IPO

Thursday, October 05, 2017 Click here for Rating Reckoner
General Insurance Corporation
Largest Indian reinsurer, ranks 12 globally
CM RATING53/100
General Insurance Corporation (GIC) is the largest reinsurer in India by gross premiums accepted in the fiscal ended March 2017 (FY2017), accounting for nearly 60% of the premiums ceded by Indian insurers to reinsurers in the fiscal year. GIC also underwrote business from 161 countries end June 2017 and was ranked 12th largest global reinsurer in the calendar year (CY) 2016 and the third largest Asian reinsurer in CY 2015 by gross premiums accepted.

Reinsurance is provided across the segments including property, marine, motor, engineering, agriculture, aviation/space, health, liability, credit and financial and life. More than 44 years of experience has resulted in the creation of a trusted brand in the insurance and reinsurance businesses in India and overseas. The goal is to be a leading global reinsurance and risk solution provider.

The restated consolidated net worth including fair value change account stood at Rs 52116 crore end June 2017. The total assets on a restated consolidated basis amounted to Rs 108320.68 crore. The solvency ratio at 1.83 end June 2017 on a restated standalone basis was above the regulatory requirement of 1.5 times.

Besides being rated A- (Excellent) with a stable outlook by AM Best, a US-based rating agency providing news, credit ratings and financial data products and services to the insurance industry for 10 consecutive years, there is a track record successive annual dividends over the past five fiscal years including a proposed dividend in FY2017 to the Union government as shareholder. Dividends paid in last five fiscal years total Rs 3320.05 crore.

The gross premiums on a restated consolidated basis from international business stood at Rs 10300.45 crore in FY2017. The contribution of business from outside of India was 30.5%. The overseas business is conducted by the home office in Mumbai, branch offices in London, Dubai and Kuala Lumpur, a representative office in Moscow, a subsidiary in the United Kingdom that is a member of Lloyd's of London and a subsidiary in South Africa.

There is a senior team of underwriters and actuaries to develop and manage reinsurance business. The experience and long-standing relationships are used to tailor the portfolio to specific market segments. The strong balance sheet allows underwriting risks across the Indian insurance market including large policies. There was participation in 74.79% of the reinsurance treaties in the Indian non-life market last fiscal year. Three domestic reinsurance pools and one African-Asian reinsurance pool are administered.

The size of the Indian reinsurance market was estimated to be approximately Rs 38800 crore in FY2017. GIC, only publicly owned reinsurer, accounts for 60% of the industry premiums. There is only one private reinsurer registered by the Insurance Regulatory and Development Authority of India (Irdai), ITI Reinsurance.

The reinsurance market in India recorded a healthy CAGR of 15% in the ten years till FY2017. Premiums ceded to reinsurers increased by 73% in FY 2017 as non-life insurance premiums grew 32% and retention ratios declined close to 9%. The reinsurance premiums in India are projected by Crisil Research to register a CAGR of 11-14% over the next five years to reach Rs 70000 crore by FY2022.

Reinsurance of the non-life insurance business accounted for approximately 95% of the total premium ceded in FY2017. The dominance of non-life in the reinsurance pie can be attributed to better geographical spread of life policies compared with non-life. As the insured amounts are typically smaller in comparison, the need for reinsurance is correspondingly lower.

The Offer and the Objects

The initial public offer (IPO) is to collect around Rs 11372.64 crore at the upper band of the issue price of Rs 912 per share (face value Rs 5 per share) and Rs 10661.85 crore at the lower price band of Rs 855 per equity share. The issue consists of a fresh issue of 1.75-crore shares totaling up to Rs 1568.6 crore at the upper price band and offer for sale of 10.75-crore shares totaling up to Rs 9804 crore at the upper price band of Rs 912 per share. The offer for sale comprises 10.75 crore shares by the Union government.

The offer includes reservation of up to Rs 11.68 crore for eligible employees. There is discount of Rs 45 per share on the offer price for retail individual bidders and to eligible employees.

The issue is to be made through the book-building process and will open on 11 October 2017 and close on 13 October 2017.

The net proceeds from the fresh issue will be used to augmenting the capital base to support the future growth of business and to maintain the current solvency levels.

Strategy

The aim is to enhance competitiveness and consolidate position as a leader in the domestic reinsurance market and maintain reputation as strong and trusted brand. The effort is to continue to lead Indian reinsurance treaties and manage domestic pools, while leveraging the strong balance sheet to underwrite risks across the Indian insurance market including large policies covering industrial and large infrastructure projects. Customer service will be delivered and claims settled in a quick and efficient manner and with a high degree of professionalism.

The reinsurance written for risks outside of India represented 30.53% of the total gross premiums on a restated consolidated basis in FY 2017. The intention is to expand presence in select overseas geographies and markets to continue to grow the reinsurance business written for risks outside of India. The goal is to achieve a balance of international and India business by premiums.

The primary focus is to accept and manage risks profitability to create shareholder value. The combined ratio on a restated consolidated basis was 100.2% in FY 2017. The objective is to further reduce the combined ratios to achieve a greater operational level of profitability.

India is the tenth largest life-insurance market in the world by total premium. India is the fifteenth largest non-life-insurance market in the world by gross premiums. Thus, the Indian life insurance market offers an opportunity due to the high growth rate, primarily driven by low penetration levels. In addition to life insurance, the intention is to grow the domestic health and liability insurance businesses and overseas fire (property), space and cyber security business lines.

Strengths

The largest reinsurer in India by gross premiums accepted and accounting for about 60% of the premiums ceded by Indian insurers to reinsurers in FY2017. Reinsurance premiums in India are projected by Crisil Research to record a CAGR of 11-14% over the next five years to reach Rs 70000 crore by FY2022. The trusted brand in the Indian market, with 44 years of experience, is well placed to take advantage of the industry growth.

Underwrote business from India and 161 countries end June 30, 2017 and was ranked the 12th largest global reinsurer in CY 2016 and the third largest Asian reinsurer in CY 2015 by gross premiums accepted. The gross premiums from the international business notched a CAGR of 24.84% from FY2015 to FY 2017.

The diversified reinsurance businesses reduce the risks by covering many key lines including reinsurance of fire (property), marine, motor, engineering, agriculture, aviation/space, health, liability, credit and financial liability, and life insurance.

The experience of over 44 years in the reinsurance business has enabled establishment of an integrated framework of policies and processes to assist evaluating and valuing risk and to ultimately provide an appropriate return. Investments have been made in the IT platforms and software to process data and model and evaluate risk. Diversification of risks is at the core of the risk-management strategy.

A diversified investment portfolio generates investment returns to support liabilities of reinsurance underwritten and to create shareholder value. Indian investment assets on a standalone restated basis had a carrying value of Rs 41929.85 crore and a fair value of Rs 73902.56 crore end June 2017. Investment income from Indian investment assets on a restated standalone basis recorded CAGR of 4% to Rs 4515.61 crore in FY2017 from FY2015. The yields (without unrealized gains) from Indian investment assets on a standalone restated basis stood at 12.35% in FY2017.

There is a track record of delivering results. The gross premium income on a restated consolidated basis recorded CAGR of 48.65% from FY2015 to 2017. Profit after tax on a restated consolidated basis registered CAGR of 4% to Rs 3140.62 crore in FY2017 from FY2015. In addition, operating expenses have been kept low at 0.83% in FY2017.

Weaknesses

There is need to accurately assess the risks associated with the reinsurance businesses. If actual losses exceed estimated loss reserves, net income and capital will be reduced.

Catastrophic losses can result from events such as windstorms, hurricanes, tsunamis, earthquakes, floods, hailstorms, tornadoes, severe winter weather, fires, drought, explosions and other natural and man-made disasters. These incidences and their severity are inherently unpredictable. The catastrophe business reinsured might result in volatility of earnings.

There is exposure to credit risk relating to reinsurance brokers and cedants.

Operations are in a highly-regulated industry. Any changes in regulations or enforcement might affect the manner in which business is carried on and the price of the equity shares.

Gross premiums in the agriculture reinsurance segment increased from Rs 644.24 crore (accounting for 4.2% of total) in FY2015 to Rs 1291.79 crore (7%) in FY2016 and further to Rs 9752.33 crore (28.9%) in FY2017. A substantial increase in the agriculture reinsurance business in recent years enhances exposures to risks, losses, uncertainties and challenges inherent in weather and political compulsions and interventions in the agriculture sector.

The exposure of investments to interest rate, credit and equity risks might adversely affect net income and the adequacy of capital.

The reinsurance industry is highly competitive. There are a number of reinsurers worldwide. Many of them have greater financial resources and experience.

The reinsurance industry is cyclical.

Through multinational reinsurance operations, business is carried out in a variety of foreign (non-rupee) currencies including but not limited to the US dollar, euro and British pound. Assets and liabilities denominated in foreign currencies are exposed to changes in currency exchange rates. Foreign currency fluctuations might reduce net income and capital levels.

The gross non-performing assets (NPAs) as a percentage of gross loans and debt securities stood at 2.67% and the net NPAs as a percentage of net loans and debt securities at 0.72% end June 2017. Writing off any significant amounts of bad debts and to invest significant management time and resources in litigation for recovery might materially impact the results of operations.

Valuation

EPS for FY2017 works out to Rs 35.8 on post-IPO equity. Though the June 2017 quarter results are available, EPS cannot be annualized due to the seasonality of the business (Q4 is the peak quarter). The price band is Rs 855-912 per share. P/E is 23.9 times FY2017 EPS at the lower price band and 25.5 times FY2017 EPS at the higher price band.

Post-issue valuation is Rs 80001 crore at the upper price band of Rs 912 per share and Rs 75001 crore at the lower price band of Rs 855 per share.

One of the largest listed reinsurers by market cap after IPO will have a valuation of US$ 12.25 billion (Rs 65.29 per US$ as on 04 October 2017) at the upper price band of Rs 912 per share, exceeding the market cap of Mapfre of Spain, at US$ 11 billion on 05 July 2017 (as per GIC IPO Prospectus).

The performance is better than global peers on a number of parameters, besides recording one of the fastest growths in the non-life gross premium income. The commission ratio as well as net expense ratio is one of the lowest in the global reinsurance industry. The yield on the investment book as well as the return on equity is strong. The combined ratio, though above 100%, has been consistently reduced.

The post-issue book value (BV) was Rs 618.1 including fair value change account end June 2017. The scrip is offered at a P/BV multiple of 1.5 times at the upper price band of Rs 912 per share.

General Insurance Corporation : Issue highlights
For Fresh Issue Offer size (in Rs crore )
- On lower price band1470.60
- On upper price band1568.64
Offer size (in number of share in crore)1.72 crore
For Offer for Sale Offer size (in Rs crore)
- On lower price band9191.25
- On upper price band9804.00
Offer size (in number of share in crore)10.75 crore
Price band (Rs)*855-912
Minimum Bid Lot (in no. of shares )16
Post issue capital (Rs crore)438.60
Post-issue promoter & Group shareholding (%)85.8
Issue open date11/10/2017
Issue closed date13/10/2017
ListingBSE,NSE
Rating 53/100
*Discount of Rs 45 per share is offered to retail individual bidders and to eligible employees

 

Consolidated Statement of Revenue Accounts: General Insurance Corporation
1403 (12)1503 (12)1603 (12)1703 (12)1706 (3)
1. Premiums earned (Net)13616.0513594.7815338.2426374.6912922.56
2. Profit on sale of Investments (Net)784.971261.911022.221112.02241.75
3. Forex Gain/( Loss)231.14-56.87152.43-36.30-24.34
4. Interest, Dividend & Rent - Gross1713.441694.301691.571839.58573.12
Total (A) 16345.5916494.1218204.4629289.9913713.10
1. Claims Incurred (Net)12107.2911911.3312965.9121529.3110651.90
2. Commission (Net)2456.782795.573514.545364.282685.73
3. Operating Expenses related to Insurance Business176.33165.15190.01251.3856.65
4. Expenses relating to Investments1.802.362.302.870.55
5. Premium Deficiency -0.0058.46-58.460.000.00
Total Expenses (B) 14742.2114932.8616614.3027147.8513394.82
Operating Profit/ Loss C=(A -B) 1603.391561.261590.162142.14318.27
APPROPRIATIONS
Transfer to Shareholders' Account 1603.391561.261590.162142.14318.27
Transfer to Catastrophe Reserve 0.000.000.000.000.00
Transfer to Other Reserves 0.000.000.000.000.00

 

Consolidated Statement of Profit & Loss Account: General Insurance Corporation
1403 (12)1503 (12)1603 (12)1703 (12)1706 (3)
1. Operating profit/(loss) 1603.391561.261590.162142.14318.27
(a) Fire Insurance 13.801318.08732.19637.05268.89
(b) Marine Insurance 451.49-121.78406.67210.48225.98
(c) Miscellaneous Insurance 1131.11326.32381.281404.27-203.45
(d) Life Insurance6.9938.6470.02-109.6626.85
2. Income from investments 982.681302.071436.371638.41352.47
3. Other income 110.00234.81242.6318.122.18
Total (A) 2696.063098.153269.153798.67672.92
4. Provisions (Other than taxation) 256.10187.62196.56334.12101.98
5. Other expenses 137.5380.0251.1948.0513.24
Total (B) 393.63267.64247.75382.16115.22
Profit before tax 2302.432830.503021.403416.51557.70
Provision for taxation: -16.9729.44331.82412.293.48
Profit after tax 2319.402801.072689.583004.21554.23
Share of Profit in Associate Companies113.6689.91133.83136.4174.45
Net Profit2433.052890.982823.423140.62628.67
EPS (Rs) *27.7432.9632.1935.80#
* on post-issue equity of Rs 438.6 crore of face value of Rs 5 each, Figures in crore,
#EPS can not be annualized due to seasonality in business
Source: GIC IPO Prospectus

 

Comparison of Global Reinsurance Companies
GIC ReEverest Re Group LtdPartner Re LtdMAPFREChinaReinsurance
(Group)  Corporation
Renaissance Re
HeadquartersIndiaBermudaBermudaSpainChinaBermuda
Market cap $ billion as on 5/7/2017N/A10.8N/A119.35.7
Non-life gross reinsurance premium earned (USD million)4,9464,2474,1893,9793,6822,375
Share of non-life gross reinsurance premium (as % of total gross premium)98.90%70.40%78.20%84.70%28.20%100%
Three-year CAGR growth (USD) –Non-life gross reinsurance premium27.10%2.60%-3.00%2.10%N/A.13.90%
Three-year CAGR growth (local currency) - Non-life gross reinsurance premium31.70%2.60%-3.00%8.20%N/A13.90%
Net retention ratio for non-life reinsurance business 89.80%91.50%91.60%61.10%97.70%64.70%
Management expense ratio (Non-life reinsurance business)0.80%3.10%9.30%0.80%1.60%16.80%
Commission ratio (Non-life reinsurance business)20.40%24.40%27.40%28.50%36.20%20.60%
Net expense ratio (Non-life reinsurance business)21.30%27.50%36.70%29.30%37.80%37.40%
Loss/claims ratio (Non-life reinsurance business)80.40%50.00%60.20%65.00%62.00%37.80%
Combined ratio (Non-life reinsurance business) 101.70%77.60%97.00%94.20%99.80%75.20%
Net investment yield based on book value7.80%2.80%2.70%5.00%5.10%3.40%
Return on equity17.40%12.70%6.60%15.20%7.40%10.00%
Financial data for GIC Re is for Fiscal 2017, and 2016 for other companies
Source: GIC IPO Prospectus

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