Maintain REDUCE on GIC Reinsurance - Operationally weak; positives priced in - HDFC Securities

Mr. Krishnan ASV, Institutional Research Analyst, HDFC Securities

Despite being India's largest reinsurer, GICRE continues to make significant underwriting losses (4QFY21/FY21 cal. COR: 105.8/112.5%). 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, we are enthused by the company's exit from weak portfolios. APAT for 4Q clocked in at INR 1.3bn (+37% beat). However, we believe that valuations, at 25.3/13.3x FY22/23E PE, are expensive for a low RoE business (FY22/23E: 8.8/11.2%). We have increased loss ratios by +191/30bps for FY22/23E to factor in higher loss ratios on account of COVID claims and higher commission ratios. We maintain our REDUCE rating on the stock with an unchanged TP of INR 190 (0.7x Mar-23E P/ABV less 10% discount for an additional 10.8% stake to be sold by the GoI).

4QFY21 highlights: NEP declined 0.9/17.2% YoY/QoQ to INR 76bn (14% below our estimates) as crop segment de-grew 51% YoY, partially offset by strong growth (+38% YoY) in health portfolio. COR (cal.), at 105.8% (-169/- 209bps YoY/QoQ), was broadly in line with estimate as ICR came down 650/602bps YoY/QoQ to 82.6%. This was mainly due to lower losses in property and motor segments. Adjustment to commission rates as a result of fixed income treaties being discontinued in FY21 resulted in commission ratio deteriorating 220bps sequentially to 20.6%.

Crop (112% COR in FY21) declined 51% YoY as the company consciously reduced exposure to loss-making geographies although business underwritten in FY19 continues to deliver losses. Within the health segment (129% COR in FY21), the management prudently provided for potential COVID claims from the second wave.

Property segment (24% of 4Q NWP; 111% COR) witnessed price hikes of 10-25% across geographies and a lower number of significant CAT events in the international book. Motor (26% of 4Q NWP; 99% COR) witnessed lower loss ratios on account of lower motor traffic and conservative provisioning in earlier quarters. Management has highlighted that the international book could continue witnessing price hikes in the range of 10-25% for another 4-6 quarters.

Shares of General Insurance Corporation of India was last trading in BSE at Rs.200.25 as compared to the previous close of Rs. 205.4. The total number of shares traded during the day was 41617 in over 1200 trades.

The stock hit an intraday high of Rs. 208.8 and intraday low of 199.5. The net turnover during the day was Rs. 8417465.

Source : Equity Bulls

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