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

Ladies and gentlemen, good day, and welcome to the General Insurance Corporation of India Q1 FY '21 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Binay Sarda from ChristensenIR. Thank you, and over to you, sir.

Thanks, Raymond. Good evening to all the participants on the call, and thanks for joining this Q1 FY 2021 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'll 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 businesses 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 our 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 quarter gone by and then -- which will be followed by Q&A session. With that said, I'll now hand over the call to Mr. Devesh Srivastava. Over to you, sir.

Thank you. Thank you, Mr. Sarda. Good afternoon, everyone. I would like to announce the financial performance of the corporation for the quarter ended 30th June 2020. The external environment continues to be challenging owing to the COVID-19 pandemic and has impacted our performance during the quarter. However, we are witnessing an improvement, albeit gradual, and expect the trend to continue in the coming quarters. This is clearly a result of the corrections that we have set in motion and are witnessing a positive movement in the right direction. We now take you through some of the highlights of our financial performance for the quarter ended 30th of June. The gross premium income of the company was INR 15,881 crores for Q1 FY '21 as compared to INR 20,813 crores for Q1 FY '20. The investment income was INR 1,142 crores for Q1 FY '21 as compared to INR 1,401 crores in the corresponding quarter of the previous year. Incurred claims ratio increased from 87% in Q1 FY '20 to 94% in Q1 FY '21, but improved as compared to 97% in the financial year 2019/'20. Our combined ratio increased to 112% for Q1 FY '21 as compared to 102% for Q1 FY '20. However, even this improved as compared to the financial year 2019/'20, during which it stood at 114%. The adjusted combined ratio, by taking into consideration the policyholders' investment income, works out to 105% for Q1 FY '21 as compared to 97% in Q1 FY '20 and 102% in FY '20. The corporation recorded a loss before tax of INR 811 crores in the quarter ended 30/6/2020 as against a profit before tax of INR 138 crores in the quarter ended 30/6/2019, and against the profit before tax of INR 108 crores in Q1 FY '20. There was a net loss of INR 557 crores in Q1 FY '21. The reduction in profit is attributable to higher underwriting loss and reduction in investment income. Solvency stood at 1.52 as on 30th June 2020, which is above the minimum required solvency ratio of 1.5 as stipulated by the regulator. Net worth of the company without fair value change account was recorded at INR 19,714 crores on 30/6/2020 as against INR 22,443 crores on 30/6/2019. Net worth of the company, including fair value change account, was recorded at INR 39,071 crores on 30/6/2020, as against INR 52,181 crores on 30/6/2019. As you would have seen, there was a reduction in premium income and that underwriting losses increased in the quarter, which impacted the performance. We are hopeful of things normalizing in the coming quarters, and it will be a constant endeavor to bring down the combined ratio and improve the performance at the underwriting level. I think all other details have already been shared with you. On the premium breakup, the domestic premium for Q1 FY '21 is INR 11,897 crores, and the international is INR 3,983 crores. The percentage split is domestic, 75%; and international, 25%. There is a degrowth in the domestic premium by about 31%, while the international book has grown by about 16%. We now invite questions from our interested parties. Thank you.

[Operator Instructions] The first question is from the line of Srinath V. from Bellwether.

Hello?

Yes, please go ahead.

Yes. I just want to understand the motor business. The largest private insurer reported very strong numbers for the motor business. Given that the TP business, most of the cars and commercial vehicles were off the road for 1.5 months, that would have seen a significant saving in loss ratios, but that does not seem to be showing up in GIC's numbers. So wanted to understand why we have not posted underwriting profits in the motor business.

So Mr. Satyajit Tripathy, can I ask you to pick it up, please?

Yes, yes. Sure. Good evening. As you know, the quarter 1 results of the direct companies will have a lag effect on the reinsurer's books. This quarter 1 accounts from many of the cedents where we received quite late at our end. And all the figures, if we would have accounted in the quarter 1 what we have received around others and net others, our combined ratio would have been below 100. The quarter 1 results of motor is reflective of the fact that it is on estimation basis, and we have been conservative on our estimations. That is why the results are showing 115 on combined ratio side. The actual figures are taken into account, which will be reflected in the quarter 2. This figure will be much less than 100. The second issue also in motor is that we have terminated the capital gearing treaties, which we are running in our books in the earlier year. Many of them have been altered, and some of the capital gearing treaties with terms and conditions have been changed. These are reflected in our books. If you can see, the motor department's gross premium would be reflecting at something around INR 1,400 crores to INR 1,500 crores. The actual amount should be much higher than that and will be reflected in our books in the second quarter.

Got it. Got it. And the same question for domestic fire business also, sir. We have taken pricing across all occupancies. Gross premium growth was also really higher reported by GI Council of India had reported growth. And in the last call, you had made it very clear that the property casualty business does not cover pandemic payouts. So I want to understand why that business is not reporting underwriting profits.

So Mr. Srinath, a, the point that Mr. Tripathy brought out also that for a reinsurer, there will always be a lag effect. In the sense, these figures would be largely what the domestic company is put in at 31st March. Now having said that, we have our appointed actuary with us, Mr. Sateesh Bhat, who can just give you an overview and also about the losses in the property department. Mr. Bhat, if you can come in, please?

Yes. Yes. Good evening, Mr. Srinath. In fact, what you said is right. Whatever premium increases that GIC has done in the last year, those have actually started showing results. But this time, what happened is that we had to make provision for the 2 cyclones, that is the Amphan and Nisarga in the domestic portfolio. So that is the reason why we are seeing for the same premium that is booked. The -- we have made a higher provision for the Amphan and Nisarga. So that is the reason you are seeing higher. So we hope that with the beneficial effect of the incurred loss ratio on the -- due to the premium increase, we would be seeing a better picture in Q2.

Got it. Got it. And the last question, sir. On the international property casualty book, that also, in January, we had taken a round of price hikes. And there also, we are continuing to see underwriting losses. So I want to understand what is your view on the international property casualty book?

Mr. Srinath, if I can just come in again for a moment before I give it to Mr. Hitesh Joshi for the international bit. Mr. Srinath, there is definitely an appreciable rise in the property portfolio premiums globally, and that hardening effect is certainly there. But with the COVID, that is struck, there is a question mark about the business interruption payouts that may happen in the international book. Secondly, we also have some event insurances that have come our way, like Wimbledon and sorts. So this is the broad picture, but I'll now request Mr. Hitesh Joshi to chip in here, please?

So Mr. Srinath, the thing is there are not really any newsworthy kind of cat events across the globe. But there are certainly, say, low-intensity cat events across the world, particularly in U.S. and flood in China. So there is a provisioning for that. And apart from that, as our CMD sir said, there is a COVID reserve, which is contributing to something like 20% of the earned premium. It is -- about 15% to 20% of the earned premium is contributed by the COVID precautionary reserve. And additionally, there is a significant reserve strengthening on the attritional side. So I would say that I think foreign property will mimic the domestic property. As Mr. Bhat said, we hope that things should be better in Q2.

Okay. Okay. Just a follow-up there. In the foreign property casualty book, want to understand that does a pandemic get covered? Because last time, we had the conversation, largely parts of America, it wasn't covered, but in Europe, there was some litigation that was bound to happen. So any broad update on -- since you have provided 20% of earned premium, does that indicate that some of these legal battles have been won and there would be large payouts being made for loss of profit for the lockdown phase?

The legal scenario is still evolving. But as far as U.S. is concerned, almost all the judgments have come in favor of the insurance companies. So whatever reserves are being maintained are essentially precautionary reserves. But on the Europe side, the situation seems to be more uncertain. Of course, since the legal changes which are proposed in the U.S. are getting backed by the legislative action, the situation remains fluid. So right now, there is no clear -- any -- what do you say, any major verdict or any trend of verdict. Almost all the litigation is essentially in pipeline. There are maybe just 2 or 3 kind of judgments which have come in. And they have largely come in favor of insurance companies rather than the claimants or insureds. So I think probably we need to wait for a quarter or two. Maybe in the next quarter, we will have the results of litigation. And probably the following quarter, I think it will go for appellate round because it will not be an easy one-way conclusion. And again, the pattern may not be uniform across the world. There will be diversity in maybe Europe and U.S. And within U.S., again, there will be diversity in terms of the court judgment because each of the U.S. states has its own legal framework.

[Operator Instructions] The next question is from the line of Deepika Mundra from JPMorgan.

Just a couple of questions. So firstly, I wanted to -- like you saw in fire since the beginning of the year, are there any other P&C lines where you are seeing hardening of rates, particularly post COVID? Secondly, solvency is nearly near the minimum requirement. Are you expecting basically for that underwriting, like you said, it's -- the benefit is expected to be booked with a lag. So are you expecting no capital raise or any effort to basically boost solvency?

Ma'am, I think you had asked this question about this capital thing in our last meeting as well from what I recall. The answer still remains that ma'am, we really don't need capital. We are sufficiently holding sufficient capital. The solvency is at 1.52 because, ma'am, if you see the way the regulator prescribes the way you have to calculate your solvency, it has a 3-year effect. So you have to take into consideration your claims for the last 3 years and then average it out. It is not a very difficult calculation, but it's not something that is just sort of one line answer that I can give you that this is what we get. But the basic point remains that it's a 3-year number -- numbers of 3 years taken into consideration. So obviously, the solvency will flow in and more slowly than what you would expect to see in a quarter-on-quarter increase or decrease. Secondly, also the fact that since the markets are down, it was not very correct for us to realize a fair value then by selling. You don't obviously want to sell your [indiscernible] when the markets are down. So in any case, we were above the solvency requirement of the regulator, and that's about it, ma'am. We have, of course, a full plan for our solvency going ahead, where we would like to be in the long term. But this is quite sufficient for us to meet our requirements of the regulator for the moment. And I think as we had mentioned earlier also, if you take our fair value into account, which is what is done globally, then our solvency is far higher. It's almost 2.5 plus.

Got it. And could you comment about the rate cycle in other P&C lines?

So ma'am, if you take it, of course, in property, everyone knows what GIC has done, and therefore, we have been holding the market rates up. If you see other lines, which is the big chunk of our portfolio, which is agriculture, I will request Mr. Tripathy to come in, but there has been an appreciable rise in that line of business as well. Mr. Tripathy sir, if you can comment, please, here about the agri bit?

Yes, of course. The agri business, if you look into on a specific line of business kind of vertical, the specific line has a combined ratio of close to 95. This has been achieved with very judicious selection of what business we are doing with the credent and what capacity we would like to give to the market. Our capacity for the agri market has reduced considerably. And from the earlier 45% to 46% of the overall Indian market, we have come down to 29% plus 5% of the obligatory, that is 34%. So the earlier year's gross written premium, which was around INR 13,000 crores to INR 14,000 crores, this year we have booked INR 6,983 crores in the past quarter, which is a 35% reduction from the corresponding period of last year, which was INR 10,676 crores. In addition to this, the crop business has been reasonably right in the tender prices all over the country. And these have put effective loss caps on companies where results were not good. And we have weeded out those treaties, which were loss making for us in the earlier years. On the back of the envelope calculation, we can say that close to 16% to 18% rise in premium is seen in crop. And as we have seen a reasonably good kharif season as of now, we are very hopeful that in the second quarter, which is deemed to be closed by end of 30th, we will have a reasonably good result from the agri portfolio. And the agri portfolio being one of the largest for -- and in fact, it is the largest for our balance sheet, I think as long as this particular line does well and keeps on adding further cash to the balance sheet, we think we are very well poised to have increasing with better combined ratio and insured claim ratio for the overall balance sheet. Rates have increased and risks are good. Rainfall is good, though we cannot say that monsoon has fully ended by now. We are pretty well poised as far as agri department is concerned.

Okay, sir. Understood, sir. Basically, the increase in the combined ratio in this quarter largely seems to be a timing issue, if I'm not mistaken?

Ma'am. Sorry, sorry, sir. You want to go ahead. Otherwise, I was just giving her a perspective from -- ma'am, if you see the increase vis-à-vis Q1 of last year, then we are not having an apple to apple. You will appreciate that. This is a world of a difference. Last year seems to be heaven compared to what we are undergoing right now. So the effective comparison essentially emerges when you look at where we were on 31st March this year, vis-à-vis where we are now as on 30th June. So you do see that the combined has come down from 114 plus then to about 112 now. So as I said, also in my opening remarks, we are moving in the right direction. Sorry, Mr. Tripathy. Please come in now, sir.

No, I was exactly pointing to that fact that post-COVID and post-pandemic world, the business scenario is much different than what was expected earlier. So the earlier projections and the earlier guidances have taken a lot of changes, plus we also have a rating downgrade. So the combined effect of everything in the balance sheet, you have to drive through that. And I think we have improved from what we have shown in the March quarter on the incurred claim side and on the combined ratio side also. So we believe from this point onwards, there will be better results in the quarters ahead. That is my only submission.

[Operator Instructions] The next question is from the line of Srinath V. from Bellwether.

Sir, the commission payouts at INR 2,500 crore has not contracted at the pace of the premiums. Just wanted to understand, we have been giving sliding scale commissions for multiple of our products to kind of bring in pricing discipline and so on. So I was under the assumption that commission will actually kind of perform in line or better than premium growth. But given the degrowth, the commission line seems to be a bit sticky. So just wanted to understand what do you make of that, sir?

Mr. Srinath, again from the commission bit, since we were doing these capital gearing treaties, which had a fixed percentage of profit for GIC at the end of the year, they had a substantial amount of commission payouts as well because the claims ratio were defined. And in any case, it couldn't have gone beyond 98%, 98.5% or whatever the treaty was. So these are those commissions that have also crept in. I could also request Mr. Tripathy to come in there, again, for...

Yes, of course.

Excuse me. Can you just explain this capital gearing treaty? I'm a bit unfamiliar to this, sir.

Actually, whenever we are doing capital gearing treaties, basically, it is done in the line of motor and some part of it is also done in the kind of health line of business, where a fixed margin is given to the reinsures for doing the business so that it does not produce a loss. So the margin of around 1.5% to 1.75% is what the reinsurer gets. And the claim is also within that 97% to 98% of the overall premium that we are receiving, and there is a commission component also attached to it. This year, if you see line-wise our commission, the major lines of business, agri has reduced its commission significantly from the earlier year of this quarter where we had paid INR 779 crores, we have paid INR 420 crores this year. Similarly for health, from INR 793 crores of commission last year past quarter, the net commission this year is INR 347 crores. The commission has gone up in motor from INR 296.96 crores to INR 497 crores, simply because of the fact that you had to finish some of the capital gearing treaties on a clean-cut basis because of the regulatory directive that is given to the companies. So when you settle this on a sliding scale commission also, the commission needs to be settled then and there. So this has got effect in the quarter 1 when the renewals have happened from 1st of the April. Otherwise, the motor commission is again going to be substantially less from the second quarter onwards. We had slightly higher commissions for fire also. This has come because of the price -- our attempt to get quality business on the international market, and that has resulted in slightly higher. But the major lines of business, agri, health and other miscellaneous and such kind of business have actually reduced the commissions, except for motor, which is a one-off thing; and fire, which is because of the business, which we are pursuing in the foreign markets.

Okay. Sir, so the -- internationally, because we are going after higher quality clientele, the commission payouts are higher, right?

It is slightly higher. I mean when you chase better quality businesses. And you also have to understand that rests have also increased overall in the domestic market also, though we are not very much into that. And not very much into that is from commission side. The commission increase in the fire side is specifically out of the business that we are pursuing.

Got it. And on motor, basically, this would be a settlement of the commissions that were due to insurers in FY '20, which you have done a kind of a onetime or a settlement as the treaty ended and a new treaty started? Is my understanding clear?

Yes. Because the capital gearing treaty had to be ended, and it has to start with a different alternate risk transfer mechanism, so the earlier treaty had to be closed and new treaty had to be started. So the commission settlement also got settled along with that. Otherwise, if we would have continued with the same treaty that was there, then the commission rate would have been continued.

Okay. Okay. Got it. And so putting all this together, it is likely that we will start showing profitability, sir, by Q2 or Q3, given that motor would also technically report an underwriting profit, property casualty probably will report an underwriting profit and commissions would not be at elevated level of INR 2,500 crores. So just wanted your view on that, sir.

While it is wrong to give guidance at this point of time regarding quarter 2, we are extremely hopeful that the steps that we have taken over the last 2 to 3 -- 2 quarters at least, have started to show results. So major components of the reinsurance balance sheet on incurred claims combined ratio and the combined ratio for individual life have started to show reasonably good progress based on the measures that we have taken. We are very hopeful that when the second quarter results are coming, we will be accounting for whatever quarter 1 results that are there for the company would have been captured in our books. And if there was any delay for the fourth quarter results, which have been accounted for on estimation basis now, will be on actual basis by Q2, and the results will remain far better than what it is. But it would be wrong to give a guidance that we will be reporting profit even in the second quarter. We are hopeful that we'll be doing much better.

The next question is from the line of Sanketh Godha from Spark Capital.

Sir, I mean the health business, as you see, it has declined 65%. And I believe it's largely because of the discontinuation of capital gearing treaty. So also in the last year, we did around INR 5,600 crores of business in health insurance business. Now given we have done around INR 840-odd crores, sir, we believe this run rate will be maintained for next 4 quarters and probably we can see at least 50% decline in health portfolio in the current year because of discontinuation of capital gearing treaty. That is first question. And second question, just wanted to understand is that, that the intentional business growth has been around 17%. It will be great if you can bifurcate this growth into value, that is price hike and the volume. And Hitesh sir, just to mention -- third question, sorry. Hitesh sir said that they've provided 15% to -- 13% to 20% as a COVID provisioning. So sir, it would be great if you can quantify that number in absolute rupees crores. And finally, on the investment book, just wanted to understand that the investment income breakup into capital gains, dividend income and normal interest yields, and the provisioning of INR 190 crores, which I see in the P&L, if you can explain that number with respect to whether it is with respect to any bad investments or Reliance Capital exposure, what we -- which was not provided fully until last year. Yes, these are 3, 4 questions, which I have. Sorry for asking so many questions.

It's fine, Mr. Sanketh. See, health, I think we have stated earlier also that it is largely a book built of obligatory. So almost 85% to 90% of our book is the obligatory portfolio that we carry. Yes, there are those capital gearing of fixed margin treaties, you can call it what you may, which we have done away with. So that is a big come down there. But health, as I said that -- earlier that these are largely are 31st March figures for the direct market that comes to the reinsurers with the lag of a quarter. By 31st March, COVID had just started creeping in. If you remember, Prime Minister had also started the lockdown and such. By 31st, we were just settling down into the COVID. And the health portfolio in the quarter has done remarkably well, if you see for the direct market because obviously a lot of planned operations and thoughts were pushed forward. People were not visiting hospitals. So the health portfolio has done well, over and above the growth that it has shown. Obviously, an insurance sells on a fear factor. And the fear factor for -- thanks to COVID or thanks to damn COVID, it is the worst right now. So I'll just ask Suchita ma'am, she heads the health portfolio, to chip in, after which she can give it to Mr. Hitesh Joshi for the foreign book and COVID provision that you spoke about. And then finally, Mr. Tripathy, again, I guess, because he will tell you about the provisions that we have done for the company we mentioned. So Suchita ma'am, can you pick it up from here, please?

Thank you. Yes. See, as CMD has said that there is a lag of 1 quarter for our health portfolio, and obviously also because of the regulatory problems, the capital gearing, we have lost quite a lot of business over there, which will also reflect on 31st. However, even we have lost a little bit because some companies for the government still have [indiscernible]. So there, there will be a dip and hit. But overall, because of COVID and others, the health industry in general having -- will do better. For the other PSUs, maybe it will not that much of a dip, so, you won't see. There will be a slight dip in the -- as on 31st March compared to 31st March '20. There will be a dip in '21, but not to that extent because health is most likely to go up the portfolio and also around 80% to 85% is obligatory. So we will see a hike in -- a slight dip, but not that larger dip in health.