General Insurance Corporation of India (GICRE) Q3 FY23 Earnings Concall Transcript

General Insurance Corporation of India (NSE:GICRE) Q3 FY23 Earnings Concall dated Feb. 10, 2023.

Corporate Participants:

Binay Sarda — Associate Vice President of Investor Relations

Devesh Srivastava — Chairman and Managing Director

Hitesh Joshi — General Manager

Jayashree Ranade — General Manager

Radhika Ravishekar — Chief Investment Officer

Analysts:

Sanketh Godha — Spark Capital — Analyst

Kailash Baheti — Individual Investor — Analyst

Deepak Sonawane — Haitong Securities — Analyst

Unidentified Participant — — Analyst

Presentation:

Operator

Ladies and gentlemen, good day, and welcome to the General Insurance Corporation of India Q3 FY ’23 Earnings Conference Call. [Operator Instructions]

I now hand the conference over to Mr. Binay Sarda from Ernst & Young. Thank you, and over to you, sir.

Binay Sarda — Associate Vice President of Investor Relations

Thanks, Mahilan. Good afternoon to all the participants on the call, and thanks for joining this Q3 FY ’23 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 could cause future result, 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 past, and then we’ll follow it up with a Q&A session.

With that said, I’ll now hand over the call to Mr. Devesh Srivastava. Over to you, sir.

Devesh Srivastava — Chairman and Managing Director

Thank you, Binay ji. Good afternoon, everyone. I’m pleased to announce the financial performance for the quarter ended December 31, 2022. Before discussing the results, I would like to thank all our shareholders for having faith in our underwriting capabilities and for patiently supporting us during the hard times. Over the past few years, we have continued to refine our approach and become more selective with a sole focus on underwriting profitability. We have witnessed hardening of rates, which has further helped us get our act together and focus on improving our performance at the underwriting level.

Let me now take you through some of the key highlights of the financial performance. The gross premium income of the Company was INR10,099.40 crores for Q3 FY ’23 as compared to INR10,240 crores for Q3 FY ’22. The investment income has increased to INR3,025.66 crores in Q3 FY ’23 as compared to INR2,271.14 crores in Q3 FY ’22.

The incurred claims ratio declined to 96.9% in Q3 FY ’23 as compared to 121.9% in Q3 FY ’22. Combined ratio in Q3 FY ’23 stood at 114.74% versus 126.54% in Q3 FY ’22. The adjusted combined ratio, by taking into consideration the policyholders’ investment income, works out to 93.63% for the nine month of FY ’23 as compared to 104.62% for the nine months FY ’22.

Profit before tax stood at INR1,595.79 crores in Q3 FY ’23 as against loss before tax of INR101.67 crores in Q3 FY ’22. And profit after tax stood at INR1,200.71 crores in Q3 FY ’23 as against a net loss of INR28.48 crores in Q3 FY ’22.

Solvency ratio increased to 2.38 [Phonetic] as on 31/12/2022 as compared to 2.25 as on 30 September, 2022. Net worth of the Company, without fair value change account, increased to INR27,822.39 crores as on 31/12/22 as against INR22,605 crores as on 31/12/2021. Net worth of the Company, including fair value change account, increased to INR61,616.80 crores as on 31/12/2022 as against INR53,723 crores as on 31/12/2021. On the premium breakup, domestic premium for the nine months of financial year ’23 is INR20,662.02 crores, and the international is INR8,559.83 crores. The percentage split is domestic 71% and international 21%. There is a degrowth in the domestic premium by 8%, while the international book has decreased by 18%.

We continue to work tirelessly towards a well thought-out strategy to get as close to 100% in combined ratio in the shortest possible time, and we are seeing our efforts paying dividends. It has been a relentless focus to make our portfolio healthier and emerge as a much better and profitable reinsurer over the long term. We are actively monitoring the competitive dynamics in the domestic and international market and, accordingly, formulating our response on a continuous basis. We remain optimistic and are fairly confident of improved performance going forward.

Having given the highlights, we will now open the floor for questions from the interested parties. Thank you.

Questions and Answers:

Operator

[Operator Instructions] We have the first question from the line of Sanketh Godha from Spark Capital. Please go ahead.

Sanketh Godha — Spark Capital — Analyst

Yeah. Thank you for the opportunity. Sir, if you look at the combined ratio breakup of 115%, we believe the domestic business has turned around with the combined less than 100% for nine month FY ’23, while overseas business remains the drag on the entire combined. So if you can give us a color of what led to that elevated combined in case of overseas business because that number, if I see, even higher compared to what it was in 1H FY ’23. So — and what led to the improvement in the domestic combined ratio? That was my first question.

Devesh Srivastava — Chairman and Managing Director

Sanketh, you are absolutely spot on when you say that the combined for the domestic is, for the nine-month period, down to 99%, which is, of course, a very gratifying factor for us. But yes, foreign is still high. And because the foreign business has been so globally, that is exactly the reason why you’re seeing hardening of rates. I would request Mr. Joshi, our General Manager looking after reinsurance, to pick it up from here, please?

Hitesh Joshi — General Manager

So as you observed that — as we discussed earlier, that there is a degrowth in foreign, which is much more than the domestic, so — and as sir mentioned just now that there is a meaningful and very — actually quite significant hardening of the international property reinsurance pricing. So we can expect a good improvement in the foreign going forward. And as sir said, it is a market-wide phenomenon during last five years, which is culminating in a very significant hardening, the hardening which is the entire reinsurance market globally has not seen in last three decades. It is such a severe reaction of the pricing correction.

Sanketh Godha — Spark Capital — Analyst

Sir, January renewals, according to you, what is the extent of price hardening you have seen, sir?

Hitesh Joshi — General Manager

Again, as we have discussed earlier in various such calls that it will be difficult to paint a broad picture. But different geographies have different hardening trends. Say, for example, Asia Pac is seeing something like a 20% to 50%. Say, U.S. is seeing something like, say, 30% to maybe 100%-plus. So — and again, within these growth ranges of hardening, there is a differentiation between at what layer, whether it is a bottom layer or a top layer, whether the program is seeing losses, whether the expiring price is adequate, whether the — what is the composition of peril, what is the restructuring in the program. So there are various aspects to the changes in rate and earning. But very broadly speaking, Asia Pac would be, say, 20% to — 40% to 50% depending on the particular account and the history of the account and geography and all.

Sanketh Godha — Spark Capital — Analyst

But, sir, this hardening, as you said, given we are almost 150% [Phonetic] combined in overseas business in the current nine months, so this hardening, should it be good enough assuming the same amount of captive and [Indecipherable] and all those things should bring back the overseas book next year to closer to the domestic numbers? Or you still believe there is some inadequacy in the price hike?

Hitesh Joshi — General Manager

I think it’ll not be correct to speculate right now as to where we will land in terms of the combined ratio. But the kind of, say, broad consensus and view which is emerging in the reinsurance market is that this hardening is going to sustain for at least a couple of more years. So if there is still felt that there is a price inadequacy, I think market will continue to correct. But on the flip side, since there is an interest rate hardening, maybe the better investment income for the Western reinsurance players will kick in. So we will need to wait how the dynamics of the price improvement and the investment income will play out.

Sanketh Godha — Spark Capital — Analyst

Sir, if the price hardening is there and if volumes don’t correct — number of contracts what you do don’t correct, then we can see the overseas business growth to pick up substantially in next year because it is minus 18% as you said, in the current year, can it become meaningfully positive with the price hardening?

Hitesh Joshi — General Manager

Sorry, I didn’t get the last sentence.

Sanketh Godha — Spark Capital — Analyst

Sir, what I was trying to say is that in current year, till nine months FY ’23, we are minus 18% in the overseas business, right? So with the kind of price hardening you are seeing, the possibility of growth to happen only because of the price hike, assuming you do the same amount of contracts next year also, then we can say a significant positive growth to happen in next year only because of the price hike for overseas business?

Hitesh Joshi — General Manager

Yes. I would say that we can expect that.

Sanketh Godha — Spark Capital — Analyst

Okay. So a mid-teen kind of a growth is very much possible, sir, in overseas business?

Hitesh Joshi — General Manager

Sorry?

Sanketh Godha — Spark Capital — Analyst

Mid-teen, maybe at a 12% to 15% kind of a growth is very much possible in FY ’24 for the overseas business, foreign business?

Devesh Srivastava — Chairman and Managing Director

See, Sanketh, growth is not the issue. I think you can grow in any market. Reinsurers never have a problem with growth. The whole idea is to be profitable. And that is why you have to find your way through.

Sanketh Godha — Spark Capital — Analyst

My question was, sir, more — just because of the price hike that growth would be in mid-teens, assuming — means you have been prudent for a while now with respect to contract selection. Means, if you maintain the prudence, assuming — I’m assuming you will maintain so, then the price hike itself should drive the growth to maybe minus 18% to plus 5%, 10%, 15% kind of a number from next year.

Devesh Srivastava — Chairman and Managing Director

Yes, so Sanketh, certainly, the risk-adjusted rate change is substantial. There’s no doubt about it. So what you’re saying should — it appears very plausible.

Sanketh Godha — Spark Capital — Analyst

Got it, sir. Got it. And domestic business correction, what you have seen, 8-odd-percentage, is largely because of the obligatory part or — obligatory part and the crop part or something else also has seen a slowdown in that sense?

Hitesh Joshi — General Manager

I think it is more across the board. And now increasingly, our approach is bottom up. So we are looking at each individual contract in terms of price adequacy. So it is not specific to a particular contract. I think as far as crop is concerned, it is a degrowth in the pruning during last two, three years. Of course, this current year was one more year. But then it is more bottom up. So it is varying degree for various clauses.

Sanketh Godha — Spark Capital — Analyst

Got it, sir. Got it. And anything you’ve heard from the IRDA incrementally, what they are going to do with the — or their approach to the obligatory partnering, the 5% has got reduced to 4%, whether it will further come down next year? Or this 4% is going to remain for couple of years and then gradually reduce to 3%, 2% and 1%?

Devesh Srivastava — Chairman and Managing Director

Sanketh, we have only statistics to say, see, you know that it used to be 20% once upon a time, then it came down to 15% to 10% to 5% and it has been 4% even last to last year — no, it was 5% last to last year, reduced to 4% last year and has continued at 4% this year. So the trend — see, the reinsurance regulations clearly state that the main objective of the reinsurance regulations is to retain premium in the country as far as possible. So we only have to wait. This is something of a decision that is taken at the highest level. It will be difficult for us to speculate and say something with any amount of certainty.

Sanketh Godha — Spark Capital — Analyst

Got it, sir. And my intention was to ask whether a dialogue has started and any communication you have to convey to us whether this number is going to come off in near future or not. That’s the only reason I was asking. But okay, sir, I understand.

Devesh Srivastava — Chairman and Managing Director

It’s always year to year. So what the notification that has come out right now is for the year [Technical Issues]. And it’s always a year to year notification.

Sanketh Godha — Spark Capital — Analyst

Right, sir, right. I completely agree. And say, this 98% [Phonetic] — or 99% combined what you have reported for the domestic business, despite obligatory coming off, means, any reason you contribute to — it’s largely because of the decline in crop or if price hardening environment, to some extent, is visible in the domestic business, especially in the commercial line?

Devesh Srivastava — Chairman and Managing Director

First, I would say it was the culmination of a lot of factors. You see crop was one, IIB rates that we had put on is another. Also the fact that we have been looking at businesses with a very keen eye. So it has been a culmination of a lot of factors and the entire management has worked towards this. This is a result of that if we were to ascribe it to a certain single source.

Sanketh Godha — Spark Capital — Analyst

Got it, sir. And last two data-keeping questions. One, just wanted to understand why tax rate around 7% is lower in the current quarter. And the next question is, if you can break down your investment income within around INR2,600 crores in the current quarter, broken down into capital gains and the dividend income and the interest income.

Jayashree Ranade — General Manager

Tax rate — I’m Jayashree Ranade here. Yes. Tax rate is — actually, we have opted for lesser tax rate regime, 22%. And hence, the tax impact is lesser this time. Also, we have got some credit for last year’s dividend, which we paid in our provision for taxation, that has also impacted around INR134 crores. So this is why the tax impact has come down in this quarter.

Sanketh Godha — Spark Capital — Analyst

So going ahead, we can safely assume that your marginal tax rate will be 25-odd-percentage, except for the one-off of dividend income you got, right, sir — ma’am?

Jayashree Ranade — General Manager

Certainly, yes. Going forward, it will be somewhat in the range of 25%.

Sanketh Godha — Spark Capital — Analyst

Got it. And investment income, you can break it down, ma’am, INR2,600 crore into capital gains, interest income and dividend income?

Radhika Ravishekar — Chief Investment Officer

Yes, so, this is Radhika Ravishekar, the CIO. The breakup of that income will be interest is around INR1,172.29 crores, dividend is around INR91 crores and the balance is from profit on sale of investments, that is INR1,217.29 crores. So the breakup of INR2,480 crores.

Sanketh Godha — Spark Capital — Analyst

Okay, ma’am. Perfect. Thank you very much. That’s it from me.

Operator

Thank you. [Operator Instructions] We have the next question from the line of Kailash Baheti, an Individual Investor. Please go ahead. Mr. Kailash, you may go ahead with your question.

Kailash Baheti — Individual Investor — Analyst

Yes. My question is, Number 1, there is this AM Best report, there is a qualification — refers to a qualification with reference to certain reconciliations. And have those been completed in receivable, payables or these are still there and will qualify as enterprise risk?

Devesh Srivastava — Chairman and Managing Director

Mr. Baheti, our CFO will answer that again.

Jayashree Ranade — General Manager

Yes. Mr. Baheti, this quarter’s audit report, we actually, with this qualification, regarding the concerns of reconciliations and confirmations, we have initiated a system now in GIC, which we also advised in this also auditors — along with concurrence of auditors, this system is there where the confirmations are inserted in our computerized system. So with that, last two quarters, most of the confirmations have been received and the balances are confirmed. So this quarterly report, if you see, the qualification has been removed by the auditor and now it is emphasis of matter, and we will try and reconcile the balance 10%, 20% also in the next quarter and this comment will go off, sir. So the qualification is already removed this quarter.

Kailash Baheti — Individual Investor — Analyst

Okay. That’s great. Just to understand, even the AM Best also has said that your enterprise risk management is still evolving and which means that it is not strong enough according to them. When — are you doing something to improve there and therefore, say, by end of the year, say that you have a robust risk management system, even according to AM Best’s standards?

Devesh Srivastava — Chairman and Managing Director

Mr. Baheti, in fact, this is one area where we have given AM Best a push already. Earlier when we had an A rating, the ERM system was found to be absolutely suitable, and that is why that rating was there. Now you can’t call it at a later date that it is still evolving. So that was a wrong nomenclature to have been used by AM Best. But be that as it may, there have been substantial work that has been done on the ERM because it’s a continuous process and not only for AM Best, but for the corporation as a whole. We do believe that the ERM systems here should be robust. We have gone ahead and, in fact, even made out a capital management plan, which is something that would be important for the corporation going forward. So it’s an ongoing process and it’s on.

Kailash Baheti — Individual Investor — Analyst

Okay. My next — this can be a suggestion or a question is that usually the investor presentation, which is circulated by the companies, is given along with the results, and that is across the board, except in your case, probably the investor presentation is put up later. And Number 2, the investor presentation is also not very exhaustive, very informative and has a pattern which is there for many years. It would be good for the image of a company if the investor presentation quality improves and it is also circulated along with the results because later on, people — I mean that’s the time when people look at the investor presentation. Later on, it actually just loses its relevance.

Devesh Srivastava — Chairman and Managing Director

Mr. Baheti, that point is — that suggestion is very well taken. Thank you for that. We will definitely take care of it.

Kailash Baheti — Individual Investor — Analyst

And while you said that reinsurance growth is not a problem, at the same time, the investors look at growth in a company. So is it that you’re not getting good enough businesses which are profit making and therefore degrowth, not that I am complaining about the Company turning stellar profitability, but growth is also important. So when do you expect to return to growth? When do you expect to [Technical Issues] which is profitable to return to growth?

Devesh Srivastava — Chairman and Managing Director

Right. So Mr. Baheti, most certainly — see, the whole idea was of consolidation because we had expanded quite a bit, and it was important for us that going forward, our systems, our processes should be certain place, so that whatever we write is something that we take informed decisions about. And that is why we have taken this. A great amount of pruning that had to be done has been done. I would say that we have almost reached an inflection point now. And now, going forward, you will see growth, but with profitability. That is going to be the essential difference. And profitability will be the key. But yes, I do agree that growth is something that you can’t wish away. That is life, growth is life.

Kailash Baheti — Individual Investor — Analyst

And this year, maybe your ROE will touch maybe close to 20% or higher, maybe higher. Do you expect that you have a minimum threshold on ROE, which will be your object every year, year after year, so that the consistency brings desired value for the shareholders?

Devesh Srivastava — Chairman and Managing Director

I mean, Mr. Baheti, yes, definitely, we would want that consistency to be part — that is part of our business. A reinsurer basically does what? It provides consistency through the operations of an insurance company, thereby to the insured, and therefore, to the commerce of the entire country, in fact. Reinsurers are the ones who actually believe in getting that evening out the crests and tufts. Similarly, we would also want that consistency to be there, and be there for the long term because our business is long term. So while we wouldn’t really want to put a figure to it, but yes, consistency is what is always going to be the hallmark of a reinsurer, and that includes GIC as well.

Kailash Baheti — Individual Investor — Analyst

You’re right. Thank you. That’s all I have.

Devesh Srivastava — Chairman and Managing Director

Thank you, Mr. Baheti.

Operator

Thank you. [Operator Instructions] We have the next question from the line of Deepak Sonawane from Haitong Securities. Please go ahead.

Deepak Sonawane — Haitong Securities — Analyst

Hello, sir. Am I audible?

Devesh Srivastava — Chairman and Managing Director

Yes, you’re audible.

Deepak Sonawane — Haitong Securities — Analyst

Yeah. Thank you for the opportunity, sir. So my first question is regarding our motor insurance combined ratio for a foreign portfolio. It has been — I mean, there’s very huge amount of deterioration over the last few quarters, right? Even in — for nine months as well, it has gone to 149% as of — from 128% from last year. And we have been taking a stance that we are coming out of some kind of geographies, right? I mean few quarters back, you gave — I mean, during the call, you gave such kind of information, but still our combined ratio is really high. So any reason for that? I mean…

Hitesh Joshi — General Manager

As sir said that we have these treaties and contracts, which tend to have a kind of filing, which we call internally in our industry. So when a contract is discontinued, you still continue to have the financial implications of this contract for, say, something like four to eight quarters. So I think this should taper off maybe more strictly than can be otherwise expected. So whatever is — whatever business is needed to be discontinued is discontinued. But then still, it still has a certain lingering effect. So what we are seeing is certainly lingering effect of the discontinued business.

Deepak Sonawane — Haitong Securities — Analyst

Okay. And that is — you said you expect this to be continued over the last, I mean, how many quarters?

Hitesh Joshi — General Manager

That is not an easy one to say because it depends on how the underlying losses behave and develop in a given geography. But it will be sticking my neck out, but probably it can be for at the most around two quarters if at all.

Deepak Sonawane — Haitong Securities — Analyst

Okay. And we are sure that we have fully come out of this kind of I mean, the loss-making portfolios, right?

Hitesh Joshi — General Manager

Almost.

Deepak Sonawane — Haitong Securities — Analyst

Okay. And if you can give us a breakup for foreign portfolio. I mean, we have reported around INR8,600 crore foreign GWP. If you can have a breakup between these major lines, that will be really helpful.

Devesh Srivastava — Chairman and Managing Director

Mr. Sonawane, you’re looking at the major components, right?

Deepak Sonawane — Haitong Securities — Analyst

Yes, major component. It is not there. I mean, I checked the presentation so — you had given claims incurred and combined ratio, but certainly not the GWP. I’m asking for international business only and not for domestic.

Devesh Srivastava — Chairman and Managing Director

So the big ones would be, fire is INR4,786 crores, water is INR1,723 crores, aviation is INR611 crores, marine hull is INR256 crores. Those are the big ones.

Deepak Sonawane — Haitong Securities — Analyst

Okay. Thank you. And sir, my last question is on agri book. So we are — I mean we’ve been pruning this book last — I mean, last two years, if I’m not wrong. So what is the next phase? I mean, what is the strategy for our next phase of growth in agri?

Hitesh Joshi — General Manager

I think we have degrown enough, and I think we are very happy with where we stand today. So any growth will be based on the offers and opportunity that we believe will be price adequate and which will contribute to our profitability and the return on equity.

Deepak Sonawane — Haitong Securities — Analyst

Okay. So that means — I mean you’ll be remain selective, right? I mean selective in terms of geography, and selective in terms of profile, right?

Hitesh Joshi — General Manager

Absolutely.

Deepak Sonawane — Haitong Securities — Analyst

Okay. Thanks a lot.

Operator

Thank you. We have the next question from the line of Malhar Avalia [Phonetic], an Individual Investor. Please go ahead.

Unidentified Participant — — Analyst

Hi guys. Thank you for the opportunity. Just given how the business has turned the corner and you’re pointing to greater profitability ahead, do you want to comment on the outlook for dividends and other capital management that could be undertaken to unlock some shareholder value? Thank you.

Devesh Srivastava — Chairman and Managing Director

Malhar, this would be, I think, difficult to comment on right now because we are a government company. There are certain guidelines there. But let’s see most certainly, we do have our investors in mind paramount.

Unidentified Participant — — Analyst

Thank you.

Operator

Thank you. [Operator Instructions] We have the next question from the line of Kailash Baheti, an Individual Investor. Please go ahead.

Kailash Baheti — Individual Investor — Analyst

Yes. My follow-on question is on the debt portfolio, which is not fair valued. Are we sitting on a gain or loss and the amount thereof?

Radhika Ravishekar — Chief Investment Officer

Sir, this is CIO Radhika Ravishekar again. Our debt portfolio, as you know, is basically held to maturity. So it will be based on the yield one, what the benefit you get is on the yield, which has shown a massive improvement.

Kailash Baheti — Individual Investor — Analyst

Okay. What would be the yield right now on your portfolio?

Radhika Ravishekar — Chief Investment Officer

Yield on my portfolio will be around 7.50%, sir. Everything put together, that is CGS, SGS [Phonetic], corporate debentures, everything, the entire fixed income category. It is around 10.53% [Phonetic].

Kailash Baheti — Individual Investor — Analyst

Sorry?

Radhika Ravishekar — Chief Investment Officer

10.53% sir, that is the yield.

Kailash Baheti — Individual Investor — Analyst

10.53% is the yield, okay. Thank you.

Operator

Thank you. [Operator Instructions] As we have no further questions, we would now like to hand it over to the management for closing comments.

Devesh Srivastava — Chairman and Managing Director

Thanks again for the interest that you have shown in the corporation. We have steadily progressed, and that progress will continue in the coming years as well. And GIC will emerge as a much stronger, much more resilient and a much stable reinsurer than before, and that is the whole game plan going forward. So thanks again for your time today. Good afternoon.

Operator

[Operator Closing Remarks]