GIC Re's size and monopoly not helping it attract investors' attention

Despite being the largest player in the domestic reinsurance industry, weak fundamentals cap the stock's appeal

State-run General Insurance Corporation of India (GIC) would probably serve as a good example of how enterprises fail to attract investors' attention despite its monopoly position in the industry. GIC is the only domestic general insurer operating in India’s reinsurance industry with a market share of over 90 per cent. Its competitors would be the likes of global giants such as Lloyd’s, Berkshire Hathaway and Reinsurance Group of America who aren’t listed in India and their asset base in the country is very small at present.

Yet, the GIC stock, despite gaining about 9 per cent in the past year, is far from its IPO listing price of Rs 435 (adjusted for one-for-one bonus). What’s more, even as GIC announced that it could commence business in Russia, the market barely took it positively (stock was down 4.1 per cent on Thursday).

What ails the stock is GIC’s unpredictable financials, which took a massive beating in the December quarter (Q3), when the company recorded a loss of Rs 984 crore due to elevated underwriting losses at Rs 2,740 crore on account of higher claims in agriculture and property insurance businesses. Analysts at HDFC Securities note that Q3’s underwriting losses is the highest since listing. GIC also provided Rs 312 crore for its exposure to Dewan Housing and Reliance Capital. The decent premium growth in property, crop and motor insurance businesses (up 19.7 per cent year-on-year) didn’t help much. Save for Rs 2,015 crore of investment income (up 35 per cent year-on-year), the quarter would have been more painful. With steep losses, the insurer’s solvency ratio was at 151 per cent in Q3, way lower than March 2019’s 206 per cent and border-lining the regulatory limit of 150 per cent. To shore it up, GIC plans to book sale of some investments.

Between Monday evening, when Q3 results were announced, and Wednesday, the stock lost nearly 10 per cent.

What could help GIC somewhat mitigate financial losses is the 13 – 15 per cent price hike undertaken across segments. This coupled with overall hardening of global pricing should help the financial performance stabilise from March quarter, according to GIC’s management. “The corporation has also pruned the portfolio based on more stringent profitability criteria,” it added in the Q3 results release.

Analysts at HDFC Securities, having a neutral recommendation on the stock, say, while price hikes in property insurance will improve underwriting profits, high proportion of crop business will add to volatility.

Investors, thus, could wait for a sustainable turnaround in financials to take fresh positions in the stock, despite reasonable valuation at 10x FY21 earnings.