General Insurance Corporation of India (GICRE) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the General Insurance Corporation of India Q3 FY '20 Earnings Conference Call. [Operator Instructions] I would now like to hand the conference over to Mr. Binay Sarda from ChristensenIR. Thank you, and over to you, sir.

Thanks, Janice. Good evening to all the participants on the call, and thanks for joining this Q3 FY 2020 earnings call for General Insurance Corporation of India. Please note that we have mailed out the press release to everyone, and you can also see the results on our website as well as it has been uploaded on the stock exchanges. In case, if you have not received the same, you can write to us, and we will be happy to send it over to you. Before we proceed with the call, let me remind you that the discussion may contain forward-looking statements that may involve known or unknown risks, uncertainties and other factors. It must be viewed in conjunction with our business that would cause future results, performance or achievement to differ significantly from what is expressed or implied by such forward-looking statements. To take us through the results of this quarter and answer your questions, we have with us the management of GIC, represented by Mr. Devesh Srivastava, Chairman and Managing Director; and other top members of the management. We'll be starting the call with a brief overview of the company and the financial highlights of the quarter, which will then be followed with a Q&A session. With that said, I'll now hand over the call to Mr. Devesh Srivastava. Over to you, sir.

[Technical Difficulty] everyone. I'm Devesh Srivastava, Chairman and Managing Director of General Insurance Corporation of India. GIC Re declared its financial performance for the 9 months ended December 2019 at the Board meeting of the company held in Mumbai on the 10th of February 2019. Against the backdrop of severe claims worldwide during the year 2019-'20, higher agriculture claims and flood claims in various parts of India, in the quarter ending 31/12/2019, underwriting performance resulted in an underwriting loss to the corporation. Given the steps taken by the corporation in revising premium rates for fire segment based on the Insurance Information Bureau statistics, the fire segment is now on a sound footing. Coupled with the global overall hardening of pricing environment, the financial results for Q4 is expected to improve. Alongside, the corporation also pruned the portfolio based on more stringent profitability criteria. The details of our financial performance has been already provided to you, but I'm reiterating it for the sake of good order. The growth in gross premium income of the company was 15.7%, with a premium of INR 41,000 crores -- INR 41,812.29 crores for the 9 months ending 31/12/2019. The investment income for the 9 months period ended -- ending 31/12/2019 was increased to INR 5,216 crores. The net value of the -- the net worth of the company, without fair value change account, was recorded as INR 19,350.67 crores. The company recorded a loss before tax of INR 1,547.06 crores in the 9 months ending 31/12/2019 as against a profit before tax of INR 2,239.74 crores in the corresponding period of the previous year. The reduction in profit is on account of provisioning for investments and increase in agriculture losses. The loss after tax for 9 months period ending 31/12/2019 recorded as INR 1,556.50 crores as compared to a profit after tax of INR 1,620.94 crores for the corresponding 9 months of the previous year. The total assets increased by 7.66%, from INR 119,367.26 crores as on 31/12/2018 to INR 1,28,509.76 crores as on 31/12/2019. Incurred claims ratio increased from 91.8% in the 9 months ending 31/12/2018 to 99.1% in the 9 months ending 31/12/2019. The underwriting loss recorded of INR 5,903.60 crores in the 9 months ending 31/12/2019 as against a loss of INR 2,312.62 crores in the corresponding period of the previous year. The combined ratio is at 115.76% for the 9 months ending 31/12/2019, as compared to 107.62% for the corresponding period of the previous year. The adjusted combined ratio is at 104.97% though. The solvency ratio of 1.51 as on 31st December 2019, has come down. Given this, I would like to invite any views or clarifications or any questions that you may have, and we would be happy to answer them now. Thank you.

[Operator Instructions] We take the first question from the line of Sanketh Godha from Spark Capital.

Just wanted to understand the recent higher crop losses. Basically, just wanted to understand the -- our actual figure on crop because if we look at the numbers, the combined ratio as a percentage of NEP -- as a denominator NEP comes to 115%. To the extent I remember, our crop loss ratio triggers -- our XOL gets triggered at 100%. So just wanted to understand why this extra 15% has resulted into higher crop losses, sir? And second thing is, I just want to -- want the breakdown of overall combined ratio into domestic and overseas, and overall combined ratio of fire segment divided into domestic and overseas. So the reason why I'm asking fire losses for domestic and overseas to just to see whether the fire loss ratio in the domestic business has improved because of the price hike or not.

For our crop business, Mr. Tripathy, General Manager looking after agriculture insurance, will answer your query.

Thank you, Sanketh. If you look into the crop portfolio, the combined ratio of 115% actually comes from the gross loss that is estimated for Kharif and Rabi together along with whatever is the retro cost and whatever is the commission cost all taken together. So all -- when you factor all the cost together along with the gross loss that is there for these seasons together, then we stand at around close to 115% at this point of time. Yes, as and when it exceeds 100% gross loss, then only you will be having a recovery. But that does not stop us from showing actually what is the actual loss on that particular portfolio. So the recovery percentage will come later on when it crosses 100. But if you factor our retro cost and the commission cost, the combined ratio stands at 115%. When we go ahead and have the Rabi information fully by the end of February, then we will look where we stand, and that will be getting a factoring in March results.

So basically, 115% is the worst-case scenario in the crop. It can't go beyond 115% considering the gross loss figure at 100%, the commission cost and the retro recurrence cost, right?

If gross loss is 120%, I will show it at 120%. The...

No, no, I'm saying 100% is the -- means, given -- means, it can't go beyond 115% for the people...

What I'm saying is, it can go to 120%, I can recover beyond 100%. But when it is gross loss 120%, I will show it as 120%. But here, in this case, the gross loss is below 100% at this point of time, but the all other costs put together, take it to around close to 115%. Recovery is a different issue altogether.

Okay. Sir, can you just give us the contract details of loss retro cover? Basically, how exactly it was? This is a basic question, but just can you give me the details there?

It will not exceed 114 for crop.

Okay, sir. And just a breakdown of combined ratio into domestic and overseas for 9 months and the quarter?

So Sanketh, the combined ratio for the domestic business is at 111.1% and for our foreign business, it stands at 129.8%.

128?

Yes, 129%, 129.8%.

Okay. So sir, this is for the 3Q, or this is for the full year -- or for the 9 months, I mean to say?

This for the 9-month period, yes.

Okay. And can you give a similar breakup for fire business into the domestic and overseas?

The domestic fire business portfolio clocked a combined of 112.5, and that for our foreign business to that 143.

Okay. Fine. And then for every natural catastrophe of overseas event, can we assume that means, the maximum hit on the P&L is closer to INR 175 crores, INR 180 crores, given our XOL gets triggered at USD 25 -- USD 25 million?

Right. So the foreign production is at -- it kicks in at $25 million, that is correct Sanketh. But I -- what is the question? I missed the question.

No, no, no. Basically, we have 4 -- we had overall 4 cat events in the current year -- 3 global cat events, basically the Dorian, then [ Faxai ], the Japanese 2 typhoons. So all 3 put together, 175 into 3, that is the worst hit, which we have taken in the overseas business because of the cat events, right?

So we have -- you've mentioned about Hagibis. So those are the cat events, and our protection will kick in at $25 million. So anything beyond that is recovered from our reinsurers.

Got it. No, no, because -- why I'm asking this question is because of the cat event, the total [ incurred ] in the current year is basically -- means it's 525 plus -- 525 from the global events -- INR 525 crores from the global events because of the 3 cat events, which have happened. And another INR 250 crores -- another INR 500 crores because of the Cyclone Fani and INR 250 crores because of the domestic monsoon floods. So that [indiscernible] loss ratio because of the cat events is right assessment? That is the only point I wanted to know.

Yes. Yes.

We take the next question from the line of [ Amey Vaidya ] from Akash Ganga Investment.

Sir, the management is always [indiscernible] on achieving combined ratio below 100%, but sir, somehow, we are not able to do that. So could you just help us understand what are we -- I mean, going to do about it? And how can we look at this number for Q4 FY '20 and FY '21?

We have been asked the whole journey starts - you know that paid-off reinsurance has a lag. So nothing can happen overnight in the street. Now the idea is to go and start making profit in our operations, which is a business that we are in, which is a business of reinsurance. So till now, our investment incomes have been bailing us out, if I can use that word. But now we do realize, all of us as a team here in GIC, that we have to work towards the combined, which is below 100%. That journey has earnestly started, and there are a lot of factors that are helping us achieve our target that we have intended to go ahead and achieve. Now what are those factors you would ask. First is, of course, the -- I mean, the fire portfolio domestically, where we have used our muscle to increase the premium and the market has stood by solidly behind us. So it's a very good situation, a very happy situation. The direct insurance company markets have already recorded a premium of almost 47% to 48%, the rise in premium to that extent, which will have a trickledown effect on the reinsurance as well. So that was for the 8 occupancies last year. We have taken it further on this year to have all the 292. See, the tariffs gave you a total of 300 occupancies. 8 of the usual suspects we picked up last year, and the balance 292 has been done now from the 1st of January, which is also holding on. And we are seeing an appreciable rise in the prices of our fire portfolio. That is on the domestic front. Now we come to the international front. You have been seeing that internationally, we have been making losses, but we are not the only ones. Everybody, the biggies and -- the big players and the others as well in the reinsurance space had been hit by these catastrophic events across the globe. Now because of all this, obviously, it's a demand-supply sort of a situation. The capacity that was available in the market has dried up. With that, since there is not much of a capacity available, the rates have gone up. I mean, purely a demand/supply thing. We have seen appreciable hardening in the market. Now since most of these international treaties renew on the 1st of January because the West is largely a calendar-driven year for them. The 1st January renewals saw appreciable rise in premiums for us. And you know 30% of our book is international. So depending on the territory that you are working in, you have seen a good rise in premiums there as well. With these factors, we intend to take it forward and work towards that paradigm shift in our thinking philosophy itself that we have to start looking at only business that makes sense for us. Maybe it means giving up a bit of your top line in the process, we are prepared to do that. But we will try and turn the wheel around, so that we make a profit at the end of the year.

Understood, sir. But can you tell us when can we see the benefit of this rate hardening, maybe Q4 or maybe Q1 in FY '21?

[ Avinash, ] (sic) [ Amey ], I couldn't hear that exactly. If you can -- rate hardening of what would you want?

Yes. You just mentioned that the premiums have increased for this 292, I mean, all 300 occupancies of fire. And international, it is going to increase again, right, for your international portfolio? So when can we see the benefit of that?

So we have, as I said, the reinsurance trade will have some lag 31st March because then they come in for the direct companies. So direct companies will have a more immediate increase in their premiums, which would be visible. For us, it should be there by Q1 or Q2 of the next financial year.

Okay, sir, Q1 and Q2. Okay. And sir, so what would be the target combined ratio for Q4 FY '20 and for FY '21?

[ Avinash, ] (sic) [ Amey, ] we do have a target, broadly speaking, of something below 100. But then we know that achieving it overnight in a trade like reinsurance is not possible. We have given ourselves a window about 6 to 8 quarters by which we should be able to achieve this.

6 to 8 quarters. Okay. Okay, sir, fine. Understood. And sir, another on solvency ratio. The solvency ratio is around 1.51, current solvency ratio, which is just a tad above statutory requirement. So sir, what are the levers that management has to increase it?

No, no, solvency has gone down, but that is a trend largely that we do witness only in quarter 3 is when the hurricane season also pops and we have had an extended monsoons that you have seen in Maharashtra and Central India and such. So we had a considerable outgo. Quarter 4 is when the premiums come in because our 1st January renewals take place, which is a large chunk of our book. Now those premiums, coupled with the fact that we are not expecting so many losses in quarter 4, the losses have already been taken care of in quarter 3 and even before a bit in quarter 2. So these things should help our solvency rise. And even then the trend normally is that in quarter 4, the solvency does rise.

Next question is from the line of Avinash Singh from SBICAP Securities.

A few questions. First is on the commission. So if we see over the year trend because, I mean, our domestic growth has been stronger and particularly in the crop, we have been reducing commissions. And otherwise also domestic is a lot direct business. So typically, commission ratio is lower. However, I mean, if you see overall commission rate, it's going up in, so far, FY '19, FY '20, and it has not come down materially from where it was in FY '18. So that's the question on commission, what's happening there? Second on pricing front, particularly for Jan Renewal. If you can just help us understand out of the 30% of foreign book of what quantum was up for renewal then for the Jan? And on that front, I mean, some of the larger peers, I mean, the pricing, just your price increase, they have just sort of reported anywhere between 2% to 3% on a blended portfolio basis. So if you can just think that, okay, what sort of a growth you have seen on Jan renewal? And how much of that is coming because of your volume increase and how much is from that from pricing? And thirdly, again, a repeated question on solvency. I mean, given that it's at borderline, I know -- I mean, it may sort of a -- you say that okay, there could be some solvency really and it could go up. But could you -- we look into sort of a booking increase sort of capital gains from your investment to sort of maintain solvency? So these are my 3 questions.

We'll take your questions in the reverse order. So first, about the solvency bit. Yes, of course, the investment is there. Mr. More is here, who is our Chief Investment Officer, he will...

[indiscernible] some of it to boost up solvency. Hello?

Yes, sir, your voice is inaudible.

Yes. So we have a huge fair value that we'll capitalize should we require in fourth quarter. And your second question...

Pricing. On the pricing, what sort of a growth you're seeing. I mean, what portion of your treaty was up for renewal? And what kind of a price and volume growth you're seeing in January renewal?

So the Jan renewal is depending on the territory we are working on. And largely, this was U.S. and Europe driven. We have seen a rise of about 10% to 15% in the premium for the same exposures. That was a very heartening sign. It has been a good run for us. So 1st January augurs well for the rest of the market, where the trend will be for the -- going forward for the rest of the international market as well. So that is how we have seen the premiums make a difference in the first of January renewals. And your first question about commissions. The commissions, we have been trying to lower commissions as far as possible. Crop, we have done quite a bit of hard work and got the commissions down.

Sir, but where are the commission increasing? I mean, particularly, if you're growing more in domestic side and you are reducing commission on agri, so where is the commission increasing? Or is that, that your retro cover is sort of a -- I mean, retro cover change is leading for you to get less commission. What's happening there? Because, I mean, given that crop is increasing and your domestic business is growing faster over the last 1 or 2 years, commissions would have come down, but it has not happened yet.

Avinash, if you see the figures given to you, the 15.5% of last year has become 16.7% this year. So it's not really an appreciable rise at all.

Yes, but mix is changing towards domestic and crop. So I mean, I would expect that to decline.

No, it's not audible. Can you please repeat it again, Avinash? Hello?

Hello.

Avinash, can you please repeat it again?

Yes. So I'm saying that if I look over the last 1 or 2 years, I mean, the growth in the domestic business has been higher, where you have a lot -- significant portion in direct where you will have lower commission or no commission and -- I mean, nonbroker market. And also crop has gone up a lot even this year. And in crop, you have been reducing commission. So I would expect on the overall portfolio level, there should be some sort of a downward trajectory on the commission, but it's going -- slightly, again, of course, but it's going up.

Yes. As and when you see commission rates, commission rates will not always remain on a particular -- it will remain within a particular range. That it is going up or going down by 1% or 2% year-on-year, will depend on what kind of business composition that we are writing, in which foreign territories and which areas we are writing we'll be actually writing whatever are the commission rates. It is not that we are writing at the same territory continuously for a particular line of business year after year. There may be some shift from one territory to another from different lines of business also. So depending on that commission will be definitely varying 1% to 2% year-on-year. We don't consider it as a very significant delta to our overall expenses at this point of time since we have brought down on the major lines of business of crop. We have brought it down to close to 5% from the earlier 10% to 12%. We continue to believe that this will remain very much within control for our balance sheet on an overall basis.

Okay. Okay. And just quickly on the Jan renewal. So -- I mean, what explain your experience a bit different. I mean, you are saying clearly a very, very hard market. Whereas some of the peers, the larger global peers have released their sort of a price experience, they are saying just like 2% to 3% price...

Sorry, sorry. Pardon me, but can you just speak a bit softly? Your voice is cracking here. Just a bit softly, please, so that we can hear you?

Yes. So on price increases, what I am saying that you are saying that you have seen sort of a hardening market, whereas some of the larger European peers who have released that January renewal experience, they are suggesting just 2% to 3% blended price increases. So what explains the difference between your experience versus the larger peers? I mean, is there any geography or any line of specific difference there?

So it's not that. See, there are 3 aspects of the business that happens in the West. One is the direct insurance, which, especially in areas of U.S. and Canada, we have seen a very major increase in rates. The second is the reinsurance part, where we have seen a sort of a rise, but not as much as you see in the direct one. And then we come to the third aspect of it, it is the retro business, where, again, the prices have shot up very, very considerably. In fact, in proportional business of retro insurance, there was absolutely a grind up of capacity. There was hardly any capacity available. So we are putting all that together and telling you direct business, of course, is something we do not do, but on the other 2 parts put together, the increase that we have witnessed is around 10% to 15%, depending, of course, on the territory.

Okay. Okay. And just the number, out of your 30% foreign business, what proportion was up for renewal in Jan?

70% to 80%.

Yes, yes, about 70% to 80% of our book would have renewed in January.

We take the next question from the line of Srinath from Bellwether Capital.

I just wanted to find out after we've taken up price increase across 292 occupancy...

Sorry, Srinath, but if you can just speak a bit softly, then we can hear. There's something wrong with the connection. So voice is cracking otherwise.

One second, just hold on. Okay, can you hear me now?

If you can be a bit further away from the mic possibly?

Sure. Sure. So I just wanted to find out in the fire segment, we have taken price hikes in 292 occupancies. Post that, are we witnessing any market share loss in this segment? Have we seen increase in competitive intensity from other overseas reinsurers in the domestic market?

Srinath, see, as far as the domestic space goes, we are the very dominant player in this market, obviously, you know that. But there is no intent of letting go of where we stand. Obviously, our -- I mean, where we stand globally is also largely as to the dominance we have in the Indian market. These rates that we increased is applicable to the treaties that intercept largely on the treaties. As you can see, [ resource ] is also there, but that is not as much in volume as treaties are. And all domestic treaties run through the 1st of April to 31st of March. So these rates were applicable to treaties effective 1st of April 2018 going on -- 2019, going on to the 31st of March 2020. So in this period, of course, there will be no loss as such because the treaties are already signed, done-and-dusted on the 1st of April last year. What we have to now look forward to is on the 1st of April this year, 2020, when the treaties renew. So obviously, we are working on a strategy to ensure that our dominance is clearly maintained.

Okay. And what would be our fire combined ratio for the domestic market in Q3 and 9 months?

It's 112% for the domestic market.

Okay, 112%. And since we reinsure part of our domestic business reciprocally, wanted to find out if there will be any benefits on the commissions we receive on those reinsurance on a sliding scale? Because once the loss ratios fall, would global reinsurers pay us higher commissions or commission inflows?

So the sliding scale commission, in fact, is designed that way that if you show a better profit -- better margin, you earn more commissions. That is exactly how a sliding scale is devised.

No, no. I do understand that we provide us the sliding scale for the domestic insurers that we deal with. But are we also on similar contracts when we reinsure our property casualty book overseas reciprocally?

So Srinath, the way all our protections that GIC purchases is on an excess of loss basis. So then we do not have the concept of sliding scale commission. That happens only in proportional treaties.

Okay. So we'll be taking proportional treaties also, right, for our fire -- domestic fire business?

No, no, no, Srinath, we do not buy proportional treaties. We are on an excess of loss, that is a sign of a mature market. All mature reinsurers largely buy excess of loss reinsurers. We are in the same bracket.

Okay. So whatever we originate, all the property casualty business we originate in India is on our book, and then we take an excess of loss on top of that?

Exactly. On the dot.

Okay. And I wanted to understand if we are planning to use the IIB burn rates and reprice our health business also. Or which of the other businesses are you looking at next to reprice using IIB burn rates in the domestic market?

Srinath, you can only flex your muscles when you have them. We do have it in property segment, unfortunately, for health and motor, the other 2 large segments of the Indian market, it is not reinsurance driven. Obviously, if you buy a vehicle for INR 10 lakh or you buy a -- take a health policy for INR 15 lakh, you do not need reinsurance for that. So largely, 85% to 90% of our health and motor book is obligatory. The concessions we get from the Indian market on an obligatory manner. So we do not have any muscle there, Srinath, we can't do anything there.

But outside the obligatory book, could we be repricing our health business?

So Srinath, it is -- we obviously look at all our health proposals on a case-to-case basis. I mean, that is important for us to do as a reinsurer, that we look at whether it's making sense to us. But if 85% to 90% of your book is obligatory, as a whole, there's nothing much that you can do about this book really.

Okay. The previous questioner had asked and you had answered that 70% to 80% of the renewals have already taken place on our overseas book. So on that 70% to 80% renewals, we've seen north of 10% to 15% premium hikes for the same risk. Is that the right way to understand it?

10% to 15% of same risk?

Right. Yes.

Yes. Okay. Yes, of course.

Okay. So we've got a 10% to 15% premium hike for the same level of risk for roughly 70% to 80% of our overseas business, right?

Yes. But you're talking about the fire book only, okay?

Yes, yes, property casualty, yes.

We take the next question from the line of [ Bhavesh Jain ] from [ GIC. ]

Just want to understand, are we done with IL&FS provisioning? And there is a slight raise in the NPA, so what's the reason of that? And apart from that, like there's a lot of question on the claim ratio on the domestic and international front. So why we don't get upfront that it's broken down in the results itself?

Thank you. For talking about IL&FS, we have done 100% provisioning earlier. It is not in the December quarter, it has been already taken up in the September quarter, and it has been fully provided for. The increase in NPA in this quarter from -- if you look from September, in September, total gross NPA was around INR 1,295 crores, which has gone up to INR 1,660 crores this quarter. The increased provision has come from 2 accounts, that is DHFL and Reliance Capital, where for the unsecured part of DHFL is 100% provided, and the secured part is provided to the extent of 57.5%. On Reliance Capital, the secured part is provided up to 15%, and the unsecured part is provided up to 75%. So this -- the impact of this additional provision beyond the regulatory guidelines has actually increased the gross NPA. However, the provision after taking the total provisions on all these NPAs, our net NPA at this point of time is 0.87%, the gross NPA is 4.39% and the net NPA is 0.87% as on December 31, 2019.

Okay. Just another question like what I heard is, you're going to -- your claim settlement rate shows like somewhere 140% for the fire business overseas, and you took a 15% raise on the current renewal of the premiums. With that calculation in mind, for the same risk, you are still going to be well below of your -- this ratio of 140%. So is 15% raise enough or you should have gone for more. So any color in that sense?

Basically, what happens is you can't expect to get more than what the market is willing to give you, that is one. Number two, you do not expect so many cat events to take place in the ensuing year. So I guess, 15% would be good enough to take care of that portfolio.

Next question is from the line of Ajox Frederick from B&K Securities.

Sir, my question is on fire again. Are you seeing the underwriting losses almost doubling, whereas premium went up by 50%. Is it due to the international exposure? What is the split on the underwriting losses for domestic versus international?

So domestic -- but that domestic this is the whole -- you wanted the fire portfolio?

Yes.

So the combined ratio for domestic was 112% as opposed to -- 112% this year. And the international was high, that was at 143%.