General Insurance Corp Rating: Buy; recovery is slower than expected

GIC Re’s Q2FY21 profit came in at Rs 2.3 bn (vs Rs 5.9 bn loss in Q2FY20). Underwriting losses fell to Rs 21.5 bn vs a loss of Rs 22.9 bn in Q2FY20, with both the loss ratio and combined ratio falling y-o-y. Losses continue to be high in the fire, health and motor segments. Gross written premium rose 13% over Q2FY20, with strong growth in health, fire, and marine insurance. The company continues to reduce its exposure to the agriculture segment (-193% y-o-y). Investment income rose 54% in Q2FY21 y-o-y to Rs 27.6 bn. Shareholders’ funds rose 2% from Q1FY21 while the solvency ratio improved to 1.63 (Q1: 1.52).

Fire continues to be a worry

Fire continues to be a worry, especially the international business. Despite price hikes, the fire segment (22% of net written premium) reported a combined ratio of 117% (10.9% of underwriting loss), mainly due to higher provisions. In motor (29% of net written premium), underwriting losses are high in the domestic business (H1 combined ratio: 112%). The health segment (23% of net written premium) reported a combined ratio of 125% on account of a rise in claims, a shift away from a fixed margin treaty model, and higher commission expenses.

Combined ratio of 110% expected in FY21e

We expect GIC Re’s March 2021e combined ratio to come in at 110.1% (previously 104.8%), largely due to an improvement in the domestic combined ratio from 113% in March 2020 to 105% in March 2021e. Our forecast is also predicated on the domestic international split to move to 55:45 and for the international combined ratio to fall to 116%.

We cut our FY21 estimates, lower TP

We cut our FY21, FY22 and FY23 estimates after factoring in Q2 results. While the company’s profitability is improving, it is slower than our expectations. We base our TP on a Gordon growth model. We arrive at our fair PB multiple of 0.6x (previously 0.8x) by assuming an average ROE of 9.6% (previously 10.5%), a cost of equity of 11% (unchanged), and a ‘g’ of 7% (unchanged). We apply this fair PB multiple to our year-end BVPS estimate of Rs 139 (previously Rs 142) and then discount it to the present to arrive at a TP of Rs 188 (previously Rs 206) after adding unrealised gains. GIC Re has time until August 2021 to comply with the minimum public shareholding requirement of 25%. Our TP implies c50% upside from current levels; accordingly, we maintain our Buy rating.