CHOLAHLDNG - CHOLAMANDALAM FINANCIAL HOLDINGS LIMITED Share Price

Cholamandalam Financial Holdings Limited's management provided an optimistic outlook during the Q2 FY26 earnings conference call on November 7, 2025. They highlighted a rebound in performance expected in H2 FY26 following a tepid first half due to crop insurance losses and 1/n accounting effects. The management reported a gross direct premium income (GDPI) of INR 1,835 crores for Q2 and INR 3,647 crores for the half year, indicating that the growth would soon become apparent as the 1/n reporting effect has ended.

Key forward-looking points include:

1. Growth Expectations: Management anticipates improved performance in Q3 and Q4, forecasting not only a return to normalized growth rates but also a sustained uptick in business fueled by recent automobile sector momentum post-GST reductions.

2. Efforts to Enhance Combined Ratio: The combined ratio for H1 stood at 115.3%, with targets aimed at reducing this to approximately 109 through conservative reserving practices and operational efficiencies.

3. Strategic Reinsuring: Management has been tactically increasing reinsurance business, particularly in property, crop, motor, and group health sectors, where profitability is reportedly better than the core business, aiding the overall combined ratio.

4. Future ROE Goals: Despite a drop in ROE, management aims to stabilize it within the 16% to 18% band, with initiatives in place to improve profitability.

5. Leverage Adjustments: There has been a conscious reduction in the focus on long-term policies (notably motorcycles) to manage risk effectively, resulting in a tactical decline in leverage from 6.1 to lower levels, impacting immediate returns but positively affecting the investment book over time.

6. Market Optimization: As of October, Cholamandalam grew by 5.4%, contrasting with a broader market decrease, suggesting enhanced competitiveness in a recovering auto segment.

Overall, the management's approach is focused on leveraging industry opportunities while navigating current challenges with a stringent operational strategy.

1. Question: "How does the recent GST cut and auto sector activity translate into growth for us in the second half, given the tepid performance in the first half due to crop business loss?"

   Answer: "The first half's tepid growth stemmed from the crop loss and the 1/n accounting effect, which we have largely digested. Moving forward, we expect growth in H2, with October showing a 5.4% increase in premiums despite the auto sector's overall decline. The effect of the GST cut should sustain momentum into Q4."

2. Question: "What is our strategy to improve the combined ratio, and where do you see it heading in the next 1-2 years?"

   Answer: "While we won't comment on competitors, our focus is on improving our combined ratio through heightened reserves for third-party losses in motors. We're expecting the adjusted combined ratio to be close to 109, and efforts like adjusting reinsurance commissions should enhance profitability. We anticipate further improvements as we manage expenses and motor loss ratios, aiming for a reduced loss ratio starting in H2."

3. Question: "Can you comment on the recent changes in our investment allocation towards corporate bonds versus government securities?"

   Answer: "We have intentionally increased our allocation to corporate bonds as their yields are more attractive than government securities. Importantly, we still maintain a conservative approach, focusing solely on AAA-rated corporate bonds. Currently, about 40% of our investment is still in government securities, above the 30% regulatory minimum."

4. Question: "What is our long-term goal for return on equity (ROE) after observing a decline in the first half of FY26?"

   Answer: "Despite a dip in ROE in the first half, we reaffirm our target of maintaining an ROE band between 16% to 18%. Management is committed to strategies that will enable us to align with these levels moving forward."

5. Question: "Can you clarify the nature of the INR570 crores in reinsurance accepted business, particularly its profitability?"

   Answer: "The reinsurance accepted business exceeded past volumes across multiple sectors, including property and crop. It is structured to enhance overall profitability, operating with a more favorable combined ratio than our core direct business, thereby helping to mitigate some losses from other segments."

6. Question: "How does the current increase in loss ratios in the motor sector affect our strategy moving forward?"

   Answer: "We recognize the rising loss ratios in motor insurance and are actively implementing measures to address this. Our goal for H2 is to reduce motor loss ratios by about 5 percentage points through corrective actions that improve claim settlements and operational efficiencies."

7. Question: "Will the current reinsurance strategy continue, or is it a tactical response to present challenges?"

   Answer: "Our reinsurance strategy is tactical, arising from the loss of crop business but also aimed at improving overall combined ratios. We expect to make strategic adjustments in core business commissions while seeking profitable opportunities moving forward."

8. Question: "How have our health and personal accident numbers performed, and do they reflect a decline due to 1/n accounting?"

   Answer: "While there has been a marginal decline in health and personal accident segments, reporting on a full premium basis would show slight growth. Despite a decrease in our benefit mix, we are committed to focusing on and growing this segment moving forward."

9. Question: "Given the recent increase in motor loss ratios, what specific measures are being implemented to improve these numbers?"

   Answer: "We anticipate a 5 percentage points drop in motor loss ratios in H2 due to several measures, including enhancing settlement processes and modifying our reserving strategy. It's crucial that we continuously monitor our efficiency and implement beneficial changes."

10. Question: "What is the outlook on third-party premiums and potential pricing hikes in the near future?"

    Answer: "We are hopeful for a third-party pricing hike by April, which would significantly benefit our financial outlook. However, the necessary steps to facilitate such an increase must be taken soon to ensure its effectiveness."