NIA has been in operation for almost a century. It was nationalised in 1974 and today it is the largest general insurance company in India in terms of net worth, domestic gross direct premium, profit after tax and number of branches.
India, with its growing population and a large proportion in the working age bracket, remains a lucrative yet under-penetrated market for insurance products. In this backdrop, the Initial Public Offer (IPO) of the country’s largest non-life insurer New India Assurance (NIA) assumes importance. The company has been a steady player in the space and offers participation in a secular theme. While the valuation at 1.6X book (after factoring in the fair value accounting) and 4.3X book appears to be reasonable in comparison with the listed competitor, the rather subdued return ratios of NIA explains the gap. Long term investors content with steady moderate return should look at this offer.Background
NIA has been in operation for almost a century. It was nationalised in 1974 and today is the largest general insurance company in India in terms of net worth, domestic gross direct premium, profit after tax and number of branches.The IssueThe issue size of Rs 9,600 crore is a combination of offer for sale from the promoter government of India (Rs 7,680 crore) and a fresh issue of Rs 1,920 crore which will go into augmenting the capital base of the company. The issue is being offered in the price band of Rs 770 to Rs 800 per share and would remain open for subscription from November 1 to 3. Retail investors are entitled to avail of a discount of Rs 30 per share.
Why should one look at the offer?
Favourable industry tailwinds – India’s non-life insurance penetration at 0.77 percent is one-fourth of the global average and much lower than its peers like China (1.81 percent), Brazil (1.76 percent) and Thailand (1.70 percent). India’s per capita non-life insurance premium at $13 is also one of the lowest amongst its peer group and much lower than the global average of US$285.3.
The size of the Indian non-life insurance sector was Rs 1.28 trillion on a GDPI (gross direct premium income) basis as of 31st March 2017. Indian non-life insurance sector GDPI grew at a CAGR of 17.4 percent between fiscal 2001 and fiscal 2017.
Drivers of the general insurance business – The double-digit growth in the industry can be attributed to increasing penetration due to continuing growth in motor insurance, introduction of government schemes in specific segments such as crop insurance, financial inclusion drive (Jan Dhan Yojana etc.).
Only 34 percent of Indians have a health insurance policy. Home insurance is practically non-existent. The growing middle class population and increasing consumerism, focus of financiers’ on pushing retail credit, benign fuel prices and interest rates, and continuous improvement in road infrastructure are having a favourable impact on domestic automobile sales and insurance.
The demographic dividend – India currently has one of the youngest populations in the world, with a median age of 28 years. 90 percent of the Indians will still be below the age of 60 by 2020. A high share of working population, coupled with rapid urbanisation, nuclearisation of families, labour mobility and rising affluence, is expected to propel the growth of the Indian non-life insurance sector.
NIA the leadership position – The company’s gross written premium has increased at a CAGR of 15.18 percent from FY13 to FY17, while its net worth (excluding fair value change account) increased at a CAGR of 7.01 percent over this period.
Diversified offering – The company develops and distributes a range of personal and commercial insurance products including fire, marine, motor, crop, health etc. NIA has a leadership position in fire, marine, motor and health insurance.
The company operates in 28 international jurisdictions and the gross written premium from the company’s international operations is in the mid-teens.
Strength of the distribution channel - The company has expansive pan-India and multi-channel distribution network that includes individual and corporate agents, brokers, bancassurance partners and other intermediaries, as well as direct sales and sales through online channels.
The large investment book – the company follows a balanced investment strategy in compliance with applicable regulatory guidelines. The size of the book is close to Rs 60,056 crore and increased at a CAGR of 11.32 percent between Fiscal 2013 and Fiscal 2017. The yield on investments was 15.40 percent in FY2017.
Healthy financials -NIA has a strong capital position with a solvency ratio (size of its capital relative to all the risk the company has taken, which is all liabilities subtracted from total assets) of 2.27x compared to the regulatory requirement of 1.50x.
The company’s Combined Ratio (sum of loss ratio and net expense ratio) has improved to 110.66 percent for the three months ended June 30, 2017 from 119.74 percent in Fiscal 2017.
The company’s operating expense ratio of 20.40 percent in FY2017, the lowest among the top 10 multi-product insurers in India.
Peer review – ICICI Lombard has grown faster than NIA with its GDPI growing at a CAGR of 26.7 percent from fiscal 2015 to fiscal 2017. ICICIL has a healthy return on equity at 16.7 percent in FY17 and this ratio has been in excess of 15.5 percent for each fiscal year since fiscal 2015. This partially explains the difference in valuation with ICICI Lombard trading at 8.2X FY17 book as against 5X trailing book for NIA.Investors got to bear in mind that the profitability of the business could be impacted by regulatory changes, macro challenges as well as natural calamities etc. However, given the strong moats as discussed above, while short-term gains may not be meaningful, the IPO is worth a look for risk averse long-term investors.