Bajaj General Insurance

Update on the Indian Equity Market:

On Thursday, NIFTY closed in the red at 16,498 (-0.6%). Among the sectoral indices, OIL & GAS(+1.5%), IT (+1.2%), and METAL (+1.2%) closed higher while AUTO (-2.3%), CONSUMER DURABLES (-1.3%), OIL & FINANCIAL SERVICES 25/50 (-1.3%) closed lower. Among the stocks, ONGC (+4.6%), UPL (+4.5%), and POWERGRID (+2.8%) were the top gainers while ULTRACEMCO (-6.7%), ASIANPAINT (-5.2%), and HDFCLIFE (-5%) were among the top losers.

Excerpts from an interview of Mr. Tapan Singhel, MD & CEO of Bajaj Allianz General Insurance (BAGIC) in Business Standard dated 3^rd March 2022:

• During the third wave in January 2022, claims moved up 241 percent compared to December 2021 but the severity and hospitalization were low as compared to the second wave. The claim ratio did move up but not as much as it did in the second wave.
• COVID claims contributed 20% to the overall claim ratio. The company has settled COVID-related claims of over Rs 8,000 mn since April 2020.
• There was a 20 percent movement in BAGIC’s loss ratios. They were the only ones to make underwriting profits in CY21 but COVID-19 still impacted the profitability of the business. There was some relief in the motor segment as the claim ratios declined during the pandemic.
• BAGIC would have considered increasing its premiums had COVID-19 been a regular phenomenon.
• Mr. Singhel worries about the rising medical inflation which has gone up 30-45 percent in the last three years from a typical range of 10-15 percent. He also pointed out the need to have regulators for hospitals to control hospital bill inflation and a reduction in GST of 18% on premiums.
• The premiums on group health policies have gone up due to price hikes taken to manage increasing loss ratios in that segment. In retail health, companies can take price hikes only after three years. During the pandemic, many consumers purchased covid- related products. Overall, on a base effect, growth in retail seems lower.
• The insurance industry has a direct correlation with the volumes of vehicles being sold. The semiconductor shortage has caused sales volumes to decline resulting in muted growth in motor insurance premiums.
• Hikes in motor third-party premiums will be taken when loss ratios start moving up in this segment. The industry seems comfortable with the existing situation.
• As infrastructure is the main focus of our country, Mr. Singhel believes there should be solutions to provide funding to contractors and free up their capital. He believes surety bonds to be a very good move by the regulator and the government and that BAGIC will be keeping an eye on this business. The idea is to not replace bank guarantees entirely.
• BAGIC is sure that any acquisition they do would be adding value to the company, in terms of distribution or processes.

Asset Multiplier comments:

• We expect the health claims ratio to moderate from its peak levels that were observed during the pandemic.
• With economic activities picking up, we believe BAGIC is well placed to maintain its combined ratio at pre-covid levels over FY23 and 24.
• Improvements in operating efficiencies and moderation in claims ratio are expected to improve BAGIC’s profitability over the subsequent quarters.

Consensus Estimate: (Source: Market screener website)

• BAGIC is a subsidiary of Bajaj Finserv Ltd. The closing price of Bajaj FInserv was ₹ 15,704 as of 3-March-2022. It traded at 6.4x/5.5x/4.7x the consensus book value per share estimate of ₹ 2,452/ 2,848/ 3,326/ for FY22E/FY23E/FY24E respectively.
• The consensus average target price is ₹ 16,341/- which implies a PE per share multiple of 4.9x on FY24E BVPS of ₹ 3,326/-.

Disclaimer: “The views expressed are for information purposes only. The information provided herein should not be considered as investment advice or research recommendation. The users should rely on their own research and analysis and should consult their own investment advisors to determine the merit, risks, and suitability of the information provided.”