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

Ladies and gentlemen, good day and welcome to the General Insurance Corporation of India Q2 FY '21 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Diwakar Pingle from Christensen IR. Thank you, and over to you, sir.

Thanks, Rio. Am I audible?

Yes, sir, please go ahead.

Thanks, Rio. Good evening to all the participants on the call, and thanks for joining the Q2 FY '21 earnings call of General Insurance Corporation of India. The press release has been given to everyone, and you can also see the results on the website as well as on the stock exchanges. 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 and achievement to differ significantly from what is expressed or implied by such forward-looking statements. To take us through the results of the quarter and answer questions, we have with us the management of the GIC represented by Mr. Devesh Srivastava, Chairman and Managing Director and other top members of the management. We will start the call with a brief overview of the quarter gone past given by Mr. Srivastava, after which we'll have a Q&A session. With those short words, I'd like to hand over the call to Mr. Srivastava. Over to you, sir.

Thank you. Thank you, Mr. Pingle. Good afternoon, everyone. I take this opportunity to wish all of you a very happy and prosperous Diwali. I'm pleased to announce the financial performance for the quarter ended September 30, 2020. Though the insurance industry continues to be affected by the impact of COVID-19, the influence has reduced significantly. We are witnessing an improvement on the external front and expect our underwriting performance to show better results and trends going forward. As such, we anticipate the turnaround in overall performance in the coming quarters. Let me now take you through some of the key highlights of the financial performance. The gross premium income of the company was INR 10,651 crores for Q2 FY '21 as compared to INR 9,459 crores in Q2 FY '20, an increase of 12.6% Y-o-Y. The investment income increased significantly by 54% to INR 2,767 crores in Q2 FY '21 as compared to INR 1,795 crores in the corresponding quarter of the previous year. Incurred claims ratio stood at 101% in Q2 FY '21 as compared to 108% in Q2 FY '20. Combined ratio in Q2 FY '21 was 122% versus 123% for Q2 FY '20. The adjusted combined ratio by taking into consideration the policyholders' investments income works out to 97% for Q2 FY '21 as compared to 107% in Q2 FY '20. The company recorded profit before tax of INR 412 crores in Q2 FY '21 as against a loss before tax of INR 620 crores in Q2 FY '20. Profit after tax was INR 230 crores in Q2 FY '21 as against a net loss of INR 595 crores in Q2 FY '20. Solvency ratio improved to 1.63 versus 1.52 as on June 30, 2020. Net worth of the company, without fair value change account, recorded as INR 20,123 crores as on 30/09/2020, as against INR 20,529 crores as on 31/03/2020. Net worth of the company, that is including fair value change account, increased to INR 39,628 crores as on 30/09/2020 as compared to INR 35,425 crores as on 31/03/2020. On the premium breakup, domestic premium for Q2 FY '21 is INR 5,888 crores and the international has increased INR 4,763 crores. The percentage split is domestic 55% and international, 45%. There is a degrowth in the domestic premium by around 5%, while the international book has grown by around 47%. We are confident of improving performance in the coming quarters and expect improvement in terms of combined ratio and performance at the underwriting level. Having given the highlights, we are now happy to take your questions. Thank you.

[Operator Instructions] The first question is from the line of Ashwin Agarwal from Akash Ganga Investments.

Sir, during the last 2 years, every time on a conference call, the management is very confident of better underwriting profits and a better combined ratio, and all efforts are also being made. But for some reason or the other, global event, catastrophe events or COVID, the performance is only deteriorating. So what kind of task force or efforts or strategy we have put in place? At least going forward, we can get the benefit of the hardening of the global premiums and also show substantial improvement in our underwriting profits. Can you please elaborate?

Sure, Mr. Agarwal. I mean if you look at our performance, when you say that we have been having a higher combined in the last couple of years. We would also urge you to have a look at how the global insurance -- sorry, reinsurance companies have performed in these last 2 years. They have been record cat events in these last 3 years, in fact, '17 and then '18, picking a calendar year basis and even '19 then, we had 3 years of continuous cat events. In fact, it has not been witnessed in the 100-year history of cat events in the world. That is what has led to the hardening of rates now, which is also something that we spoke about. When we say that our foreign book has grown appreciably by 47%, it is also a factor of the hardening of the rates that we have been witnessing, and that is what is resulting in this increase of our book. Now for our combined ratio, which is our topmost priority now, when you stop looking at our top line and have only a bottom line focused growth, that is when the results start deepening. Now in reinsurance, things do not happen overnight because we are not a manufacturing industry. It is more of a finance industry that is giving support to the insurance company. In a direct insurance company, if something -- the rate has -- you have put up a rate for a certain, let's say, motor class of business, and your car is renewing in its premium and instead of giving INR 100 for a premium, now you have to pay INR 125, that direct company will see that gain of INR 25 immediately. Whereas for a reinsurance company, there is a lag, and that lag will always show. So anything that we do will always have the actual effect coming in the numbers after a small amount of lag. Now in our own case also, that is very much true. And now you also look at the fact that for a reinsurance company, generally, the biggest period when they can actually make a difference is on January 1 when the global treaties renew. For us, fortunately, in GIC, there are 2 such dates, not only December 1, that is important because the international book largely renews in January 1, but fortunately because India runs from April 1 to March 31, our domestic business, which is a large chunk of our business, renews on April 1. So effectively, we have these 2 dates to make a change and to effect changes, results of which will show in the subsequent 2 or 3 quarters thereafter. So we have affected quite a few changes in the April 1 renewals this year because now the focus is only on bottom line. A similar process is being undertaken now as we approach our January 1 renewal, which is when our international book will renew, which is also a time when we have seen the rates hardly. And then we are also starting our preparation for the domestic book, which renews on April 1, 2021. So that is the planning that we are putting into effect. We are going down to the very basics taking each and every treaty, looking at what is making sense to us, task force are certainly there. The departments are doing a huge amount of churn of all the data, and we are -- being the national reinsurer, we are replete with data. We have more data than anybody else can boast of. That data, we are utilizing very effectively now to churn, to model, to ensure that we do just the best of business because, as is fairly evident, Mr. Agarwal, that we do not look at top line anymore without a bottom line.

So that's quite heartening. Just a follow-on, whether there would be any protest by the domestic insurance companies on April 1, if we increase, say, the agriculture crop insurance and other lines of premiums also because last year also, we had increased substantially, there were some kind of protests, I don't know what it resulted into. So will we be able to pass on everything what we intend to?

Mr. Agarwal, what happened last year was you're talking about an endorsement that GIC brought into the market, which said that this is going to be the minimum rate at which you're going to seed into our treaties which was a very bold move really because nowhere in the world, given that the world is a global village today, can you say that this is a product, and this is the price for it, take it or leave it. But we did exactly that. And it was something that we could do only because of our dominance in the Indian market, and those rates have held. There have been no breaches that we are aware of because everybody now has fallen in line and that is why you see the fire rates in the direct market have hardened by almost 35%. So now when you talk about the domestic market. See domestic market is still some time away on April 1. Before that, we have the renewal, which is where the globe renewals on January 1. Now the trade of reinsurance is such that no reinsurer wants to write 100% of the pie. It is a business in which you spread your risk, spread as much as possible so that you get the benefit of diversification. Now when the January 1 renewals are happening, no reinsurer will be writing 100% of any treaty. So he will be writing, let's say, a big -- a magnanimous lead line of 25% or 30%. That still leaves 75% to 70% to be written by other reinsurers, who are technically called the follow reinsurers because they get the same terms and conditions as the leader. Now if the leader has given very, very competitive terms and a rate that is not in sync with what the world today demands. The cedent, the company, the insurance company who is seeking their protection will only have 30% of a line from the leader and the 70% will remain unplaced in the market, which is a very dangerous situation, and so nobody wants it. So typically, what happens is that leader will price it in a manner that will ensure that it gets placed, the 70% balance or the 75% balance also gets placed in the market. That is typically how the trade of reinsurance functions.

Right. Right. Sir, can we lastly achieve a combined ratio of 100% maybe in the year FY '21, '22 with all these positives coming in?

Mr. Agarwal, we have given a commitment to all our stakeholders that we will try our utmost to better the combined in 6 to 8 quarters. We are working towards it actively. There is absolutely no let-up on that.

The next question is from the line of Deepika Mundra from JPMorgan.

Sir, just on both the international and the domestic combined ratio. I mean your international business in terms of the top line growth has been very strong for the past 3 quarters now, like you mentioned because of the pricing action taken. And on domestic also, we've seen last year, the pricing action on the fire line since last year and even on crop to that extent. Yet in the first half of this year, we've not seen any increase in the -- sorry, any decrease in the combined ratio. Can you actually pinpoint as to where the mismatch is in terms of the flow-through of the price increases?

Ma'am, price increases in the domestic market, as I mentioned earlier, will have a lag effect that -- by the time it comes into GIC's books. We did have cat -- we have with us our Chief Underwriting Officer, Mr. Deepak Prasad, who also hit the property vertical. So I will just request sir to come in here and say something. Sir?

Hi, good afternoon. I think the lag remains in the fact that between the direct market and us, there is always a normal lag of about 1 to 2 quarters, like some of the cedents would not have given their statement of accounts for the first quarter. So what we would do is we would estimate the premium and we estimate the claim also. So how do you estimate? So estimates go as for the previous 2 or 3 years' performance that we have had. So that could be precisely the reason for it to not show up. But I'm sure, normally, by the end of third quarter or so, things would start showing up. It's already, I think, if I'm correct, property, domestic is already showing up with a combined ratio of less than 100% down to if I'm correct, 96% or 97%.

94%.

So as the quarter passed by, we will see more effects coming into play. Did that answer your question?

Yes, sir, in part, yes. And if you can like comment on the international side as well, I mean, Jan 1 is your next renewal, but even last year, I think you had some strong momentum on the renewal side. So again, the combined ratio has not really moved in the last few quarters. So if you could guide as to how is that expected to play out?

Okay. Fact remains, I think the hurricane season has come to a close now in U.S. and we have seen 1, 2, 3, 4, 5, 6, 7, 8, 9 incidents for the year totaling to around INR 976 crores. So what we have done is we have whatever loss intimations we have received, we have put it on the book. And wherever we have not received the loss intimation, that also we have picked up as incurred, but not reported to the tune of INR 520 crores. So that's being a bit conservative. But as the time passes, you will see releases coming from IBNR and things getting better.

Okay, sir. And sir, just on the -- if I can just ask a question on the segmental underwriting numbers that you have released, any one-offs over there? Because I mean, most of -- and secondly, in terms of motor and health, last quarter you had mentioned that the low frequency of claims will be -- which is seen in the lockdown would come through in this quarter, the benefit of that. But I'm not seeing anything much on the health side, in looking at the underwriting loss?

Ma'am, that is also because in the health sector, as we had mentioned, and I think last time, there was a lot of debate also on that. Questions were asked on our fixed margin treaties, which is also called the capital gearing treaties. Since we have not written all that -- those treaties this year, there has been the release -- I mean you adjust your books of accounts to take care of that and all profit commissions and everything, all commissions are booked. That is the reason. We also have Suchita ma'am here, who heads up the health vertical. Ma'am, can I request you to please come in here?

Yes, good afternoon. See in health, though the premiums have increased, we have a little of that capital gearing, as sir was telling, the premium dropped by around INR 300 crores this quarter because now we have to move out of that, the insurance companies have not renewed those treaties. Also from the month of March, government has seen -- which was underwritten by GIC last year, they have moved to the trust mode. So there also, there was a lower of INR 115 crores of loss in business over there. And also from the March, government has seen also some losses were booked in the obligatory part of it for COVID. And also, we had to -- because the capital gearing went off, and we had to book some profit commission because of which the commission has also increased. And these are the few reasons why our combined for health has deteriorated a little this quarter. Anything else? Does that help you?

The next question is from the line of Madhukar Ladha from HDFC Securities.

Sir, can you comment a little bit on the domestic crop side? The combined ratio there has shot up. And I believe this year, we had also taken sufficient price hikes, and we were modeling in -- we were pretty -- sort of had done a pretty tight modeling as well. So why your combined ratios have gone up again?

Yes, sure, Madhukar. Happy to take that. I would have liked to answer it, but we have the ultimate expert, Mr. Tripathy there. I'll request him to come and see.

Sure, sir. Good evening. Madhukar, am I audible now?

Yes.

Yes. The combined ratio in domestic crop is purely because of an accounting adjustment that has been done. If you look into the gross premium of agri, for this year, for this second quarter, we have booked a total premium of around INR 5,999 crores. The issue here is we are showing an overall underwriting loss of INR 730 crores, which is purely arising out of taking the estimate out of the gross premium. Around INR 780 crores of estimates, which were there earlier has been taken out from this estimate because it is not being considered for adjustable assets. So once we are getting into the rabi season, that is December quarter, when the rabi premium will be good, the book will absolutely come into 100% and below. It is purely because of an accounting entry at the top end. There is nothing more. The crop portfolio is doing excellently well. The season has gone down fine. But we have taken a hard decision this time to take out the estimates and go purely by whatever is adjustable within the 1-year premium that has been [indiscernible]. So the earlier year's premium of '17/'18, '18/'19 amounting to INR 780 crores has been taken out from the gross premium, resulting in a INR 730 crores of underwriting loss, yes. Had it been there, we would have been below 100%.

And may I ask why we have removed that INR 780 crores in the premium for the earlier years or -- and -- [Audio Gap] that the premium has been removed from the top line, but the claims are there.

Claim remains.

Claim remains. So -- but why did we remove the matching should have happened, right? Why are we doing that?

The matching should have happened. The RBI requirement currently is for crop earlier, they were allowing. Now the requirement has come down to 270 days, okay, for crop premium to be taken into consideration. We have taken it up to 1 year, and we are not taking up the previous years' now.

Okay. Okay. I still did not fully follow this because...

Because what happens, if I take out the claim also, whenever the amount for payment will come, it cannot be accounted for, again, in the book by putting a fresh number, which will show the earlier numbers as wrong. So the claim amount remains, the premium amount being not adjustable has been taken out from the calculation.

Why is it not adjustable?

It is not adjustable as per regulatory requirement.

Okay, sir. And sir, why is profitability in the motor segment, domestic motor also low? So given that we had a lockdown in the first quarter, and I expected this quarter to show lower combined ratios. But we're still at about 112%. Yes. So can you explain that?

Yes, I'll tell you why. I'll tell you exactly why. If you look into the quarter 1 press release, which we had given, the domestic motor, the total amount of incurred claims was given at around INR 810 crores. Okay? And the motor gross premium was given as INR 1,726 crores. Okay? Now when we come to this quarter, the motor domestic incurred claims have been pegged at INR 2,274 crores. Okay? From INR 800-odd crores to -- it has gone up to INR 2,274 crores, and this reporting has come from basically PSU companies. So PSU company accounts, which we were not received, even in the quarter 1 for the March year ending, has now come and that has been booked. So whatever accounts were there for the PSU companies have been received and have been booked. So the jump from the INR 810 crores of domestic incurred clams in quarter 1 has gone to INR 2,274.86 crores. So that is why this is showing the domestic combined ratio is showing 112.21% and this has been adequately provided for also in our books. We think this particular line will remain stable from here onwards. And we are not going to see any further hike in incurred claims.

Right. But it should actually -- I believe it needs to come down because 112% is also...

It will -- I mean, it will come down when you receive the quarter 1, quarter 2 accounts of the PSU companies going ahead in the third quarter and fourth quarter, obviously it will normalize.

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

Yes, sir, just again, going back to the agri book. Could you please explain why the regulator has disallowed that premium? Is it pertaining to a prior period or because that loss number is significantly impacted. We would had a INR 1,000 crore net profit otherwise. So that is why we are a bit worried about why that was disallowed?

So this is disallowed -- see normally for all kinds of premium. Earlier, you can have the estimates in your books, you can put it up to 3 years also. But that is not going to help you in your adjustable assets calculation for solvency. So there is no point putting it and then not getting calculated for your other calculations. That is why this has been taken care of in this particular quarter. And once -- we are already into rabi now. So the rabi premium, which is due and will be booked -- 50% of which will be booked in the third quarter, will obviously negate the impact that has been taken in the second quarter. So since regulator allows for 270 days, we have extended and taken it up to 1 year. That is why this INR 770 crores of [indiscernible] in the gross premium figures in agri.

Got it. Got it, sir, got it. So effectively, the agri's performance in combined is not as bad as what is the ground performance.

See I will say -- I will go to the extent of saying that it is not a true reflection of how agri is performing on ground. Since we have taken a onetime call, we would see the -- whatever decisions we have taken in respect of agri, as to following only the private companies, reducing our capacity is absolutely in line, and we are going to see the third quarter and year-end results, absolutely in line of our action that has been taken.

Got it. Got it. On the international fire book, sir, last year, we had got about 15% kind of price hike year-on-year. Just want to understand on an as is various conditions, what kind of price hikes are you seeing in this market give us come January, given that our combined ratios in the international book persists to be extremely very strained on property/casualty?

We -- see the property book is really hardening. In fact, the London market today is above with all the activity that it can muster to say how much it's going to be in sorts. We have Mr. Hitesh Joshi, he's actually hands-on because he's handling those treaties as they come up for renewal. So of course, we have -- his boss is Deepak sir, who can also tell you. But Hitesh bhai, can I ask you to come in there and give an impression of how the Jan 1 renewals are progressing? Hello? Hitesh bhai?

I think we have lost him. Deepak sir, can I ask you...

Yes. Sorry I was on mute, sorry. Okay. So following the '17 and '18 losses globally, there is this very significant counter-reaction. Actually, if you look at '17 and '18, both the years, the return on capital was negative. Most of the reinsurers were combined of 110% plus. And '19 also, the reinsurance globally did not underwritten on capital, so a net negative result for the stakeholders. So again, '20 turned out to be bad not because of the catastrophe, but because of the COVID pandemic. So there is a very significant reaction. And whatever was the alternative capital, which was providing competition and preventing the hardening of the market, that is all locked up till the time these catastrophe claims are settled. So presently, depending on the geography and the type of contract, the hardening can be expected something in the range of 10% to 25%. Now the reason -- now the thing is this is already in action for, say, even January '19 renewal -- January '20 renewal. And it is going to continue in January '21 renewal, as also most likely January '22 renewal. Now the thing is that it is still not showing in our second quarter results. That is because, as Mr. Deepak Prasad just now said that, there are some 9 events, which have happened in U.S., Japan and some of the other geographies. Now these claims, there is no certainty about what are the claim amounts. So there is a very significant strengthening of reserves. For example, there is a Typhoon Maysak and Typhoon Haishen. These are which happened near Korea and Japan. And there are -- figures are yet to come, but we have made a very significant reserving, very conservative reserving. So as sir said, we have INR 976 crore of provisioning made during this quarter. And this is certainly very much on the higher side. So it is not showing really in the figures. But as the time develops and the reserves are released, the figures should -- results should improve.

[Operator Instructions] The next question is from Vipul Kumar Shah, who is an individual investor.

Sir, can you tell me what is our annual budget on IT?

Hello, Mr. Shah, that is a tricky one. Let me see this value.

No. Because why I'm asking is because generally insurance companies invest, spend a very huge sum of money on their IT systems. And to the best of my knowledge, if I remember, we are spending very minuscule sums. So is that one reason why our performance is lagging?

Not really, Mr. Shah. You see, you should also bear in mind that as unlike an insurance company, which has 15,000 to 20,000 employees, I'm talking about the other PSUs, GIC only has about 550 employees. So as far as the hardware and software goes, we are absolutely top notch. We also use SAP as our basic platform on which we work, which is one of the best in this world. So Girija ma'am are you there, can you pop in here?

Sorry, sir?

No, I'm just asking my colleague.

Yes, sir.

Girija ma'am, yes, please.

Yes, sir. Yes. So actually, we use SAP as our base software. And over the last 10 years, we have established our operations very well using SAP. We are -- on an ongoing process, we are upgrading our operations, our software also regularly, depending on how -- what kind of needs arise with the business. Currently -- in fact, in the next 6 months, we're going to invest heavily in risk management and also in solvency and capital management software. That is on the cards at the moment. And as far as modeling goes, we already have the pricing model -- we have the modeling tools for all the geographies that we operate in, which was a very significant investment, which we have done across the last 5 years. Going forward, we will be enhancing this portion of our investments in the software side. We are also getting into this cybersecurity in a big way. So we are trying to find out I mean what possible attacks could happen and how to fortify ourselves. That's all an ongoing process at the moment. So we are investing heavily in IT at the moment.

But ma'am, you cannot quantify, no, how much we spend per annum or how much we have spent over the last few years. Yes.

Actually, the SAP software itself is a huge expense. And then we have -- our entire hardware, we have outsourced and we have it on the DC-DR. So we're expecting close to around INR 50 crores to INR 75 crores, I must say, on an annual basis.

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

Just on the agri premium part of it. So is this what is basically impacting the net premium earned in the quarter, which is significantly lower? And hence, can you assume that the impact on the combined ratio for the quarter is about 800 bps because of the disallowance of the premium?

Tripathy sir, may I request you to answer?

Yes, yes, yes, I would not say exactly that this is a disallowance. There is a regulation, which is in place. And we have taken that -- we should take that regulation to the team and we'll do the accounting accordingly. Now if you look into agri, we have also this quarter, put in the adjustment premiums, for whatever protection we had bought for the earlier years. Now premium, what happens on the premium getting estimated in a couple of years' time and 2 years' time we realize premium on a basis on which we will pay our retro cost? Now the realized premium for the earlier years, that is '17/'18, '18/'19 also demands that at this point of time, we increase the retro premium, which we had booked earlier this -- from now onwards, so that we don't have further bookings to be done by March. So that also has been taken into account to the extent of around INR 280 crores. So since these things are all based on very conservative practice that we follow, the resultant combined ratio is showing around 111% to 112%, which stands to get corrected on the positive side going ahead.

Ma'am, if I just may add to what Mr. Tripathy just said. See, in agri, we have taken landmark decisions this year for the Kharif 2020, which is what has resulted in not only the market getting more stable, also the fact that the premium rates became more -- I mean, much, much better. We have seen an actual growth in the premiums for the Kharif season, and that trend is very much under control now. The way that the agri portfolio is behaving, that has been good. And on top of that, by the grace of God, we've had a very benign monsoon ma'am. So it's all hunky-dory as far as our agri portfolio is concerned, and we are very optimistic about it.

[Operator Instructions] The next question is from the line of Sanketh Godha from Spark Capital.