CHOLAHLDNG - CHOLAMANDALAM FINANCIAL HOLDINGS LIMITED Share Price

In the earnings conference call for Q3 FY26, management of Cholamandalam Financial Holdings Limited provided a candid outlook citing challenges faced during the year while underscoring opportunities for improvement. Notable figures include a Gross Direct Premium Income (GDPI) of INR 2,067 crores for Q3 and INR 5,714 crores for the nine-month period, despite the loss in crop insurance business impacting GDPI by INR 84 crores in the quarter and INR 467 crores cumulatively.

Management noted that for motor insurance, the claim ratio has significantly pressurized performance, with a claims ratio of 80.5% for the quarter and 81.1% year-to-date, a concerning increase when compared to previous periods. They recognized a decline in Return on Equity (ROE), which for the nine-month period stood at 7.9%, not annualized, and addressed investors' concerns about restoring ROE to the previously targeted range of 16% to 18%.

Management remains focused on operational efficiencies, indicating an expense of management (EOM) ratio at 30.63% for Q3, with adjustments expected to follow once the market stabilizes. They committed to participating in the upcoming crop business tender, which is aimed at regaining lost revenues.

Key forward-looking points include:

1. A targeted overall combined ratio improvement from current levels due to expected enhancements in operational efficiency and revenue regeneration from winning crop tenders.
2. Increased scrutiny on the current provisions for motor third-party insurance, expected to reverse as pricing corrections may occur, contingent on regulatory changes.
3. Intention to scale the long-term health and personal accident segments following regulatory compliance.

Overall, management expressed confidence in reviving performance in upcoming quarters as they adapt their strategy to market conditions.

Question 1: "Given the current non-annualized ROE at 8%, along with some pressures on loss ratios as well as competitive environment, specifically in motor OD and TP business. Could you please share your thoughts on factors that led to decline in ROE and our plans to improve returns and move back towards the guided 16% to 18% range over the medium, long term?"

Answer: The rise in motor OD loss ratios has been a significant factor, with an increase of 8% to 9% for us compared to 6% to 7% in the industry. We're working to restore efficiencies across our operations. Our conservative provisioning for motor TP losses, which is 14% higher than peers, also contributes to a higher combined ratio and lower ROE. We aim to address these factors and see improvements as we enhance operational efficiency through changes in our business focus and upcoming crop business tenders.

Question 2: "Could you elaborate on the efforts we are taking to improve ROEs?"

Answer: We have been reducing our expense of management, with the current EOM at approximately 30.6%. Additionally, we lost the crop business, normally running at a 95% combined ratio, which impacted our overall numbers. We anticipate a new crop tender next year that should allow us to re-enter that profitable sector. Overall, we expect our efficiencies and the return of crop business to lead us to improved ROE in the coming quarters.

Question 3: "On health and PA, any way to improve it? How to change the combined?"

Answer: The health loss ratios have indeed increased, largely due to reinsurance arrangements affecting overall performance. We're analyzing the data closely and are prepared to make necessary changes. As we approach compliance with EOM levels, we plan to explore increasing our engagement in long-term health and PA products, which should help in balancing our combined ratios better while catering to demand shifts.

Question 4: "If there's a price hike in the third-party insurance, will your provisioning reduce?"

Answer: Yes, if there is a price hike, it is likely that our TP provisioning will decrease as we adjust to the new pricing environment. The current provisioning has been made conservatively, and an increase in third-party prices could lead to a reduction in our reserves, positively impacting our future profitability.

Question 5: "What number should we focus on for ROE, IGAAP or IFRS?"

Answer: For regulatory and reporting purposes, IGAAP numbers are what we adhere to, as they are mandated for insurance companies. While we have provided IFRS translations for the holding company, the most reliable benchmarks for assessing our economic performance are the IGAAP numbers until full IFRS adoption is mandated.

Question 6: "Is the true economic ROE higher once IFRS comes into play?"

Answer: Yes, we anticipate that once we transition to IFRS, the true economic ROE will indeed reflect higher values. The current 8.2% ROE is not annualized, but it indicates room for improvement. We expect that positive adjustments from IFRS treatment, particularly around provisioning and expense management, will enhance overall returns, potentially approaching 19% to 20%.