Strong prospects make GIC Re IPO attractive
Robust growth in the non-life segment, diversified book and improving operational efficiencies are positives
Growth prospects for the country’s largest reinsurer, General Insurance Corporation of India (GIC Re), which has 60 per cent of the ~39,000-crore reinsurance market (nonlife plus life), appear robust. The company takes on risks from general insurance companies for a premium. It is expected to benefit from the strong growth in India’s non-life insurance segment, which accounts for 95 per cent of the reinsurance market.
Non-life premiums of the sector have grown at 17 per cent annually over the FY12-17 to ~1.28 lakh crore. The is projected to more than double to ~3 lakh crore by FY22, growing annually at 15-20 per cent, according to estimates by CRISIL and the Insurance Regulatory and Development Authority of India. This should also reflect positively on the Indian reinsurance market, just under ~40,000 crore and expected to grow at an annual 11-14 per cent to ~70,000 crore by FY22.
This, with robust yields on investment and a diversified book, both in terms of segments GIC Re caters to as well as the geographies, helps mitigate risk. While the company underwrites risk in eight segments, the India business contributes 55-69 per cent of premium, the rest coming from operations outside the country. Its overseas operations are also big, given that GIC Re was the 12 largest reinsurer globally in 2016, according to CRISIL Research. Its international operations are spread over 160 countries and earned gross premium of ~10,300 crore in FY17.
Overall, net premiums have doubled over FY14-FY16. The key drivers are the crop insurance market (Pradhan Mantri Fasal Bima Yojana), motor (automobile sales, third-party premiums), health (led by higher medical costs) and fire. Agri, motor and fire account for three quarters of gross premiums. Premium growth in FY15-17 period of 48 per cent was largely led by the agri reinsurance business, on a low base. Analysts, however, say even if the agri segment is excluded, growth is expected to be about 20 per cent over the next few years, driven by low penetration levels and expansion in international business.
The other important source of revenue for the reinsurance company is the return from investment income. This is important, given that reinsurance players fail to generate underwriting profits on a consistent basis. The company, which has over 55 per cent of its investments in equities, has generated yields of over 12 per cent over the past few years. This coupled with the fact that operating expense ratio are coming down consistently over the last few years from 133 per cent to in FY14 to 83 per cent in FY17 should help. The ratio is defined as operating expenses as a percentage of net premiums and is an indicator of operational efficiencies.
The company, however, needs to improve its return on equity, which has come down from 20.7 per cent in FY15 to 17 per cent in FY17, given competitive pricing, which is impacting profitability. Analysts, however, say pricing pressures in the reinsurance market globally should ease over the medium term, which coupled with the company’s objective of improving combined ratios (ratio of costs and revenues) should reflect in higher profitability and return ratios. Though the ratio stood at 98.4 per cent in June 2017 quarter, it has been over 100 per cent (100-108 per cent) over the past few years, translating into losses at the operating level. The quantum of claims the company gets in a year, however, has a strong bearing on this ratio. For instance, in a year which has witnessed catastrophic events, the claims could be higher.
However, GIC’s risk management capabilities should help minimise the impact. The company expects to bring the ratio down to the 95-100 band over the next two years and between 90 per cent and 95 per cent over the next five years. This should help it generate net profits from core operations, rather than be dependent on investment income.
Lastly, all this comes at a decent price. The initial public offering (IPO) valuations at 1.2-1.3 times its FY17 price-to-book (including unrealised gains in investment book) are, according to analysts, reasonable and in line with global peers. The solvency ratio, which indicates how well a company is prepared to service claims, is also reasonably high at 2.4 times in FY17. Given the potential for growth, the underwriting skills in various segments, the diversified base and an improvement in key parameters, investors could look at the issue with a medium term investment horizon.