Wednesday, October 4, 2017

GIC Re IPO - 9 Reasons Why it is a Promising Opportunity

India's only public sector reinsurer GIC Re has announced its IPO details. GIC Re's IPO will open on October 11th and close three days later on 13th. The price range is between Rs.855 to Rs.912 a share, and the reinsurer's initial public offer aims to raise around Rs.11,500 crore from the market, the bulk of which - around Rs.10,000 crore - will go to its promoter, Government of India, which is selling 107.5 million shares amounting to a 14.2% stake in the firm. GIC Re will also be selling 17.2 million fresh equity shares that will fetch the company around Rs.1500 crores. Seasonal Magazines gets in-depth into the strengths and risks of this IPO and finds nine reasons why GIC Re’s IPO would be one of the most promising public offerings to hit Indian markets in recent years.

Up for grabs is a $100 billion opportunity in wealth creation from the new market capitalization of several insurance IPOs this year. However, not all of them provide investors with the same level of safety and growth prospects. GIC Re might be the black horse among the pack due to its monopoly status in the re-insurance business of the country.

FY’18 is all set to go down in Indian corporate history as the year of insurance IPOs, with more than 7 large insurance firms, belonging to both public and private sectors, going for their listings in the stock market. These include life insurers, general insurers, and may be even niche players like the specialized health insurers.

Owing to India’s burgeoning working age population, all these companies are expected to do reasonably well, but it is a fact that almost none among them have a highly differentiated value proposition, due to the commoditisation of both life and non-life business in this country. Except perhaps GIC Re, which is India’s sole public sector reinsurer.

Insurance companies also need to insure themselves against their potential liabilities, especially their large policies, and re-insurance companies precisely provide that. It is no secret that capital markets are not too fond of generic businesses. Add to it, LIC’s stranglehold in the life business, and the four public sector general insurers’ head-start in that sector, and what we have is a highly fragmented market for the newer private sector players who are, however, hogging the current limelight this IPO season due to their better marketing acumen.

But in the long run – and markets always strategize for the long run – there is no doubt that better prospects await the only monopoly in India’s huge insurance market – GIC Re. While studies show that India is already the largest insurance market in the world by number of policies, analysts are pegging new market capitalization from all these new listed players to grow to a $100 billion wealth creation opportunity within a few years.

In this fray, it is highly likely that GIC Re’s IPO would be the most promising bet in the long run due to its monopoly status, as well as the systematic way in which it has been proving to be of value to all other insurers in the country. It’s various services insure insurance companies against major liabilities in sectors like aviation, shipping, heavy industries etc, apart from bulk retail businesses like life, health, crop etc.

Under Chairman & Managing Director, Alice G Vaidyan’s visionary leadership, GIC Re has also spread its re-insurance business across SAARC countries, Middle East, Far East, Russia, & Africa with offices in London, Dubai, Malaysia, Moscow, and a subsidiary based in Johannesburg, South Africa.

Among the key risks faced by the company include massive natural calamities like earthquakes, tsunamis, hurricanes, floods etc as well as manmade catastrophes like wars and invasions, which can shoot up the liabilities of a reinsurer. Government and IRDA allowing more players in the segment would also pose as a risk for the current monopolistic business of GIC Re.

Seasonal Magazine investigates in-depth about the prospects and risks of GIC Re’s IPO, and finds 9 reasons why GIC Re’s upcoming IPO would be one of the most promising public offerings to hit Indian markets in recent years.

1) Reinsurance Opportunity Worldwide:

Insurance companies the world over, especially non-life or general insurance companies have been exploring ways and means to mitigate their huge risks when huge natural calamities or large scale wars surge their liabilities. Over the past few decades, the method of choice that has emerged for this requirement has been reinsurance, in which insurance companies themselves go for insurance against their liabilities. Reinsurance is provided by both specialised reinsurance companies and by large diversified insurance companies. Due to its absolute need, the multi-billion dollar reinsurance business has been growing rapidly.

2) Profile of Reinsurance Leaders:

The potential of any industry is evident from the players it attracts. Reinsurance sector has attracted what is perhaps one of the world’s largest and most successful public companies – Berkshire Hathaway, promoted by one of the world’s richest investors, Warren Buffett. While Berkshire Hathaway invests in hundreds of sectors and companies, its mainstay business has been insurance, and reinsurance has been Berkshire’s most profitable business ever. In fact, the huge premiums Berkshire reinsurance units attract upfront have been driving Buffett’s stock investments, the huge returns from which is enough to mitigate reinsurance liabilities.

3) Reinsurance Business is Nascent in India:

As in any other emerging segment, developed countries like USA and EU rule the roost when it comes to reinsurance. Indian industry has awakened to the need for reinsurance only during the last ten years or less, and this makes the growth potential for this industry in this country, absolutely huge. Added to this is the sheer size of the insurance business in India, which is already pegged as the largest in the world by way of number of policies, if not value. Reinsurance has also been growing the fastest in India, among all Asian nations, even outpacing large markets like China.

4) Industry Reliance on Reinsurance:

More and more industries are awakening to the need for insurance, while, in turn almost all insurance companies are realizing that participating in this growth without taking adequate reinsurance is impossible. Insurance and reinsurance are vital for property and against casualty, and therefore vital for almost all heavy and medium industries. Huge service industries like airlines and shipping rely heavily on insurance companies, and these insurance companies in turn rely hugely on reinsurance firms, as any casualty from these businesses can surge liabilities, and make insurance companies without reinsurance go bankrupt.

5) GIC Re is India’s Sole Public Reinsurer:

The reinsurance business in India has so far been dominated by its sole public reinsurer, GIC Re, and a handful of Indian offices of large international reinsurance firms. The Indian opportunity in reinsurance is so huge that Berkshire Hathaway which exited Indian insurance market two years back is mulling a re-entry as a reinsurer and has already applied for a license for the same. Reinsurance is largely against general insurance, and with India’s general insurance scene dominated by four large public sector insurers, GIC Re’s prospects as the sole public sector reinsurer makes it a virtual monopoly, which makes it attractive in stock markets.

6) Beneficiary of Major Government Initiatives:

GIC Re posted an 82.2 percent growth in its gross premium to Rs 33,585 crore in FY17 compared to FY16, which is the best performance among all Asian reinsurers in this past fiscal. The company recorded a profit-after-tax of Rs 3,127 crore in FY2016-17, an increase of 10 per cent over the previous year. This splendid performance has been aided by Pradhan Mantri Fasal Bima Yojana - the crop insurance scheme launched by the government. All such mass benefit schemes being planned by the government is likely to have an insurance component, and as such, a reinsurance component too, which will benefit GIC Re.

7) GIC Re has International Business:

Today, GIC Re has reinsurance business across SAARC countries, Middle East, Far East, Russia, & Africa with offices in London, Dubai, Malaysia and Moscow. Even more importantly, GIC Re has been targeting the huge African continent where the reinsurance business is still nascent like in India. Towards this it has started a subsidiary based in Johannesburg, South Africa, which has also taken over a local player. For reinsurance companies, overseas expansion is a bigger opportunity as they can also address insurance business there without license through local insurance companies acting  as proxies.

8) GIC Re is Moving Up in Global Rating:

Reinsurance is rated by international rating agencies like Standard & Poor’s and AM Best. Both the rating agencies in their latest global ranking list of 25 top international reinsurers, released last week, have upgraded GIC Re by two notches to the 12th position from 14th. The only Asian reinsurance companies that are above GIC Re in ratings are from developed nations like Japan and Korea, except for a Chinese major. But when it comes to growth, GIC Re has outpaced all these Asian companies that are both above and below it in the 25 top international reinsurers.

9) Risk Mitigation Strategies:

The greatest risk for reinsurance companies come from natural disasters and wars that surge their liabilities. However, like the best reinsurance companies worldwide, GIC Re has been extremely cautious on this front, offering to take up only part reinsurance risk with each insurer, sharing the rest of the risk with other reinsurers. Secondly, GIC Re is also a capital markets investor, the returns from which compensates for the potential liabilities. It also understands the general insurance business intimately as the granddaddy of that business in India. Lastly, each major disaster also attracts more reinsurance business and higher premiums.

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