I mean by reserve release.

So sir, in H2, are you expecting any reserve release in H2 for motor TP reserve?

So as I said, I maybe don't want to give guidance, but every quarter, if you see, we have been having reserve release. What I mentioned was that in the last two quarters, whatever trends we have seen, we have no reason to believe that this trend will not continue for the next 2 quarters and TP release. But since by principle, we don't give guidance, sitting here as of now, those reserve release will continue until unless, certainly, no more expense starts coming in or something which we don't expect. So that trend should continue for next 2 quarters.

The next question is from the line of Supratim Datta from Ambit Capital.

So what I am asking on the health insurance side, firstly I wanted to understand within the group health business what proportion of your group health business is now attachment products versus employer/employee products. If you could give us the breakdown this quarter versus what it was last year similar quarter. That will help us understand how things have moved here. And the other question about here is that which are the banks or partners that you're selling this product to? And is it an attachment with a loan or attachment with credit cards. Because currently what we are seeing is on the lending side there is a slowdown, things are slowing down. So just wanted to understand 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 product going forward that would be helpful. Now moving to motor side of the business. Now if you look at the commentary from peers who have reported or some of the auto OEMs suggest that second half the volumes are going to be muted. Now in this scenario, how do you look at growth in the second half? Or how 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, if OEM, the auto demand remains weak, then despite that, could we still get to our AUM target within the time frame or we would have to revisit that. If you could give some color on these three points, that would be very helpful.

So thanks for questions. So on the pipeline products, I think this corporate agency information is public. I obviously don't want to share names of the companies, et cetera, simply because now 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 exact proportion, our employer/employee business degrew by 3.3% in this quarter, while the growth in attachment business was 110%. So you can actually see that this business is growing nicely. Now if the group health pricing, employer/employee pricing improves, then this mix can again change. But it will come at a price for us, employer/employee, where we should not be making big losses, at least we should try and achieve a breakeven. But this growth which we are seeing in non-employer/employee will continue. And will continue for two reasons. This year, the first half has been a bit difficult on personal loans headwinds, on micro-finance, 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 lot of these partners have in H1. We are also launching some new partnerships. So that proportion can change because we might end up writing more employer/employee business in pricing corrects. 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. But again, as I'm saying, all things being equal to where we are. On the OD side, new vehicle sales were muted. And that is why if you look at, we grew in motor OD by 14% in Q2 and industry grew 6%. So our growth rate in OD in quarter as well as in the first half has been 2x of the industry. Now we obviously also have a very good base in new vehicles and in the old vehicles renewals coming in from last year. So new vehicles continue to be sluggish, the sales. Again, I think no guidance, but you can see that we have been growing faster than the industry on the OD side. So TP and OD put together, you can actually then see what will happen on the motor. Now even as I explained, we had a 3-year glide path. I gave the datelines from December after submitting the updated business plan and updating the H1 performance in '23-'24. We haven't heard some regulator anything. They obviously have no visibility to what has happened with us on the expenses on '24-'25. Last year, we did slightly better than the glide path we had shown. Based on where we are today, we feel that we'll be able to achieve the glide path over 3 years. And as I also said please to look at expense ratio AUM of some of the larger companies. Their AUMs are going up, our AUMs are actually reducing. I had also said in the past that AUM is more a function of the line of business mix rather than actual AUM because for each product line, the expense ratios are more or less similar for everyone. 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 1, at 7.5%, our admin expense ratios are 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. So AUM is actually coming in from a product mix. It is not due to our inefficiency. So if it was our inefficiency, we are already the best-in-class despite having a lower scale. So this is maybe an additional point I can add about AUM in terms of our admin expenses.

That's really helpful. I have just one follow-up. So given you're one of the best spending on the OpEx side, it can be seen that despite your scale you are better than some of the larger players. But then the question is that can this improve further or has it come to a level where it will remain at a similar place. So if you could give some color on that, that would be really helpful.

Everything can be improved. So I used sleep 7 hours 4 years back, now a days I sleep 9 hours a day. So I never used to go to the gym before. I at least pass by it now even if I don't go inside. So everything can improve. I am saying this intentionally because I don't want to give any sort of guidance. But if you keep looking at our admin expense ratio, they are coming down each year. But on a serious note, if I may add, I have seen this across having the benefit or the disadvantage of working in different countries that because of expenses companies stop investing in tech. And then over a period of 2, 3, 4 years then it catches up with you and then you have to overinvest in technology. We as business have been overinvesting in technology. We have seen a massive benefit. API use Is one of those examples, now transparency on admin expenses, these are fewer example of what it can do. So I think all of us are here very, very conscious of the fact that in trying to say 0.25% of the management expenses, we would never underinvest in technology. So that is what I wanted to say from a philosophy person. But 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 2 of last year, in fourth quarter, we had gone down to 5.7% 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. But if we see an opportunity, we act, and if we have to do lesser business or cut something, we will cut it. In such a difficult market when industry grew by 2%, you can actually see we grew by 14%. If you had asked me this in say, July, that in quarter 2, would industry only grow by 2% and you will grow 14%. I would have said chances are first, I don't know 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, for us.

The next question is from the line of Uday Pai from Investec India.

I just had a couple of questions. Firstly, so over the last 4 or 5 quarters, your total absolute amount of reinsure accepted 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, if you could share. And secondly, since we are seeing some kind of mix change due to various factors such as Motor TP pricing, et cetera. How do you envisage the steady state book mix and profitability of the book? If you could give some color on that.

So let me answer the motor question first. So basically, if you see when we said that the profitability is under stress in case of TP business, we kept on releasing market share. But at the same time, we started working more and more granular selection if we could steer the TP portfolio according to what we thought the opportunity is. We obviously never say if anybody -- I would say, we never consciously do any loss making business but because there was no TP 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 then 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 finished at 6.6%. All things being equal, we could actually see some growth. On the reinsurance side, I think I would there are 2 things: One is that the cedents we work with over a period of time now 5, 6 years, we've developed a recent relationship. And we have also started exploring both on the direct side and at times on the facultative inverse side reinsurance. And this is -- there is one particular line of business which we have started this year, which we didn't have earlier. Just due to confidentiality reasons, I don't really want to get into that level of details. Overall, our underwriting philosophy, whether we write by way of inward facultative or directly, that philosophy stays same. And I may add here that facultative basically means we are writing it for each individual risk. So facultative inward reinsurance or your direct business from an underwriting pricing perspective, there's actually no difference. You see every risk and then you expect it or you don't expect it. While another type of reinsurance, which is much bigger is treaties, where you basically give a capacity within certain guidelines and the insurance company can within that framework keep giving you the business. So facultative, we see every single risk. So our underwriting philosophy, whether it is a direct or inward facultative, it actually stays the same.

The next question is from the line of Sanketh Godha from Avendus Spark.

I was just asking to improve our ROE to mid-teen in the current accounting, that is IGAAP accounting, we need to improve our combined ratio, maybe compared to the last year also by maybe 400 basis points. So I just wanted to understand that given we are already best-in-class in loss ratio, we are already best-in-class in the other OpEx ratio. So the only lever leftover for is the commission cost. So naturally, then is it fair to say that the next leg of the growth will predominantly come from the segments where the commission cost is meaningfully very low. And probably through the same loss ratio what you have today. And that will be the next leg of the growth and that will be the trajectory of including the combined order. And if that is the case and then what is the thought process what you have to achieve that thing? That's my first question. Second question was that maybe the previous participant asked that question. Just if you can give the mix -- because the fire segment is the reinsurance, overall GWP has declined whether it has come more from non-fire business in the inward facultative reinsurance whether it is crop or government health or just if you can give a better understand of the business will be helpful, whether it is tactical and you believe that it will be sustainable going ahead also. And lastly, this benefit-based business what you have done. Just want to understand its nature, whether it is 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 a long-term benefit based plan, whether it will have a negative impact on AUM or not. These are the 3 questions I have.

Thank you, Sanketh. 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, captive basically means the promoter banks. They would actually suffer the most. So this is something which from a competitive perspective should actually improve our position. So that is I think the first point I wanted to make. The second, I think if we look at the reinsurance questions you asked, as I mentioned earlier that we started a new line of business. Even on property, we have not -- without getting into too much details because I don't honestly know this also. I don't have the numbers in front of me. Our reinsurance business on inward facultative business on property has also grown in the first half and also in the second quarter. So we feel that with the sort of market pressure, pricing market is seen. In April, the reinsurance will have to have act on the pricing, otherwise, it would -- they will be 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 the last year in a new line of business. So that was the second point. On the call, actually, Sanketh, and I think you would know this better than I do that the combined ratio definition as for IRDA actually has no direct reference on the profitability. Because 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 2, our combined ratio despite whatever I said on TP and what I said on NAT CAT claims, despite that our net earned premium combined ratio has actually improved over the last year. So this combined ratio, unfortunately, the rate is presented has no direct correlation to profitability. And I think that is something which is a bit strange. And second, also, as I said, is in a lot of cases, companies which have lower retention and this is visible in their quarterly accounts, they book a lot of upfront commission, reinsurance commission, especially with long more than 2 years, 3 years kind of products, which gives them that slight advantage on the net basis, which is not visible. It will not happen in the case of IFRS. Did I answer your question, Sanketh?

Yes. Mostly answered. But my only simple point was that whether -- see you are at 108 kind of a combined for the half. Just wondering, given the kind of expense and loss we have whether the commission cost is the only place where we see -- even if I look at from the underwriting point of view, or NEP basis point of view, if it triggered to improve the overall profitability of the company? From Underwriting, not from the investment.

Understood. Understood. So Sanketh, I will say 2 things here. One is if you see in H1, without annualizing, our ROE has been 6%. On Indian accounting, on the entire year, if we have a ROE, which is slightly more than 10%, and I am just giving arithmetic equation, no guidance, we actually will hit a profit of about INR 400 crores. So 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. Combined ratio, the way the definition is in this, it is not a right way to drive profitability. Otherwise, our combined ratio has increased, and I look at by 3.5%, and our profit has gone up 3x, while our investment income has not gone up 3x. So this is a misleading number. Personally if you ask me, I don't look at this number at all because neither in IFRS, this combined ratio, I've not seen in any country, and I have had the benefit of working about 26 countries, this definition of the combined ratio. Because it does not reflect true accounting or true profitability of a company.

Got it. And lastly, your leverage is at 4.7x, which actually came off because of the capital raise. So what is the comfortable investment leverage you'll always prefer to work at?

So here again, I think Sanketh, because we are generating profit every quarter my sense is by end of 31st March, '26 so next financial year, I think the leverage would increase to something like 5x. Now the way we look at it is not from a leverage perspective, we will look at it from a solvency perspective. So the idea is that we would want to keep our solvency margin, say, around 210%. I'm giving you ideal scenario. Age by equity allocation to 10% of the assets. So far we in a downmarket also solvency ratio is about 175%. So that is how we will look at it. Secondly, if you look at now our network in IGAAP is also about INR 3,800 crores. I think regulation allows you to raise preapproved capital up to 25% of the net worth. Now if I just go forward this by 2 years, and again, no guidance under normal circumstances suppose, our net worth hits INR 5,000 crores and we have today INR 350 crores of Tier 1 bonds, we can actually raise another INR 900 crores of Tier 1 bonds to basically take to enhance our solvency. So from a capital perspective, I think we are in a very decent place. We have all the space to grow the business, to also change the asset allocation. And even after 2 years or 3 years, if we need capital, we can actually always raise a decent amount of capital through NCD because we have not done this previously. Obviously, there are other things which we can also do for better capital efficiency. But as of now, we don't really have to artificially do anything to either enhance or leverage or reduce or 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.

The next question is from the line of Dipanjan Ghosh from Citibank.

I have a few questions. First, going back to the group employer/employee business. Just wanted to get some color on how the business mix is shifting, let's say, between larger corporate and smaller corporates. And in line with that, if you can give a positive understanding on how the claims ratios have been behaving in each of these two buckets Y-o-Y or 1H? And next is what is the sourcing channel for -- how does the sourcing channel differ between when you source large corporates which I believe would be more direct versus let's say the smaller corporate, so how does the profitability really shape up in these 2 segments? The second question is more on the motor business, and this is data keeping question. If you can give the split between 2-wheelers, EVs and PVs and also how that has changed Y-o-Y. And lastly, going back to one question which has been asked quite a few times on the call on your strategy regarding inward reinsurance. So we do the numbers for 2Q and 1H. I just wanted to get some color on whether do you plan to increase that going ahead over the next, let's say, 12 to 18 months. And if so you already mentioned there are few products -- new product segments of partnerships that you kind of got in fit, are there more in the pipeline? And how does that entire strategy really shape up?

So thank you, Dipanjan, for the questions. Let me start on the inward facultative reinsurance because as I said earlier and explained that this is a case to case. So very difficult for us to say that how the business is because it also depends upon what other reinsurers who write facultative business are doing. And there are other now direct companies also in India which have started writing inward facultative business and we are seeing companies wanting to write that. So 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 the reinsurers substantially changed their KTs. Then this opportunity for all direct companies who write and collaborate with each other for inward facultative business would substantially increase. I may also add that Government of India as well as IRDA Chairman are very keen that India reinsurance capacity should actually increase and more business should be done. And they are also wanting to endorse one to retain more and more business within India. So hopefully, directionally, I think with the support from IRDA and also from the 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, financing smaller business groups with employees less than 5, 000 or 2,500. But in H1, as you know, that in April, we have a lot of big renewals of large companies. So H1 is always skewed. But 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 the 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, the competition was actually in our first quarter, competition was seen on price on the larger groups. And our core conversion ratios was much lower on the larger groups compared to the smaller groups. But these things can change because the business written in April, May, for large groups, the loss ratio has been actually stop showing by already, but by November, it will become like a trend. And then people companies when they will see that the losses are increasing on large groups. And then in January, where we see, again, good renewals of large companies, things would actually change. So depends on, this is, I would say, significantly more dynamic. But I personally feel that if you look at fire, you look at motor, your look at group health, if loss -- if the pricing composition is really increasing, group health is the first one where the loss starts emerging and then the trends starts emerging very, very fast. So we have started seeing some early -- very early trend wherein if you look at in 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 TP, et cetera, this again moves a bit dynamically. But all 3 are in the 30s for us and the private car I think last year, this is our non-biggest segment within motor. So this is what Dipanjan, I can say.

The next question is from the line of Jayant Kharote from Jefferies Group.

Congrats guys on the claims side. Good performance on the health side as well. Slightly broader question, little Go Digit, but larger industry issue we're hearing in show cause notices going out to a lot of players maybe in double digit it seems. So -- and correct me if I'm wrong, if EUMs are supposed to be brought down and the time lines are like next there are two options that we have. One is of course doing more writing or more retention. And second is doing a bit more on the group low commission business, 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 I think there are probably 10 or 12 companies going to go off similar lines of business, they seem like in group as we've been seeing for the past 6 months. So how do you solve this puzzle, Kamesh? Because even if we were to wait a bit to get the pricing right, the irrationality might continue because everybody is trying to finish the sort of -- end before the finishing line in 6 quarters. I don't know if I'm putting the question correctly, but just to understand how do you think that it will play out eventually?

So basically, Jayant, your voice was cracking but let me say that you're saying that in EUM, if every company is trying to meet the EUM guidelines and because of that base 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 6 quarters, right, to complete the EUM. So there would be a rush or high competitive intensity for the next few quarters.

So I think, Jayant, I would say there are two ways to look at that. So this year, we look at industry's growth rate has not been good, which basically means that EUM for almost every single player will actually go up. I already said earlier that larger companies amongst the largest, they have actually seen increase in OEM this quarter or this half despite the slightly better than industry growth. Others have seen lesser growth, they would have seen even further increase in EUM. Now companies which have become aggressive in group health, employer/employee business to make up for the EUM, they will actually see a very bad outcome on the loss ratio. So the profitability will suffer. So eventually, all of this has to balance itself out. Secondly, my sense is that regulator will realize, and that is my sense that after EUM has come, the expense ratios have actually gone up rather than going down. And this is happening because instead of having -- and this is my personal opinion, not Digit's, this is happening because everyone is trying to develop business in low commission, this is group health, government health, crop, I'm 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 see that this is something which regulator, because we are very serious about it, they will look the results of '24, '25 and then think about as to what is to be done. Sanketh had spoken about change which is happening from 1st 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, I have not done a calculation, but I have a sense that almost every company, barring maybe one or two, would actually see EUM limit being increased. 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 a better idea to everyone maybe as for third quarter. But as of now, we feel that we should be able to stick to the glide path this year also.

That was very elaborate. If I could just add 1 last question. As an industry, are there any representation being made to the regulator for extending the year and time lines? .

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. So my sense is, and this again is assessment, that 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 have heard and again I have no inside knowledge. I have heard is that on this accounting change from 1st of October, there are some companies which have pushed hard. I think standalone health insurance companies, some multi-line companies have requested IRDA to postpone the date. I think this is what I heard from the industry sources. But I have no internal information, Jayant, on this.

Thank you, Kamesh, as always, for your insight on this and congrats on the claims, especially again on the health. Great job over there.

We can take one more question. We have another call starting in 5 minutes.

Sure. The last question is from the line of Nischint Chawathe from Kotak Institutional Equities.

This is actually on the IFRS part. On the discounting impact in IFRS, as and when it gets implemented, how do you think the industry takes it? Does it get translated into higher payouts? Or does it get translated into tariffs? Or how does it play out?

So Nischint, I actually can't really talk about the industry because the challenge we have is that we were very established companies are not publishing IFRS results. And what we hear is that most of them want this IFRS implementation date to be postponed. And I think we hear that it has been postponed by a year already. So very difficult for me to comment on what we will do because I don't know the IFRS results. My sense is for a lot of companies IFRS results would be worse than Indian accounting results. Simply because lot of them are taking upfront 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 results, we will not be seeing this from a perspective increasing commission. So I think philosophically, that is definitely -- I can say my CEO is sitting next to me and she is nodding and saying absolutely.

Because if you are going to price the product, I mean, very, very conceptually based on an ROE basis and then probably there is some release that happens -- the competitive dynamics will mean that it goes on to either the distributor or the customer.

My sense is Nischint, it will not. Simply because as I said IFRS results for most companies will be worse than Indian accounting. So how -- when the results will look worse, how do you increase the commission. And I would say that and I will be very transparent here when we were in the IPO and I was meeting one of very reputed mutual fund in India, and I think the person asked me that -- above IFRS results and this so that will we publish IFRS results after listing. So actually, I can say it again now, ICICI Securities has also organized the call, they and Morgan Stanley were a lead bankers. We have proposed to SEBI to improve 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 23rd May, if I remember, and our results came in the first quarter of June or second quarter of June. We had actually published audited IFRS results and after that, every quarter, we have given IFRS results. From next quarter, we'll start giving quarter-on-quarter. So my request in a way, for people like you, Nischint, and I think you are some of the most reputed insurance analyst on this call, if you ask insurance companies to publish IFRS results even if unaudited, we will publish our audited results, but please push them so that no -- I think if I can speak in Hindi [Foreign Language] 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 [indiscernible] too serious on a Friday. But thanks, everyone, for joining. Nischint, I hope I have answered your questions.

Yes. Happy Diwali to you.

Thank you. Thanks a lot, Nischint. So 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.

That's it for 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.