BUY on GIC Reinsurance - Negative surprise yet again - HDFC Securities

GICRE is India's largest reinsurer, but it continues to make significant underwriting losses (2QFY21 COR: 122.1%). 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 target price of Rs 165. We estimate an FY22/23E adj. RoE is at 8.7/10.9%, and value GICRE at 0.7x Sep-22E ABV less 10% discount for an additional 10.8% stake to be sold by GoI.

2QFY21 highlights: NEP was 1.5% below estimates at Rs 95.6bn (-19.4/- 30.0% YoY/QoQ). However, COR (cal.) at 122.1% (-301/+917bps YoY/QoQ) was significantly above estimates as ICR shot up 516bps QoQ to 100.0% and commission ratio increased 303bps QoQ to 20.5%. This was mainly due to high losses in property, health and motor segments.

Despite price hikes, the Property segment (22.4% of NWP) reported a COR of 117.1% (10.9% of underwriting loss), mainly due to higher COVID provisions. Motor (28.9% of NWP) reported CoR of 98.3% due to better underwriting in the international book. Loss ratios remain high in domestic business at 112.2%. Health (22.7% of NWP) grew 263.1%, largely due to base impact (52.9% YoY decline in 2QFY20), while CoR remains high at 125.0%. High underwriting losses continue in the Health segment at Rs 3.7bn (17.4% share) as (1) COVID claims increased, (2) business changed to transfer-of- loss model from fixed profit treaties and (3) commissions increased.

Investment book grew 6.1% QoQ to Rs 796bn as equity markets remained buoyant. 2QFY21 realised investment yields (net of provisions) rose to 13.4% as the company booked profits. GICRE provided Rs 1.5bn for doubtful debts and investment assets. Solvency improved to 163%.

Outlook: GICRE continues to surprise negatively with continually high loss ratios. We remain sceptical of management ability to make underwriting profits.

Shares of General Insurance Corporation of India was last trading in BSE at Rs.126.1 as compared to the previous close of Rs. 127.15. The total number of shares traded during the day was 56487 in over 1868 trades.

The stock hit an intraday high of Rs. 128.1 and intraday low of 124.4. The net turnover during the day was Rs. 7107557.

Source : Equity Bulls

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