Friday, April 20, 2018

GIC Re debut fails to impress

India’s state-owned reinsurer GIC Re got off to a mediocre start this week as its shares began trading in Mumbai and Delhi after its Rs113.7 billion (US$1.75 billion) initial public offering, which was the biggest since Coal India’s 2010 offering.

The shares were priced at Rs912 in the IPO but opened more than 13% lower, before recovering slightly to close at Rs854, representing a 6.4% decline from the IPO price. The weak first-day performance mirrors ICICI Lombard General Insurance’s debut last month, as a trend for rich pricing in India’s young market for insurance IPOs seems to be taking hold.

Analysts noted that the company was valued at a price-to-book of up to 1.6 times, which is significantly higher than either Swiss Re or Munich Re, according to brokerage Sushil Finance. The reinsurer could have provided a good rally for initial investors had it priced at around 1.2 times, said Vatsal Shah, head of wealth management at Sushil Finance, to Reuters. “As per our valuations, the issue price was already expensive by about 30%,” he said.

Of course, investors are buying into the company’s long-term growth prospects. It is the largest reinsurance company in India, accounting for approximately 60% of the premiums ceded by Indian insurers to reinsurers — and those premiums are projected by Crisil Research to increase at up to 14% a year during the next five years to reach Rs700 billion. Given its dominance, GIC Re is clearly well placed to take advantage of this growth.

However, foreign competition is increasing and the company will clearly need to raise its game to maintain this edge into the future. Historically, GIC Re enjoyed first preference in all facultative and treaty reinsurance business from Indian insurers, but in 2015 the regulator redefined the order of preference, allowing certain foreign reinsurers to compete on a level playing field (at least in terms of preference).

“We anticipate that competition in India for reinsurance will become more pronounced as Indian insurance companies continue to look to our international competitors for reinsurance coverage,” the company said in its prospectus. “The lack of strong barriers to entry into the reinsurance business means that new companies in India and internationally may be formed to enter the reinsurance markets and compete with us.”

For one thing, GIC Re will need to improve the quality of its underwriting. Its combined ratio has been above 100 for the past three years, although the ratio has been consistently declining during that period.

At the same time, it has significantly increased its exposure to the agriculture sector by reinsuring crop insurance at the behest of the government, which has launched an initiative to help farmers insure their crops. Gross premiums to the segment have increased from Rs6.44 billion in 2015 to Rs97.5 billion this year, or more than 50% of GIC Re’s overall insured risk.

“We have not operated at this level of exposure in our agriculture segment before, and this substantial growth in our agriculture business exposes us to risks, losses, uncertainties and challenges peculiar to this segment,” the company warned in its IPO prospectus.

Achieving a better balance of business is clearly a goal going forward, and international expansion is part of this effort. Overseas reinsurance accounted for 30.5% of total gross premiums in fiscal 2017 and the company has said that it plans to expand further. These include establishing a syndicate at Lloyds, accepting more US risks, opening representative offices in China, Brazil and Bangladesh, converting its Moscow representative office into a wholly owned subsidiary and establishing a strategic relationship for reinsurance business in Myanmar.

This will require capital, but because the IPO is part of the government’s disinvestment plan, under which the Department of Investment and Public Asset Management plans to sell government stakes in several state-owned enterprises, the money raised will mostly go to government coffers. However, a small portion of the offering comprised new shares that will provide Rs15.7 billion in fresh funds for the company.

It will need more money in the future, so expect the company to return to the capital markets in the not-too-distant future.

Citi, Axis Capital, Deutsche Bank, HSBC and Kotak were bookrunners on the IPO. Clyde & Co and Cyril Amarchand Mangaldas provided legal advice to the company, while Herbert Smith Freehills and Khaitan & Co advised the banks.

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