SELL on New India Assurance - High COR dents profits - HDFC Securities

NIACL is India's largest insurer but continues to make high underwriting losses. We note that the company's competitive positioning is weakening and remain concerned about its ability to write profitable business. We estimate an FY23E adj. ROE of just 8.7% and can at best assign a valuation of just 0.6x Sep-22E ABV (less 10% discount for additional 10.4% supply). We rate NIACL a SELL with a TP of INR 106.

3QFY21 highlights: NWP grew +7.5/-3.0% YoY/QoQ to INR 63.8bn as health portfolio posted strong growth (+15.2/10.8% YoY/QoQ) along with motor growing 5.3/13.7% YoY/QoQ. NWP for Crop grew 7.7x YoY; thus, ex. Crop, NWP grew 5.6% YoY to INR 62.5bn. This resulted in a higher-than-expected growth in NEP at INR 67.2bn (+8.8/1.8% YoY/QoQ). Loss ratios in motor OD/motor TP/ health shot up to 99.0/79.0/106.0% in 3Q vs. 64.0/63.0/74.0% in 1HFY21. Coupled with provision for pension liability due to fall in interest rates (INR 4.7bn), it resulted in overall 3QFY21 COR at 116.6% (+90/860bps YoY/QoQ). Investment income (net of provisions) was at INR 18.0bn (- 18.5/34.7% YoY/QoQ), resulting in a realised investment yield of 11.6%, most likely driven by booking of equity gains. Full provisions on investments in debentures of ILFS/RCAP for INR 195/2,032mn were made in 3QFY21. Total investment yield (including MTM) for the quarter was 36.1% (annualised), given strong equity market performance. Solvency remains strong at 215% (+500/+100bps YoY/QoQ). Higher-than-estimated underwriting losses were partially offset by higher investment income, resulting in a decline of 41.6/5.8% YoY/QoQ APAT of INR 6.3bn. RPAT at INR 5.2bn (+7.7/-7.1% YoY/QoQ).

Outlook: We expect FY21E to be a muted year in terms of NEP/APAT growth (FY21E: 4.6/-38.5% YoY) but we expect underwriting losses to reduce substantially (-56.1% YoY).

Source : Equity Bulls

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