Investment Shastra

GIC Re IPO : Good business; Punchy valuations

Issue Open: Oct 11, 2017 – Oct 13, 2017
Issue Type: Book Built Issue IPO
Issue Size: 124,700,000 Equity Shares of Rs 5 aggregating up to Rs 11,372.64 Cr
Face Value: Rs 5 Per Equity Share
Issue Price: Rs 855 – Rs 912 Per Equity Share
Market Lot: 16 Shares
Minimum Order Quantity: 16 Shares
Listing At: BSE, NSE

About the company

GIC Re 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 has exposure to domestic and international business. In FY17, reinsurance written for risks outside of India represented 30.5% of gross premiums. It has underwritten business from 161 countries and as on June 30, 2017 the company was ranked as the 12th largest global reinsurer in 2016 and the 3rd largest Asian reinsurer in 2015 in terms of gross premium accepted.

The company’s gross premiums on a consolidated basis have grown at a CAGR of ~48.7% over FY15-17 to ~` 33,741 cr. The company’s gross premiums from international business have grown at a CAGR of ~24.9% over FY15-17 to ~` 10,300 cr.

MoneyWorks4me Opinion

GIC Re is a re-insurer of General Insurance companies like ICICI Lombard and New India Assurance. Looking at the past track record we believe the underwriting process is prudent. Reinsurance sector is more about underwriting practices rather than distribution and growth. A good reinsurer finds unique bets where uncertainty is the highest and high premium more than justifies loss potential. Occasional loss is not uncommon in this sector. Sudden crack in geopolitical risk or act of God may dent its profit and loss statement and wipe out some of the reserves. But if all deals are signed with good risk reward scenarios, aggregate results are very good. Hence we can’t discard lumpiness in results for such companies.

Going forward, we believe the company is using its capital base to insure global players too. Insurance companies buy reinsurance spread across many reinsurers as one sudden blow can bankrupt one Reinsurer. This gives GIC Re a seat amongst large reinsurer table. Top 10 Reinsurance companies are based in UK, France, US and Germany. Renowned investor Warren Buffett to owns one of the top reinsurers, Gen Re. We have learnt a lot about insurance business from him. His crisp Letters to Shareholders are pleasure to read.

We are wary of the valuations at which the reinsurer is offered on the block. Most of the investors on the street are ignoring risk and willing to pay 4X book value or 25X FY17 earnings for a business which may see occasional slump in earnings.

We believe the street is missing the average run rate of earnings which Warren Buffett Popularised called as Earnings Power. Today’s earnings are possibly higher due to generous investment income. The combined ratios are just bare minimum with lot of risk not materialized in current FY.

The brokers are pushing this expensive deal by focusing on the growth rates which may not sustain for long. Bulk of the growth in last 3 years came from agriculture from the government pushed reforms. The growth rate from this may not last or a sudden Agri disruption could eat away entire year’s profits.

Its difficult to assign a fair value to a company unless we see the Cyclicity of the business and drivers for Return ratios. However, we are certain that doing reverse calculation of IPO offer price, the estimates built in are quite steep. We do not have margin of safety nor the room for error on risk materializing.

Even if the business model is good and valuations are stretched, we recommend AVOID.

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As lot of hands are chasing handful of stocks, IPO issues may experience rapid increase in share price in short term. You may wish to ‘speculate’ with small capital.

But as an advisor, our duty to inform you what is right and refrain you from risk taking behaviour in this market. We will definitely recommend you select issues which are worth investing. We are equally interested in making money as you are!

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