General Insurance Corporation of India

Transcription

1 Improving operating metrics; decent valuations October 10, 2017 Vidhi Shah R Sreesankar rsreeshankar@plindia.com Pritesh Bumb priteshbumb@plindia.com Rating Price Band Subscribe Rs885 Rs912 IPO Fact Sheet Opening Date October 11, 2017 Closing Date October 13, 2017 BRLMs Citi, Axis Capital, Deutsche Bank, HSBC and Kotak Securities Issue Size (OFS) Rs 106.6bn Rs 113.7bn Objects of the Issue To augmenting its capital base to support the growth of business and to maintain current solvency levels Issue Details Pre issue equity (m shares) 860 Post issue equity (m shares)* Post issue Market Cap (Rs bn)* 800 General Insurance Corporation (GIC) is the largest reinsurance company in India in terms of gross premiums accepted and manages Rs391.3 billion of Indian investment assets. It is also an international reinsurer that underwrites business from 162 countries. It enjoys strong capital position with solvency ratio of 2.4x. The promoters are coming out with an offer for sale of around Rs98bn and fresh issue of Rs15.7bn with dilution of 14.2% at a price range of Rs At the upper band of Rs912, the company trades at 27.4x Mar 17 EPS which we believe is fairly priced, but given the liquidity in the markets and company s performance in the recent past, we recommend to Subscribe for long term gains. Premium growth led by opportunities seen in crop insurance: GIC Re showed strong net premium growth at 73% YoY mainly led by four fold jump in crop insurance premium collections in FY17 due to the implementation of Pradhan Mantri Fasal Bima Yojana (PMFBY) scheme whereas fire insurance continues to grow stable at ~23%. GIC Re does not look to increase third party motor business and health group business which has historically had high losses and has not been a profitable business line. Operating income will improve hereon: GIC Re continues to make better investment yields (12.4% in FY17) on Indian investment assets. Over and above that it earns fixed income on foreign investment assets. GIC Re loss and combined ratios have seen good improvement as it grows its business in profitable segment i.e. agriculture insurance coupled with technology platform allowing it to operate at lower costs. Return ratios to remain good: GIC Re s IPO price of Rs implies a valuation of 25.7x 27.4x on Mar 17 EPS which is fairly priced in our view. RoE is also expected to remain good in the range of 15 18% on high investment income and better operating efficiency. The company too has robust payout ratio; hence we recommend subscribing for long term gains. Key Financials (Y/e March) Premiums earned (net) 1,36,160 1,35,591 1,52,106 2,63,136 Growth (%) 2.8 (0.4) Total income 1,63,456 1,64,572 1,80,746 2,92,312 Operating Profit /(Loss) 16,034 15,650 15,522 19,886 PAT 23,218 28,027 26,549 28,579 Growth (%) (5.3) 7.6 EPS, Rs Book Value, Rs IPO Note Share Holding (%) Pre IssuePost Issue* Promoters Public & Others 14.2 *Equity issuance calculated on higher band price Profitability & valuation RoE (%) Dividend yield (%) P/E (x) P/B (x) Source: Company Data; PL Research Note (1) Valuations based on upper band Prabhudas Lilladher Pvt. Ltd. and/or its associates (the 'Firm') does and/or seeks to do business with companies covered in its research reports. As a result investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of the report. Investors should consider this report as only a single factor in making their investment decision. Please refer to important disclosures and disclaimers at the end of the report

2 Business Description GIC is the largest reinsurance company in India and has a market share of 60% of gross premiums ceded by Indian insurers in FY17 of which private non life insurers account for nearly 48% of insurance ceded to reinsurers. It also has an international presence and underwrites business in 162 countries. It develops its overseas business through its 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. Exhibit 1: Market Share has been increasing in India in non life space Exhibit 2: Business mix has shifted towards domestic operations Market Share of GIC Re of premium ceded to reinsurers Domestic Foreign 36% 47% 40% 43% 45% 60% 43% 45% 31% 57% 55% 69% FY12 FY13 FY14 FY15 FY16 FY17 FY15 FY16 FY17 Exhibit 3: Business Segment and line of business in and outside India Business Segment FY15 FY16 FY17 India Outside India India Outside India India Outside India Fire (Property) 7.95% 16.31% 11.42% 23.70% 10.98% 20.11% Marine 1.25% 2.11% 2.04% 3.48% 2.70% 4.55% Miscellaneous Motor 15.24% 4.40% 17.80% 6.41% 19.75% 5.48% Engineering 1.33% 1.27% 2.60% 2.20% 2.88% 2.33% Agriculture 28.39% 0.52% 6.82% 0.15% 4.03% 0.19% Aviation 0.25% 1.72% 0.05% 2.40% 0.98% 3.51% Health 9.46% 2.90% 8.88% 4.63% 8.61% 5.17% Liability 0.60% 0.16% 0.50% 0.31% 0.49% 0.21% Credit 0.89% 0.07% 0.88% 0.07% 0.55% 0.05% Others 4.43% 1.47% 3.00% 1.36% 3.50% 1.04% Life 0.86% 0.25% 1.00% 0.29% 1.08% 0.01% Total 56.71% 43.29% 54.99% 45.00% 69.49% 30.54% October 10,

3 We see a large shift in business operations between domestic and foreign operations from 55% to 70% due to tremendous surge in crop insurance business. A substantial proportion of crop insurance premiums collected in FY17 were ceded to reinsurers. Crop insurance accounted for 35 40% of reinsurance premiums in India. GIC s market share in crop reinsurance is 48%. ~99% of GIC s premium comes from non life segment as life insurers in India have the capacity to take the risk amongst them so they don t reinsure. This is because term plan which is the most risky product is very less in the product mix of life insurance industry. Claims Ratio and Combined Ratio Claims Ratio means the amount of claims paid on the premiums received. Thus lower claims ratio is better and also reflects the underwriting quality of the company. Claims Ratio for life product segment is above 100% which means the company is paying more than received and thus incurring losses in that particular segment. Combined Ratio means Claims Ratio and Opex Ratio. Thus lower combined ratio is better. But the combined ratio across most of the product segments is above 100% for GIC which means it is incurring losses in that product segment. However agriculture product segment being the highest business segment is quite profitable. Exhibit 4: Claims Ratio for Health product is getting better whereas for crop product it is quite volatile on account of natural calamities Claims Ratio FY15 FY16 FY17 Fire (Property) 66.89% 75.63% 76.01% Marine % 68.89% 83.15% Miscellaneous Motor % 94.03% 96.36% Engineering 61.09% 31.88% 45.21% Agriculture 95.09% % 80.97% Aviation 86.68% 69.90% 92.71% Health % 92.28% 89.58% Liability 6.01% 47.60% 56.97% Credit 99.42% % 11.87% Life 70.71% 72.59% % Total 87.62% 84.53% 81.63% Exhibit 5: Combined Ratio across product segments is improving which is reflecting in overall combined ratio Combined Ratio FY15 FY16 FY17 Fire (Property) 93.15% % % Marine % 91.23% % Miscellaneous Motor % % % Engineering 89.90% 59.46% 69.73% Agriculture % % 92.22% Aviation % 90.87% % Health % % % Liability 13.26% 63.18% 70.90% Credit % % 31.32% Life 81.99% 77.73% % Total % % % October 10,

4 Types of Reinsurance There are two types of reinsurance contracts: treaty reinsurance and facultative reinsurance. Treaty Reinsurance In a treaty reinsurance agreement, you provide reinsurance coverage for all or a portion of a specified group or class of risks ceded by the direct insurer or by another reinsurer. The cedent (direct insurer) enters treaty reinsurance contracts in advance with the reinsurer, which set out their rights and obligations including the type of treaty contract, scope of business, treaty limit, account settlement and exclusions. Once the treaty is in place, the cedent is obliged to cede and the reinsurer is obliged to reinsure all the business that comes within the scope of the terms and conditions under the treaty. Generally, under a treaty arrangement, the reinsurer does not separately evaluate each individual risk assumed under the contract and they follow the original underwriting decision made by the cedent. Facultative Reinsurance Facultative reinsurance agreement permits the reinsurer to decide in each case whether to underwrite each risk and to more accurately price the reinsurance to reflect the risks. Both treaty and facultative reinsurance contracts may be entered on either a proportional or non proportional basis. Proportional Under proportional reinsurance, the reinsurer shares proportionally in the original premiums and losses of the direct insurer or reinsurer. The reinsurer pays the ceding company a commission, which is generally based on the ceding company s cost of acquiring the business being reinsured (including commissions, premium taxes, assessments and miscellaneous administrative expenses) and may also include a share of the underwriting profit. The two types of proportional treaty contracts are: Quota Share Treaty In quota share treaty contracts, a risk or business line is shared between the reinsurer and the cedent in an agreed predetermined manner such as a 50% 50% basis or 40% 60% basis. In quota share treaties, premiums, claims and claim expenses are also shared in the agreed proportions. Surplus Treaty In surplus treaty contracts, the ceding company determines the maximum amount that it can retain for each risk in the portfolio. This amount is defined as a line. In the industry, treaty capacity is expressed as a number of times the line. The total amount of risk that the reinsurance treaty covers, called the capacity, is typically expressed in terms of a multiple of the insurer s lines. The reinsurer s share of the premiums and losses is the proportion that the amount ceded bears to the total. October 10,

5 Non proportional (excess) Under non proportional reinsurance, the reinsurer indemnifies the direct insurer or reinsurer for all or a portion of a loss in excess of an agreed upon amount or retention. Non proportional business is written in layers and a reinsurer or group of reinsurers accepts a band of coverage up to a specified amount. The total coverage purchased by the cedent is referred to as a program and is typically placed with predetermined reinsurers in pre negotiated layers. Any liability exceeding the upper limit of the program reverts to the ceding company. Stop loss Stop loss is an excess reinsurance contract that protects against catastrophic losses or large shock claims by protecting reserves after a certain threshold is reached. Exhibit 6: Gross Premiums split between types of reinsurance written Rs million FY15 % of Total FY16 % of Total FY17 % of Total Treaty (proportional) 1,16, % 1,41, % 2,79, % Treaty (non proportional) 17, % 23, % 32, % Facultative (proportional) 16, % 17, % 21, % Facultative (non proportional) 2, % 4, % 4, % Total 1,52, % 1,85, % 3,37, % Exhibit 7: Top ten clients in terms of gross premiums as on FY17 Name of Company Gross Premiums (Rs million) Agriculture Insurance Company of India Limited 41,455 National Insurance Company Limited 29,506 ICICI Lombard General Insurance Co. Limited 26,153 United India Insurance Company Limited 22,334 The New India Assurance Company Limited 17,780 HDFC ERGO General Insurance Company Limited 15,646 Reliance General Insurance Co Limited 12,081 The Oriental Insurance Company Limited 8,832 Iffco Tokio General Insurance Company Limited 8,358 Bajaj Allianz General Insurance Company Limited 7,907 Total 1,90,051 October 10,

6 Investments GIC maintains a diversified investment portfolio in accordance with IRDAI investment regulations. The major sectors in which the company has invested in equity are Financial Sector (~29%), Infrastructure (~16%), Mining and Metals (11.08%), Petrochemicals (9.2%) and Auto and auto ancillary (5.5%). 94% of the fixed income securities are AA+ rated and above. GIC holds fixed term deposits at banks outside of India for their overseas business (written outside of India at our branches) amounting to Rs76 bn which earned ~Rs998 mn interest income in FY17. Exhibit 8: Composition of Indian investment assets Rs million FY15 % of Total FY16 % of Total FY17 % of Total Equity 73, , , Fixed Income Securities Central Govt Securities 69, , , State Govt Securities 37, , , Other Approved Sec. 4, , , Debentures and Bonds 88, ,00, ,11, Money Mkt Instruments 28, , , Loans 3, , , Venture Capital Funds 1, , , Preference Shares Application Money Total 3,06, ,40, ,91, Exhibit 9: Net Investment Income and Yield of Indian investment assets Rs million FY15 FY16 FY17 Without Unrealised Gains Investment Income Yield Investment Income Yield Investment Income Yield Policyholders' Funds 28, % 27, % 29, % Shareholders' Funds 12, % 14, % 16, % Total Investment Income 41, % 41, % 45, % October 10,

7 Ratios and Financial Parameters Exhibit 10: Premium growth will improve here on which will drive operating profit Op Profit (Revenue A/c) (Rs mn) Growth YoY (%) 17,247 16,034 15,650 15,522 19,886 FY13 FY14 FY15 FY16 FY17 30% 20% 10% 0% 10% Exhibit 11: Shareholder s profit has seen stable growth PAT (Rs mn) Growth YoY (%) 28,027 26,549 28,579 22,889 23,218 FY13 FY14 FY15 FY16 FY17 25% 20% 15% 10% 5% 0% 5% 10% Exhibit 12: Return ratios have been declining yet decent RoE (%) Calc Exhibit 13: Dividend Payout Ratio is quite robust Dividend Payout Ratio (%) 21.7% 19.1% 19.0% 16.2% 16.1% 24.5% 24.5% 36.2% 13.8% FY13 FY14 FY15 FY16 FY17 FY14 FY15 FY16 FY17 Exhibit 14: GIC Re EPS is on growing trajectory EPS Exhibit 15: GIC Re has strong solvency ratio compared to regulatory requirements 293% Solvency Margin (%) 332% 380% 241% FY13 FY14 FY15 FY16 FY17 FY14 FY15 FY16 FY17 October 10,

8 Key Risks Due to inherent uncertainty in estimating loss reserves which are based on future claims liabilities; the company cannot guarantee that the ultimate liability will not exceed the amounts reserved. If estimated reserves turn out to be inadequate, it could have a material and adverse effect on financial condition and its operations. Catastrophic events, including natural disasters could materially increase the liabilities for claims and can result in losses and have adverse effect on financial condition and its operations. Substantial increase in their agriculture reinsurance business in recent years exposes them to risks as they have not operated at this level of exposure in agriculture segment before. Particularly, they can face large losses in the event of bad monsoon or successive bad monsoon, drought or floodings. October 10,

9 Valuation Exhibit 16: Issue Details in million No. of Shares offered Value offered Dilution (%) Total issue , % Fresh Issue , % Offer for sale Govt of India , % in million O/s number of Shares Market Cap Equity Shares Pre Issue 860 Equity Shares Post Issue ,006 Exhibit 17: Valuation Table In million Lower Band Upper Band FY17 PAT 28,579 FY17 EPS, Rs P/E (FY17) FY17 Net worth 1,84,906 FY17 Book Value, Rs P/B (FY17) FY17 Net worth (incl. Fair value change account) 4,85,270 FY17 Book Value, Rs P/B (FY17) At the upper end of the band at Rs912 GIC Re trades at 27x FY17 P/E of Rs33.2 which we believe is fairly valued with upside potential in the medium/long term. We recommend investors to subscribe to the issue with a long term investment objective. October 10,

10 Company Background GIC re ranks as the 12th largest global reinsurer in 2016 and the 3rd largest Asian reinsurer in 2015 in terms of gross premiums accepted. It accounts for approximately 60% of the premiums ceded by Indian insurers to reinsurers during FY17. It has 44 years of experience and has become a trusted brand to the insurance and reinsurance customers in India and overseas. GIC has been rated A (Excellent) with a stable outlook by AM Best for 10 consecutive years. Management Alice G Vaidyan is the Chairman and MD of GIC Re. She holds post graduate degree in English language and literature from University of Kerala. She has training in Strategy: Building and Sustaining Competitive Advantage at Harvard Business School, Boston, USA and is a fellow of the Insurance Institute of India. She has over 30 years of experience in the Indian insurance and reinsurance industry. She began her career at The New India Assurance Company Limited before moving to GIC Re as Deputy General Manager (Reinsurance) in Vimal Chand Jain, aged 59, is the CFO of the Company. He holds a bachelor s degree of commerce from University of Rajasthan, certificate of membership from the Institute of Chartered Accountants of India, certificate of membership from the Institute of Company Secretaries of India, and is a fellow of the Insurance Institute of India. He has been admitted as an Associate of the Institute of Cost and Work Accountants of India. He has been associated with the Company since October Satyajit Tripathy, aged 53 is the DGM and manages Investment Operations of the Company. He holds a bachelor s degree in science (agriculture) from Orissa University of Agriculture and Technology, a post graduate diploma in management (Human Resources and Marketing) from Xavier Institute of Management, Bhubaneswar and has completed the licentiate examination of the Insurance Institute of India. He has been associated with the Company since March, Exhibit 18: Key Managerial Personnel Details of GIC Re Insurance Name of Person Designation and Role Alice G Vaidyan Managing Director and Chairman Vimal Chand Jain Chief Financial Officer Suchita Gupta Deputy General Manager and Company Secretary Madhulika Bhaskar Deputy General Manager (Chief Risk Officer) Satyajit Tripathy Deputy General Manager (Investment Operations) Dinesh R Waghela General Manager Priscilla Sinha Appointed Actuary (non life) October 10,

11 Financials Exhibit 19: Revenue Account (Rs m) Y/e March FY13 FY14 FY15 FY16 FY17 Premiums earned (net) 1,32,508 1,36,160 1,35,591 1,52,106 2,63,136 Growth (%) 2.8% 0.4% 12.2% 73.0% Profit on sale/ redemption of investments 7,564 7,850 12,625 10,222 11,114 Foreign exchange gain/ (loss) 1,249 2,311 (568) 1,514 (297) Interest, Dividend & Rent Gross 14,154 17,134 16,924 16,904 18,360 TOTAL (A) 1,55,475 1,63,456 1,64,572 1,80,746 2,92,312 Claims Incurred (net) 1,09,423 1,21,073 1,18,918 1,28,999 2,16,520 Commission (net) 29,085 24,568 27,810 34,985 53,489 Op. expenses related to insurance 1,104 1,763 1,587 1,803 2,392 TOTAL (B) 1,38,228 1,47,422 1,48,922 1,65,224 2,72,426 Operating Profit /(Loss) 17,247 16,034 15,650 15,522 19,886 Growth (%) 7.0% 2.4% 0.8% 28.1% Exhibit 20: Profit and Loss Account (Rs m) Y/e March FY13 FY14 FY15 FY16 FY17 Transfer from technical a/c 17,247 16,034 15,650 15,522 19,886 Income From Investments 7,260 9,851 13,009 14,422 16,384 Other Income 604 1,100 2,337 2, Total Income 25,111 26,985 30,995 32,341 36,442 Growth (%) 7.5% 14.9% 4.3% 12.7% Other expenses 1,692 1, Provisions (Other than taxation) 96 1,249 1, ,596 Amortisation of premium on Investments Diminution in the value of investments written off 32 1, , Total Expenses 2,008 3,936 2,675 2,475 3,740 PBT 23,103 23,049 28,320 29,866 32,702 Prov for Tax 214 (170) 294 3,317 4,124 Effective Tax Rate (%) 0.9% 0.7% 1.0% 11.1% 12.6% PAT 22,889 23,218 28,027 26,549 28,579 Growth (%) 1.4% 20.7% 5.3% 7.6% October 10,

12 Exhibit 21: Balance Sheet (Rs m) Y/e March FY13 FY14 FY15 FY16 FY17 Sources of Fund Share Capital 4,300 4,300 4,300 4,300 4,300 Reserves And Surplus 1,01,105 1,22,386 1,45,217 1,67,516 1,80,606 Networth 1,05,405 1,26,686 1,49,517 1,71,816 1,84,906 Growth (%) 20.2% 18.0% 14.9% 7.6% Fair value change account 1,75,986 2,05,319 2,81,469 2,34,560 3,00,363 Total 2,81,391 3,32,006 4,30,986 4,06,376 4,85,270 Application of Funds Investments 3,99,986 4,56,877 5,57,251 5,44,412 6,47,449 Loans 4,629 4,241 3,938 3,658 3,221 Fixed assets 566 1,181 1,421 1,752 1,688 Deferred tax asset Current assets 1,60,412 1,67,486 1,71,885 1,91,872 2,97,237 Current liabilities 2,84,265 2,98,016 3,03,565 3,35,399 4,64,459 Net current assets (1,23,854) (1,30,530) (1,31,680) (1,43,526) (1,67,221) Total 2,81,391 3,32,006 4,30,986 4,06,376 4,85,270 Exhibit 22: Key Ratios Y/e March FY13 FY14 FY15 FY16 FY17 Operating ratios Investment yield (%) Claim Ratio (%) Combined Ratio (%) Solvency margin (%) Valuation ratios Dividend yield (%) Dividend payout ratio (%) EPS, Rs Book Value, Rs RoE (%) October 10,

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