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General Insurance Corporation of India

There is a huge leg space for GIC of India to expand its business and earn substantially in the years ahead. As a reinsurance market leader in India, which is the tenth largest life and fourth fifteenth largest non-life market, GIC, through its global strategy of focusing on better premium fetching business, can show wonderful results and make its shareholders cheer for their long term holding. Other than the home market, its focuses on the fast-growing Afro-Asian including Russia and CIS and Latin America ensure better quality business, thanks to its carefully chosen target. It has already shown remarkable achievement in cutting the combined ratio when the world average has been on arise in the last three years.

Seven months after listing of India’s largest reinsurer’s stocks on the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE),its Board of Directors, on 25th May this year, recommended dividend of Rs 13.50 per share of Rs 5 face value. That was staggering 270 percent dividend on the face value, less than two per cent of the IPO price. This is also one of the highest rates of dividend declared by a public sector undertaking (PSU) to its shareholders in the financial year 2017-18. It also paid issued one-for-one bonus share simultaneously. In normal circumstance,these prodigious rewards to shareholders would have bull-fired the stock. But that, barring short-term spurt in the prices for couple of days, didn’t happen.It reported net profit of Rs 3233 crore for the year ended March 2018, the highest in the history, which made its earning per share over Rs 36 on the pre-bonus equity.

Yet the stock of this highly profitable and four and half decades old company with market leadership and presence in high growth potential failed to shine. Investors are yet to show fascination towards this, though some of the analysts appeared bullish on the stocks for medium to long term earning. Plenty of unanswered questions haunt the insurance stocks immediately upon their listing and when many are contemplating to list on bourses. It has never touched the IPO price of Rs 867 for retail investors and Rs 912 for institutional investors. At the current post-bonus price of around Rs 340 a share, the depletion in investors’ 10-month stock holding value is 20 per cent and annualized, obviously, is 24 per cent. At this price, its valuation is less than four times the book value and far less than the valuation of other listed insurance stocks, despite being the leader of the segment and long standing player with consistent growth in top and bottom lines. General Insurance Corporation of India’s institutional strength, unbeatable leadership in its segment, business model, proven skills and growth potential do not warrant a lower earning ratio. These leave no space for panic. Nevertheless, market is unconvinced. How long would this be so is a question the time will answer.

Life Insurance Corporation of India (LIC of India) picked up over 75 million shares for a price of Rs 912 per share, which constitutes more than 8.60 per cent of GIC’s equity capital of Rs 438 crore. Now LIC of India is the largest public shareholder in GIC of India. The retail public is currently holding only 1.60 per cent of the equity. Some analysts say, limited floating stocks available in the market may have created a resistance for large institutional buying fearing a probable price volatility. But the time is not too far for GIC of India to dilute 10 per cent more for public holding to bring down the promoter’s holding level to 75 per cent. That may see many of the large investment institutions, which are seemingly watching the stocks closely now, finding opportunities for sharing the fortune of the reinsurance business prospects and its experience.

One of the major reasons of bearish sentiment in the stock was understood to be the missing of an anchor investor in the IPO, who could have conveyed message or rung a weather bell of investments in the new sector like reinsurance, which had the potential to grow to the tune of Rs 70,000 crore premium by the year 2022 in the domestic market alone. Investments in the so-called blue-chip stocks are also not absolutely safe as the price can be dragged down along with fall in overall indices for which anything from political risk to natural calamity could be sufficient reasons. Though that couldn’t be a justification for its 10-month long price slip bringing nightmare for traders, what obviously notable is the new opportunity the current level has created for entering into the stock for a long term return.

But is it really so? Can GIC of India and reinsurance business be considered promising for equity investors? Is there something wrong with the perception of insurance business or its operational metrics? Haven’t analysts understood the nuances of reinsurance business? A realistic analysis on the company’s financial fundamentals, business model, future growth potential and GIC’s skills may give different picture.

No matter whatever be the answer; this obviously shows the stock is becoming cheaper and offers better opportunity for long term investments. On the other side, how do analysts weigh the stock is yet to be clear. Analysts whom Ecostar Business spoke appeared highly bullish on GIC stocks with an opinion: “It is a good investment bet for medium to long term return. One should not buy any such stock with greediness to make quick money. These stocks are linked with overall economic performance of India and the world wherefrom large size of its business emerges,” he said.

However, it is still not clear, whether a large section of analysts is matured enough to figure out the nuance of insurance business with enough prudence, especially in re-insurance.  But it is always better to let analysts understand the nitty-gritty and nuances of the re-insurance business directly from the management itself as they present them with facts and figures rather than conjecturing over the business and possibilities based on the figures available in public domain.

GIC of India seems to have set up a team with sufficient knowledge of equity market to clarify doubts of share holders and prospective investors, so that nothing remains enigmatic about its business and financials. In Indian stock market, most retail investors believe it is the company that controls its share price, though it is the market force and investors sentiment. But every investor’s question is answered patiently and convincingly, says the top management of GIC of India.

The top management has already spent enormous time in meeting equity analysts, investment consultants and investment institutions on an average at least once in 10 days to explain to them how its business potential could be looked at and financials worked vis-à-vis the global reinsurance business. Hundreds of analysts have been already explained and given opportunity to read its business models closely. The management explained to them how GIC of India stood different from other insurers. GIC of India’s is a B2B business model unlike other insurance business model which are largely B2C models.

Insurance stock is a new asset class for Indian equity investors. Every business has its own risk. Insurers cover other’s risk, which obviously means an insurer with long track record of profitability knows how to stay safe from all-pervading risks, besides having knowledge of how to make and save its own money. It is imprudent to question the capability of a four-and-half-decade old insurer, who might have seen good and bad times over the period and acquired knowledge of both financial and underwriting risk management. A brilliant insurer takes calculated risks, though unforeseen is unavoidable. Each analyst has been convinced that its geographic diversity not only helps it expand its underwriting business but also to balance the portfolio risk. Similarly, it has built a diversified portfolio to absorb possible risks by covering many key business lines like reinsurance of fire, property, marine, motor, engineering, agriculture, aviation, health, liability, credit and financial liability, and life insurance.

GIC of India’s DRHP explained the risk factors more lavishly while offering its stocks at a hefty premium, which the management calls reasonable in the context of comparative valuation with that of other listed insurance stocks. Some analysts also say “the premium was not higher.”  Let’s not forget, GIC is the only reinsurance company listed on the stock exchanges and would also be theonly one in the foreseeable future too. So naturally, it is the market leader in the business of it focus and will continue to be in the same position. That also calls for a higher premium valuation, set aside the performance consistency over the last five years under different domestic and globale conomic atmosphere, which also works in favour higher premium. In the equity market, usually the market leadership and performance consistency are valued with higher premium over the peers, a fact that no analysts can rule out. 

But it seemed analysts weighed more heavily the risk factors stated in the DRHP than the prospects of its business and the inherent nature that is globally accepted and unchallenged. More than 90 risk factors covered in over 30 pages in the DRHP should not hence haunt an investor unreasonably since such risk factors aren’t uncommon in the thriving reinsurance market. 

Reinsurance business is directly linked with the prospects of economic boom, which the world sees inevitable in a country where global investors have set their eyes on. Today, India is the fastest growing economy in the world and the trajectory is set to stay for another decade at least. Less than two years ago, Warren Buffett, the world’s most successful investor, who once had seen reinsurance as one of the most fascinating sectors for investment, in an interview to a leading business news channel expressed his desire to fly down to India, if someone would offer him good sector for investments. Six months later Buffett’s Berkshire Hathaway Inc won a license to open an office in India with an eye on reinsurance market looking at the growth potential in the country. Buffett’s company finds India as an important market in view of the growth potential available in the country. Experts predict the insurance and re-insurance industries to grow at an impressive rate for the next five years in the context of huge under-penetration existing in the country. The last five years saw the industry doubling its size.  In fact, India shows a reverse trend from the global market trend, where glut of capital in reinsurance industry has led to a decline in prices of for some coverage.

Forty five years is a long enough period for it to make it trust worthy among insurance and reinsurance customers in India and abroad. It writes reinsurance for every non-life and life insurance companies in India and has long-term business relationships with almost all of these domestic insurance companies. Reinsurance premiums in India are expected to rise 11 to 14 per cent CAGR to touch Rs 70,000 crore by the year 2022.  For the financial year ended March 2018, it reported premium income of Rs 41,873 crore as against Rs 33,740.79 crore of the previous year. The net income from investments rose substantially to Rs 3831 crore. The claim incurred for the year 2017-18 was Rs 21,352 crore.

GIC of India was the 12 largest reinsurer in the world based on 2016-17 figures with around one third of its business coming from abroad. It writes business from more than 160 countries with offices in strategic locations. Its strategy of establishing footprint around the globe to balance its portfolio risk has worked well. This led to an exponential growth in underwriting revenue with CAGR of around 25 per cent. The gross premium for risk outside India is showing a steady growth in the last three years. A. M Best rated it “A-” (Excellent) with a stable outlook for 10 consecutive years from 2007 to 2016. The leading credit rating firm, CARE Ratings has consistently rated GIC of India with “AAA”, a stable outlook for its claims paying ability since 2004. This reflects its strong balance sheet, comprehensive risk management framework and capabilities.

Extremely careful underwriting strategy with deployment of capital across diverse lines of business makes it capitalize on opportunities for favorable returns. In fact, as it maintains a diversified investment portfolio to generate investment returns that support its underwriting liabilities, thereby enhancing shareholder value. Its strong balance sheet allows it to underwrite risks across the Indian insurance market including large policies. GIC of India administers three domestic reinsurance pools and one Afro Asian reinsurance pool that allow it to manage reinsurance economics better and strengthen relationships with its customers.

In November last year, A.M. Best in its briefing titled Global Reinsurance – Where Have All the Losses Gone? projected an estimated combined ratio of 110 percent for its composite of global reinsurers, with return on equity (ROE) ranging from zero percent to minus five percent. GIC of India, however, could perform at the best ratio of around 100 per cent, showing a reverse trend to the global average, which plunged below 100 forcing global insurers to harden the premium. In fact, the combined ratio of GIC of India at 108.86 per cent in 2015 consistently came down to 107.03 per cent in 2016 and to 100.16 per cent in 2017. “It is aiming to grow the premium income in higher margin geographies like the US, China, Japan, Israel Turkey and also explore regions where pressure on premium is lower.

It is ultimately careful balancing act on the choosing geography for premium income, managing risks and fund management that would make it a successful institution. History did not leave behind it anything to repeat for worry. Competition would make it more prepared; its public shareholding now makes it more responsible; public sector advantage makes it more accountable. No worry has a space.   

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