Profit Margins Will Shrink Despite Diversification Into Emerging Insurance Sectors

Key Takeaways

• Diversification into emerging areas like cyber insurance and health insurance aims to optimize revenue and stabilize earnings against climate risks.
  
• A recent credit rating upgrade supports potential international revenue growth, while strategic exits improve combined ratios and margins.
  
• GIC Re's strategic focus on diversified growth, disciplined underwriting, and international expansion supports stable profitability, financial resilience, and enhanced revenue streams.

Catalysts

Provides reinsurance services in India and internationally.

• GIC Re is focusing on diversifying its portfolio by growing in emerging areas such as cyber insurance and surety bonds, aiming to optimize future revenue streams and enhance long-term profitability.
  
• Despite a challenging external climate, the company has reported improvements in its combined ratio due to disciplined underwriting and strategic exits from underperforming segments, which could lead to better net margins.
  
• International business prospects are expected to improve following a recent credit rating upgrade, suggesting potential revenue growth opportunities in overseas markets.
  
• The company is strategically increasing its exposure in the health insurance sector, which has seen significant growth, to mitigate risks from climate-related catastrophic events and stabilize earnings.
  
• Continued efforts to balance the portfolio between obligatory and non-obligatory segments aim to enhance overall profitability, given the non-obligatory business allows for more selective, potentially higher-margin underwriting.

General Insurance Corporation of India Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming General Insurance Corporation of India's revenue will grow by 6.0% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 16.3% today to 13.3% in 3 years time.
• Analysts expect earnings to reach ₹72.7 billion (and earnings per share of ₹41.39) by about March 2028, down from ₹75.1 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as ₹52.6 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 12.9x on those 2028 earnings, up from 9.8x today. This future PE is lower than the current PE for the IN Insurance industry at 60.6x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 12.53%, as per the Simply Wall St company report.

General Insurance Corporation of India Future Earnings Per Share Growth

Risks

• GIC Re's Q3 FY '25 results show an improvement in the combined ratio and disciplined underwriting, which could lead to better profitability and stabilize earnings in the future.
  
• The company’s focus on diversified growth areas such as health, cyber insurance, and surety bonds reduces exposure to climate change and catastrophe, supporting more consistent revenue streams.
  
• GIC Re has expanded its investment in less catastrophe-exposed sectors and maintained a profound emphasis on disciplined underwriting, which could result in more predictable revenue and profit margins.
  
• With an improved credit rating to A minus, GIC Re has already seen substantial growth in its international business, which may enhance revenue streams and profit margins.
  
• The company's solvency ratio improvement suggests financial resilience and ability to sustain growth initiatives, contributing to stable earnings and improved net margins.

Valuation

• The analysts have a consensus price target of ₹374.25 for General Insurance Corporation of India based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₹550.0, and the most bearish reporting a price target of just ₹197.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ₹547.0 billion, earnings will come to ₹72.7 billion, and it would be trading on a PE ratio of 12.9x, assuming you use a discount rate of 12.5%.
• Given the current share price of ₹418.45, the analyst price target of ₹374.25 is 11.8% lower.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.