BUY on GIC Reinsurance - Arduous Road Ahead - HDFC Securities

Mr. Madhukar Ladha, Institutional Research Analyst, HDFC Securities.

GIC Reinsurance (Q4FY20 Results Review): Arduous Road Ahead. BUY
(TP Rs 185, CMP Rs 155, MCap Rs 272bn)

Higher losses in agriculture and aviation led to increased 4QFY20 claims ratio of 89.1%, +1,917/-1,788bps YoY/QoQ. This resulted in underwriting losses of Rs 7.2bn. Investment income was hit by higher provisions of Rs 3.8bn bringing yield down to 7.7%. 4QFY20 APAT was Rs 12.2bn (+37.5% YoY).

NEP: Led by healthy growth in property/health i.e., 71.7/17.5% YoY, 4QFY20 NEP grew 43.6% YoY to Rs 76.6bn. For FY20 the company delivered an NEP of Rs 443.5bn (+16.0% YoY).

CORs: 4QFY20 CORs (cal.) increased 1,676bps YoY to 107.5% as ICR increased 1,917bps YoY to 89.1%. FY20 CORs (cal.) increased 929bps YoY to 114.5% as ICR increased 848bps YoY to 97.3%. This was mainly due to high losses in crop and fire.

Crop's share in 4Q/FY20 NWP was 7.5/29.9% but its share in underwriting losses was higher at 377.1/56.5% as 1) losses due to unseasonal rainfall mainly in MH and MP leading to post harvest losses, and 2) loss development on crop portfolio for FY19. Management stated that crop losses should reduce FY21 onwards as the company had reduced its capacity to ~Rs 80bn (-40% YoY) and implemented stricter loss corridors.

Investment book declined materially to Rs 702bn (-10.9/-12.4% YoY/QoQ) due to MTM hit on account of equity losses. 4QFY20 realized inv. yields (net of provisions) was at 7.7% (annualized). Investment yield (incl. FV change) declined to -20.3% (vs. 8.2% in FY19). On FV basis equity accounts for 35% of exposure. Duration of the fixed income book is ~7-10 yrs.

GICRE provided Rs 3.8bn for doubtful debts and investment assets. Management highlighted that it has provided for 100% for secured as well as unsecured portion of ILFS (Rs 7.9bn) and DHFL (Rs 2.1bn). Exposure to ADAG was secured/unsecured at Rs 2.95/1.64bn. Co has provided for 15% secured and 100% unsecured portion.

Management stated that it will book investment gains to shore up solvency, which is now at just 153! Solvency (incl. investment gains) stands strong at ~300%. Adj. for FV change (net of tax), GICRE's annualized ROE for FY20 works out to -28.8%.

STANCE: GICRE is India's largest reinsurer but continues to make high underwriting losses (FY20 COR: 113.8%). A calibrated approach to underwriting is expected to change this over FY21-23E. While we are not fully convinced about the pathway to underwriting profitability, inexpensive valuations- FY22E P/ABV of 0.6x result in our BUY recommendation with a TP of Rs 185. We estimate an FY22E adj. RoE at 7.4%, and value GICRE at 0.7x FY22E ABV less 10% discount. We continue to rate GICRE a BUY with a TP of Rs 185 (Mar-22E P/ABV of 0.6x).

Shares of General Insurance Corporation of India was last trading in BSE at Rs.151.5 as compared to the previous close of Rs. 149.15. The total number of shares traded during the day was 31986 in over 1210 trades.

The stock hit an intraday high of Rs. 154.3 and intraday low of 151.1. The net turnover during the day was Rs. 4871504.

Source : Equity Bulls

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