GIC Re IPO – reassuring value proposition
The company, enjoys a near-monopoly in the Indian market and the valuation of the offer at 3.4X post-issue book (1.5X book with fair value change) is in line with global peers and looks reasonable in the context of a steady track record and macro opportunities.
The IPO (initial public offer) of GIC Re has many firsts to its credit; it is the first offer from an Indian reinsurer, and also the first issue that crosses the magical 10k size this year, making it the second largest IPO in Indian markets. The insurance market in India is growing at a fast clip and general insurance, which has the predominant share in Indian reinsurance market is still under-penetrated and has a strong growth path ahead. The company, enjoys a near-monopoly in the Indian market and the valuation of the offer at 3.4X post-issue book (1.5X book with fair value change) is in line with global peers and looks reasonable in the context of a steady track record and macro opportunities.
The IPO of GIC Re, being offered in the price band of Rs 855 –Rs 912 (with a discount of Rs 45 for retail investors) would be open for subscription from October 11 to 13. The issue size of Rs 11,372 crore (at the upper band) is predominantly an offer for sale from the government to the tune of Rs 9,804 crore (stake stands reduced from 100 percent to 86 percent) and the remaining Rs 1,569 crore is a fresh issue (dilution of 12.5 percent) to augment the capital base of the reinsurer. The post issue market cap (at upper band) would be approximately Rs 80,000 crore.
General Insurance Corporation of India (GIC Re) is the largest reinsurer company in terms of gross premium (GP) accepted, having a market share of 60 percent in India. GIC Re provides reinsurance across key business lines including fire (property), marine, motor, engineering, agriculture, aviation, health, liability & credit, etc. The company is the 12th largest in the world, and third largest in Asia.
Diversified product portfolio
Risk management through diversification
In the reinsurance business, risk management through diversification is important. GIC Re benefits from a fairly well-diversified book, geographically as well as on product basis. Share of gross premium from domestic/international businesses was at 70/30 in FY17. Of the 70 percent domestic business, split between private/public direct insurers is currently 60/40. Furthermore, the company reinsures across both life and non-life with all possible lines of business being covered. The international business also benefits from being spread over 162 countries.
Strong growth from crop insurance
GIC Re showed strong net premium growth at 73 percent year-on-year (YoY) mainly led by four‐fold jump in crop insurance premium collections in FY17 due to the implementation of Pradhan Mantri Fasal Bima Yojana (PMFBY) scheme. Since the government wants to expand the coverage of this scheme to 50 percent by FY19, the road ahead looks exciting. Incidentally, it is the largest agri-insurer globally and this segment has been profitable for the company.
GIC Re has been granted right of first refusal by the government, which means every re-insurance proposal is first looked at by GIC Re and if rejected is sent to other reinsurance players. GIC Re would also benefit from Lloyd’s syndicate status, which it expects to receive in FY18, as it would open up the international marketplace.
Healthy financials & dividend history
GIC’s Solvency ratio (the size of its capital relative to all risks it has taken), is at comfortable levels, coming in at 2.41 for FY17 against regulatory requirement of 1.5. Combined ratio (calculated by taking the sum of incurred losses and expenses and then dividing them by earned premium) was 100.16 in FY17 and improved to 98.43 in Q1 FY18. The company has shown consistently steady return on equity (RoE) and has robust retrocession (reinsuring the reinsurer) levels with net liability of only 10 percent of gross loss.
In addition, it has shown healthy growth in gross premium and profit after tax and has managed to reduce its expense ratio. The company has been consistent in its dividend payment and the payout ratio for FY17 stood at 32 percent.
Consistent performance of the investment book
In the reinsurance industry, investment results are paramount to profitability. The company has historically generated healthy returns from its domestic investment portfolio, with an investment yield of 12.3 percent for FY17. The Carrying Value of the portfolio was Rs 39,126 crore in FY17 and the market value was Rs 69,163 Crore. The portfolio is fairly diversified and has generated consistent returns.
There are certain inherent risks due to uncertainty in estimating loss reserves which are based on future claims liabilities; catastrophic events, including natural disasters that could materially increase the liabilities and substantial increase in their agriculture reinsurance business in recent years exposing it to bad monsoon, drought or floods.
However, the vantage positioning, macro opportunities and reasonable valuation makes it an attractive secular proposition for long-term investors.For more research articles, visit our Moneycontrol Research Page.