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GRUPO CATALANA OCCIDENTE: 1Q’21 RESULTS AND T.P. INCREASE (ANÁLISIS BANCO SABADELL)

1Q'21 results vs. 1T'20 results:
Premiums: € 1.447 Bn (+1.1% vs +1.1% BS(e));
Operating result: € 124.7 M (+23.1% vs. +4.2% BS(e));
EBT: € 164.4 M (+31.1% vs. +14.5% BS(e));
Net Profit: 124.7 M (+42.0% vs. +17.4% BS(e)).

The company has released results far above expectations, with a positive surprise in Credit Insurance, whose recurring result (46% of the total) came in at € 67.7 M, +40% vs. 1Q’20 and +40% vs. our estimates. This was against all odds considering the current economic scenario, and would be explained by the fact that the company obtained a gross CR of ~62.3% (levels unheard of) vs. our estimate of 85% and vs. 873% in 1Q’20 and 94.1% in 2020. This would compare with a recent historical average of 80%. It appears to be evident that the rise in the claims rate is being far less significant than expected (which leads to provisions being released by the company, always in a prudent manner). As a result, this non increase in the claims rate, the portfolio cleanup carried out in 2020, and the state-backed insurance policies (which will expire in June 2021) have translated into a larger portion of yield being ceded (the company cedes premiums but cannot cede claims). This fact alone explains the current net CR of 64.3% (above the gross reference) and, therefore, the high penalisation on the result of reinsurance (-22.4% in premiums vs. structural reference of -7% on average exc. Covid-19). Despite this, as we mentioned earlier, the recurring result from 1Q’21 already beat that from FY2020.
Separately, the Traditional business’ results came in fully in line with our estimates, with around +1.1% growth in premiums vs. 1Q’20 and a recurring result of € 57.1 M (54% of total) and +3.1% vs. 1Q’20. As expected, the lower claims rates in Autos, Funeral and Health have been offset with an increased technical cost in Multirisks (due mainly to a peak event and an increased use of home) and Miscellaneous. Thus, the business’ CR remains at very healthy levels of 88.9% (vs. 90% BS(e)), in line with 2020 (8.6%), but above the pre Covid-19 average’15-19 of 90.5%. Conference call on 30 Apr at 11.30 (CET).
Without a doubt, these results lead us to believe that in 2022 BS(e) the structural trends would be clearly normalized. This means a Combined Ratio (CR) in the Traditional business of around 90.5% (in line with 2019), while in Credit Insurance it would be already at 79.7% in gross terms (vs. around 76.4% net), very close to 2015-18 levels (i.e. our estimates do not assume the record low CR hit in 2019 of 73.4%). See further details in the revision of estimates section. This would mean a recurring result in the Traditional Business of around -10% over the 2021-22 period BS(e) vs. our previous estimates while Credit Insurance would improve by around +40% in 2021 BS(e) and +15% in 2022 BS(e) vs. our previous estimates. With this in mind, we foresee a +21% CAGR in Net Profit’20-22 BS(e) on the consolidated level, leaving our T.P. at € 40.00/sh. (+15% vs. previous T.P.; +15% upside), and thus we reiterate our BUY recommendation.