Operating profitability the Achilles' heel for GIC; stock rises 8%

Bringing down combined ratio to below 100 a tough task

The General Insurance Corporation of India (GIC) stock surged 8 per cent to close at Rs 245.25 on Thursday. However, it has still shed 7.5 per cent in one month and is trading much below its listing price of Rs 400.
 
A weak performance during H1FY20, with the combined ratio worsening to over 111 per cent, had made investors jittery. GIC — the only Indian and listed reinsurance player — with domestic market share of 87 per cent, is expected to fare better in H2FY20. Bringing down its combined ratio to below 100 per cent will, however, be tough.
 
Combined ratio is a profitability measure for insurers. It is calculated by dividing the sum of incurred losses and expenses by the earned premium. A ratio below 100 indicates profits.
 

Avinash Singh, analyst at SBICAP Securities, says: “Combined ratio is likely to improve on account of expectations of less natural catastrophe in H2FY20, which should help improve profitability. However, GIC is still far away from posting a sub-100 per cent combined ratio.”
 
The general insurance industry is currently dominated by public sector units, which purportedly have poor underwriting practices. This, along with expectations of significant losses from existing business, will hinder a sharp improvement in combined ratio, say analysts.
 
The good news is that the improved Rabi outlook and higher insurance pricing in the fire segment, provide some comfort.
 
Spark Capital’s report following the H1FY20 results stated: “The benefits of higher reinsurance rates and hike in fire insurance premiums shall trickle down to H2FY20, resulting in better combined ratio.”
 
The fire segment contributes 20 per cent to GIC’s gross premium. Analysts foresee the combined ratio reducing to 107 per cent in FY20, and further to 104 per cent next year.
 
Thursday’s rise could be attributed to the possibility of a hike in re-insurance premiums in other segments. Reports also suggest a divestment to reduce the government’s 85.78 per cent stake in GIC, which could help improve free-float in the counter.
 
Beyond business operations, the trend in investment income, a major source of income for GIC, has steadily improved and helped post profit.
 
However, for the stock to see significant gains, an improvement in combined ratio to below 100 per cent is crucial.