New India Assurance Company share price fell 4.45 percent intraday on November 18 after HDFC Securities downgraded the stock to sell with a target price of Rs 116, implying 27 percent potential downside from current levels following the recent run-up in the share price.
The stock rallied more than 60 percent in the last one month. It was quoting at Rs 151.90, down Rs 6.35, or 4.01 percent on the BSE at 1406 hours IST.
New India Assurance (NIA) is India's largest insurer but continues to make high underwriting losses (first half of FY20's combined operating ratio (COR): 116.4 percent), said HDFC Securities which expects the stock to correct in near term.
"We also note that the company’s competitive positioning is only weakening and thus we remain concerned about its ability to write high quality (profitable) business in the near future. We estimate an FY22E adjusted return on equity (RoE) of just 7.2 percent, and can at best assign a valuation of just 0.6x September 2020 ABV (less 10 percent discount for expected 10.4 percent supply)," HDFC Securities added.
While NIA reported a better-than-expected COR of 118.3 percent (down 610bps YoY), high net earned premium (NEP) meant large underwriting losses of Rs 1,100 crore (up 9.4 percent YoY).
Investment income (Rs 1,710 crore, 11.6 percent yield) and low tax rate (12.2) ensured a high PAT of Rs 560 crore (up 59.8/99.2 percent YoY/QoQ).
Despite a 19.5 percent YoY increase in net written premium (NWP), NEP increased only 12.4 percent YoY to Rs 5,880 crore.
Motor/Health/Fire NEP grew 9.1/19.9/36.0 percent YoY. Management has highlighted that a slowdown in motor persists.
"Underwriting losses narrowed marginally sequentially to around Rs 1,100 crore. Health (Rs 450 crore, 44.3 percent share) and motor (Rs 270 crore, 26.4 percent share) continue to report highest losses. NIACL continues to write low margin group health and government business leading to higher losses in health," HDFC Securities said.
Investment book grew a mere 1.3/-1.5 percent YoY/QoQ to Rs 59,100 crore, aiding investment yields to 11.6 percent (+50/160 bps YoY/QoQ). Fair value reserves have declined by Rs 3,130 crore over the first half of FY20.Disclaimer: The above report is compiled from information available on public platforms. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.