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Investment profits cover underwriting losses
While NIA reported a better than expected COR of 118.3% (-610bps YoY), high NEP meant large underwriting losses of Rs 11.0bn (+9.4% YoY). Investment income (Rs 17.1bn, 11.6% yield) and low tax rate (12.2%) ensured a high PAT of Rs 5.6bn (+59.8/99.2% YoY/QoQ). We note improvement in core ICRs but our estimates already build the same and hence remain unchanged.
HIGHLIGHTS OF THE QUARTER
* Despite a 19.5% YoY increase in NWP, NEP increased only 12.4% YoY to Rs 58.8bn.
* Motor/Health/Fire NEP grew 9.1/19.9/36.0% YoY. Management has highlighted that a slowdown in motor persists.
* CORs: CORs (cal.) declined 610bps YoY however increased 110bps QoQ. to 118.3%. CAT losses (due to floods) meant higher provisioning of Rs 3.4bn; adjusting for CAT losses, COR was at 112.6%. Foreign business (FY19 NEP share 13.4%) continues to remain profitable.
* ICR declined 530bps YoY (high CAT losses in base quarter) to 92.7%. Claims ratio improved across segments both on a YoY and QoQ basis(except for fire and PA).
* Underwriting profits: Underwriting losses narrowed marginally sequentially to ~Rs 11.0bn. Health (Rs 4.5bn, 44.3% share) and motor (Rs 2.7bn, 26.4% share) continue to report highest losses. NIACL continues to write low margin group health and government business leading to higher losses in health.
* Investment book grew a mere 1.3/-1.5% YoY/QoQ to Rs 591bn, aiding investment yields to 11.6% (+50/160 bps YoY/QoQ). Fair value reserves have declined by Rs 31.3bn over 1HFY20. Adj. for decline in FV reserves (post tax) 1HFY20 adj. ROE was -9.3%.
* Near term outlook: We expect stock price to correct.
NIA is India’s largest insurer but continues to make high underwriting losses (1H COR: 116.4%). We also note company’s competitive positioning is only weakening and thus we remain concerned of company’s ability of write high quality (profitable) business in the near future. We estimate an FY22E adj. RoE of just 7.2%, and can at best assign a valuation of just 0.6x Sep-21E ABV (less 10% discount for expected 10.4% supply). Given recent run up in price, we downgrade the stock to SELL with an unchanged TP of Rs 116.
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HDFC Securities Limited (HSL) is a SEBI Registered Research Analyst having registration no. INH000002475
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