IPO Snapshot:

General Insurance Corp (GIC) is entering the primary market on Wednesday 11^th October 2017 with an IPO of 12.47 crore equity shares of face value Rs. 5 each, comprising a fresh issue of up to 1.72 crore shares and an offer for sale (OFS) of up to 10.75 crore shares by the Government of India, both in the price band of Rs.855 to Rs. 912 per share, with retail discount of Rs. 45 per share. At Rs. 11,176 crore, issue is the third largest IPO in the history of Indian capital market (after Coal India and R Power), of which, Rs. 9,635 crore will partly meet FY18’s Rs. 72,500 crore divestment target and balance Rs. 1,542 crore will flow to the company. Representing 14.22% of the post issue paid-up share capital, issue will close on Friday 13^th October and listing is expected on 25^th October.

Company Overview:

99.99% subsidiary of Government of India, GIC is India’s oldest and largest re-insurer with 60%  market share, clocking gross premium of Rs. 33,714 crore for FY17. With operations across 161 countries globally, company is the world’s 12^th largest and Asia’s 3^rd largest re-insurer, with international business accounting for 30% of FY17 gross premium. Company has presence across diversified business segments, such as agriculture (29% of FY17 gross premium), fire (24%), motor (20%), health (12%), marine (3%), engineering (3%), life (1%) among others. In India, GIC writes reinsurance for every non-life and more than half of the life insurance companies. It has an investment book of Rs. 41,930 crore (30-6-17), of which, 20% is in listed equities. Yield on investments was at 12.35% in FY17, excluding unrealized gains. 

Financials:

While gross premium rose at a CAGR of 32% for 3 years between FY14-17, total income clocked 12% CAGR. FY17 gross premium saw extraordinary 82% YoY jump, boosted by agriculture segment, due to PM Crop Insurance Scheme, growth of which should stabilize to 15-20% annually going forward. Thus, FY17 profitability was also strong, with consolidated total income rising 17% YoY to Rs. 3,799 crore, of which, Rs. 2,141 crore was operating profit, up 35% YoY. Of this, miscellaneous business segment (comprising agriculture insurance) contributed operating profit of Rs. 1,404 crore vis-à-vis Rs. 381 crore operating profit in FY16.

FY17 income from investments was up 14% YoY to Rs. 1,638 crore, resulting in 12% YoY higher net profit of Rs.3,140 crore. On equity of Rs. 430 crore (FV Rs. 5 each), EPS was at Rs. 36.52, of which, dividend of Rs. 10 per share has been paid for FY17. Company is required to pay annual dividend of 30% of PAT or 30% of Government of India’s equity, whichever is higher.

Q1FY18 performance has been satisfactory, albeit operating loss of Rs. 203 crore reported by miscellaneous segment on account of higher claims incurred. Total Q1FY18 operating profit (including all business segments) stood at Rs. 318 crore, while income on investments was at Rs. 352 crore, leading to total income of Rs. 673 crore. Net profit for the June quarter was at Rs. 629 crore, translating into an EPS of Rs. 7.31.

As of 30-6-17, company’s net worth stood at Rs. 20,687 crore, translating into BVPS of Rs.234. Post listing, Government’s 99.99% holding will contract to 85.78%. While profitability has been healthy, company’s RoE has been on a decline, falling from 18.97% in FY15 to 16.21% in FY16 to 16.09% in FY17 and just 12.48% on Q1FY18 on an annualised basis.

Operating Parameters:

To fare competitively vis-à-vis few global re-insurers, which have combined ratios of as low as 75%, company has made relentless efforts to reduce this ratio, which seems to be paying-off, as it has declined from 107.0% in FY16 to 100.2% in FY17 and further to 98.4% for Q1FY18. Calculated as (incurred losses + expenses)/premium earned, combined ratio of 100% indicates break-even for core insurance operations while ratio < 100% implies insurance activity being profitable.

Company’s solvency ratio, as of 30-6-17, is at 1.83x, against minimum regulatory requirement of 1.5x. Fresh issue proceeds of Rs. 1,542 crore will augment capital base and strengthen solvency. Other operating parameters such as claim settlement ratio or mis-selling ratio used for non-life and life insurers is not applicable to reinsurance.

Valuation:

At Rs. 912 per share, company’s market cap will be Rs. 80,000 crore, implying PE and PBV multiples of 25x and 3.9x respectively, on historic basis. Based on FY18E earnings, PE and PBV multiples are 22x and 3.4x respectively. Calculating net worth (and hence BVPS) after taking into account fair value changes may not be appropriate, as it considers unrealised gains as well, which can fluctuate vastly. Moreover, markets generally do not value BFSI companies in such as manner.

Although not a strict peer, just for the sake of comparison, recently listed ICICI Lombard General Insurance is trading at PE of 40x and PBV of 6.8x, on FY18E. Another metric to benchmark insurers would be market cap to premium ratio:

From the above peer comparison as well as on per-se basis, valuation of GIC appears fair, given its pedigree, market leadership position, and sector growth.

Conclusion:

Company has sound fundamentals supported by healthy sector growth. Retail discount of 5% to issue price is not only an investor friendly move, but also keeps up with Govt’s motive to encourage formal avenues of financial savings in the nation. Based on reasonable pricing of the issue, GIC is a Good Investment Choice. . 

Disclosure: No interest.