General Insurance Corporation of India (GIC) - IPO Note

Issue Opens: October 11, 2017

Issue Closes: October 13, 2017

Face Value: Rs 5

Price Band: Rs 855-912

Issue Size: ~Rs 11,176 cr

Public Issue: 12.47 cr shares (at upper price band)

Bid Lot: 16 Equity shares

Issue Type: 100% Book Building

Source: RHP

Company Background

GIC Re is the largest reinsurance company in India in terms of gross premiums accepted in FY17. It accounted for ~60% of the premiums ceded by Indian insurers to reinsurers for FY17. The company writes reinsurance for every non-life and over half of the life insurance companies in India. The company provides reinsurance across many key business lines including fire (property), marine, motor, engineering, agriculture, aviation/space, health, liability, credit and financial and life insurance. The company’s gross premiums on a consolidated basis have grown at a CAGR of ~48.7% over FY15-17 to ~ Rs 33,741 cr. The company’s gross premiums from international business have grown at a CAGR of ~24.9% over FY15-17 to ~ Rs 10,300 cr.

Objective of the Offer

The offer comprises both fresh issue and offer for sale. The main objective of the offer is to augment the capital base of the company to support the growth of its business and to improve the solvency ratio against the regulatory requirement of 1.5.

Key Investment Rationale

1.Rising gross premiums, improved investment income and lowering operating expenses has led the company to register 4.2% net profit CAGR over FY15-17. Its operating expenses to net premiums earned ratio has declined by 35 bps to ~0.8% over FY15-17 led by growth in premium and better utilization. Besides, it has maintained strong balance sheet, which allows it to underwrite risks towards large policies. Its net worth over FY15-17 has improved by ~14% to Rs 49,551 cr.

2.In life insurance, India is the 10th largest market in the world in terms of total premium (Source: CRISIL Report), whereas in non-life insurance, India is the 15th largest insurance market in the world in terms of gross premiums. Given that most reinsurance premiums written in India come from the non-life segment (~95% over FY13-17), future growth in reinsurance premiums will be driven by growth in the non-life insurance segment. Penetration levels of non-life insurance market in India for 2016 stood at 0.8% (premium as % of GDP), which is the lowest amongst BRICS and other Asian economies, reflecting the significant growth potential of the Indian non-life insurance market.

Key Risk

The company is exposed to interest rate risks, as ~63.1% of their investment portfolio as on March 31, 2017 forms debt portfolio. So any significant increase in interest rates could materially affect their return on investments.

Conclusion

At upper end of the price band, the company is commanding P/E of 25.5x its FY17 EPS (post IPO equity). Considering its superior financial track record, strong balance sheet and growth potential we believe the issue is attractively priced and hence we recommend SUBSCRIBE on the issue.