GIC IPO Review: Insurer of Insurance companies

General Insurance Corporation IPO (GIC IPO) opens on 11 October and will mobilize INR11,372.64 crore through sale of 124,700,000 shares. This will be 30^th mainboard IPO in India this year and will be the biggest IPO since 2010. It will find third place in the list of biggest IPOs in India after Coal India (INR15,200 crore) and Reliance Power (INR11,700 crore). Here is a more recent list of biggest public offers. Given the massive size of the IPO, investors are looking forward to better allotment and the discount of INR45 per share is another reason for retail investors (employees too) to look forward to the offer. Through GIC IPO review, we try to find out if this public offer is good for your portfolio.

General Insurance Corporation IPO Review: Largely OFS, government selling  

The company, India’s largest reinsurer, is fully-owned by the President of India as of now. However, this will change as the government plans to sell 10.75 crore shares or 12.2% equity in the company through the IPO.

GIC will also issue 17,200,000 new shares worth INR1,568.6 crore. These funds will go towards improving its capital base and general corporate purposes.

General Insurance Corporation IPO Review: Domestic and international reinsurance

Reinsurance is the insurance purchased by a ceding insurance company from one or more insurance companies known as reinsurer. In simple words, it is insurance to the insurance company. Almost all insurance companies have reinsurance operations as part of their risk management strategy. For inclined readers, here is more on reinsurance.

India is the 10th largest life market and 15th largest non-life market and GIC is the largest reinsurance company in India in terms of gross premiums accepted. The company provides reinsurance across fire (property), marine, motor, engineering, agriculture, aviation/space, health, liability, credit and financial and life insurance. GIC accounted for approximately 60% of the premiums ceded by Indian insurers to reinsurers during FY2017.

GIC is also an international reinsurer that underwrote business from 161 countries. In terms of gross premiums accepted, the company was 12th largest global reinsurer in 2016 and was third largest in Asia. It has offices in London, Dubai, Kuala Lumpur, Moscow, South Africa and is part of a syndicate formed with UK reinsurance marketplace Lloyd’s. In FY2017, FY2016 and FY2015, its gross premiums for risks outside of India were 30.5%, 45% and 43.3%, respectively, of its total gross premiums.

GIC IPO Review: Financial performance

The company has posted strong revenue growth in the recent years and it is clearly visible in the table below. The company has presented its consolidated financial performance only for the last three years but it is clear that the company has been able to consistently grow its revenues. The sharp jump in FY2017 revenues is due to the Pradhan Mantri Fasal Bima Yojana insurance scheme which boosted its agriculture reinsurance revenue from INR1,291.8 crore in FY2016 to INR9,752.3 crore in FY2017. This growth has boosted profits also but has presented a downside in the form of lower margins. In the last three years, GIC’s net margins have dwindled from 17.5% to 10.7% as a result of the growth in low-margin agriculture reinsurance and higher claims in fire and life insurance businesses.

GIC IPO Review: Worthy addition to portfolio?

Going forward, the company plans to increase its presence in global markets. In line with this strategy, it is going to open offices in China, Brazil and Bangladesh while converting the office in Russia into a subsidiary. Similarly, GIC is making efforts to boost sales in high margin markets like the US and the UK. Margins have historically been higher in the international business due to higher average premium and availability of sophisticated historical information. As a result, GIC plans to grow its proportion of gross premium from the overseas market from 30% to 40% in the short to medium term.

Now this needs to be taken with a pinch of salt as most public sector undertakings (PSUs) are nothing but instruments of executing government’s plans. This was once again highlighted in the way GIC took up the low-margin crop insurance business. With the government looking to make GIC the Technical Support Unit (TSU) for PMFBY, it is likely that margins will remain subdued in the coming years.

On the positive side, the company has done well in controlling its costs. Its operating expenses related to insurance business as a percentage of net premiums earned have been trending down and stood at 0.83% in FY2017.

In terms of valuations, the company has Earnings Per Share (EPS) of INR36.52 which translates the price band into the Price/Earnings (P/E) ratio of 23.41 – 24.97. If we consider the retail discount, the effective ratio comes down to 22.17 – 23.74. Its Net Asset Value (NAV) of INR226.90 per share means that the Price/Book Value (P/B) ratio is at 4.0. Although ICICI Lombard General Insurance isn’t a direct peer, it is a good proxy and it helps to know that the latter trades at a P/E ratio of more than 45 while the P/B ratio is at 8.2. This makes GIC an attractive play. Additional tailwinds are offered by its strong balance sheet and the government’s backing.

Overall, GIC IPO review reveals that the company has all the elements of a successful listing – fundamentally-strong business, stable balance sheet, positive industry outlook and attractive pricing. Big size of the IPO is most probably going to address investors’ qualms of no allotment. Throw in the discount for retail investors and it becomes quite attractive an offer. Nevertheless, it might be helpful to keep an eye on the discussion page for General Insurance Corporation IPO.