BUY on GIC Reinsurance - High COR dents profitability - HDFC Securities

Mr. Madhukar Ladha, Institutional Research Analyst, HDFC Securities

GICRE is India's largest reinsurer but continues to make significant underwriting losses (1QFY21 COR: 112.9%). A calibrated approach to underwriting is expected to change this over FY21-23E. While we are not entirely convinced about the pathway to underwriting profitability, inexpensive valuations - FY22E P/ABV of 0.5x-result in our BUY recommendation with a 9.8% lower target price of Rs 165. We estimate an FY22E adj. RoE is at 9.8%, and value GICRE at 0.7x FY22E ABV less 10% discount for an additional 10.8% stake to be sold by GoI.

1QFY21 highlights: Led by steep decline in crop/motor i.e., 65.7/30.6% YoY, NWP declined 25.6% YoY to Rs 146.6bn. COR (cal.) increased 1,021bps YoY to 112.9% as ICR increased 725bps YoY to 94.9%, and commission ratio increased 282bps YoY to 17.5%. This was mainly due to high losses in property and motor segments.

Despite price hikes, Property segment (22.4% of NWP) reported a COR of 134.3% (61% of underwriting loss). Management stated that (1) claims come in with a lag, and hence company continues to provide conservatively, (2) provisions were higher on account of CATs (Amphan and Nisarga), (3) COVID reserve provided for 20% of NEP (Rs 1.8bn) on international business. Motor (11.3% of NWP) reported CoR of 115.6% as loss estimates are conservative and not building in material benefit of lockdown. Health (5.6% of NWP) declined 65.7% YoY, partially on account of capital gearing treaties coming to an end, while CoR shot up to 142.9%. Crop (47.5% of NWP) reported CoR of 95.5%, as segment saw a sharp increase in pricing.

Investment book grew 5.7% QoQ to Rs 750bn due to a sharp recovery in equity markets. 1QFY21 realised investment yields (net of provisions) was at 5.4%. GICRE provided Rs 1.9bn for doubtful debts and investment assets. Solvency is low at 152%, and we expect some equity profit booking in FY21.

Outlook: We expect the company's underwriting profitability to improve in 2Q/3QFY21 as the impact of lower loss ratios for 1QFY21 come in with a lag. We have tweaked our estimates to build in lower premium growth, higher CORs, and lower investment yields.

Shares of General Insurance Corporation of India was last trading in BSE at Rs.134 as compared to the previous close of Rs. 138.85. The total number of shares traded during the day was 46276 in over 1512 trades.

The stock hit an intraday high of Rs. 138.1 and intraday low of 132.5. The net turnover during the day was Rs. 6204047.

Source : Equity Bulls

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