GIC India to extend country's insurance IPO wave

India’s biggest reinsurance company aims to raise a whopping $1.7 billion next week in what could be the third-largest IPO in Indian history.

India’s stock market rally this year coupled with the stable post-listing performance of private insurers appears to have given General Insurance Corporation of India (GIC India) the confidence to come to market.

In what looks destined to be India's first listing of a state-owned insurance company, GIC India announced on Wednesday that it will kick off its blockbuster initial public offering next week.

Preliminary terms show that GIC India’s IPO could raise as much as Rp112 billion ($1.7 billion) through a combination of new share sales and existing shares offered by the government.

As it stands GIC India will become the third-largest IPO in Indian history after Coal India’s $3.5 billion flotation in 2010 and Reliance Power’s $3 billion deal in 2008.

As such, the GIC India IPO will be critical to whether the government fulfils its ambitious divestment target for the 2017/18 fiscal year. New Delhi has set its divestment goal at Rp725 billion but has only raised Rp191 billion six months into the current fiscal year, which began on April 1.

The government plans to sell 107.5 million shares, or 12.2% of GIC India’s enlarged share capital, while 17.5 million new shares will be issued as part of the IPO, according to the preliminary terms released on Wednesday.

Riskier?

GIC India's flotation announcement comes in the wake of similar share sales by ICICI Lombard and SBI Life Insurance, which have both stayed above their IPO price since making their debuts.

ICICI Lombard, the general insurance company backed by ICICI Bank, is trading about 3% above its Rp661 offer price a week after its debut on September 27. SBI Life Insurance, a joint venture between State Bank of India and BNP Paribas Cardif, saw its share price rise by 1% on its Tuesday debut.

It remains to be seen whether GIC India will be able to find the same success, not least because of its state-backed status but also because of the lofty valuation it is seeking.

Based on the IPO’s price band of Rp855 to Rp912 per share, GIC India will command a post-money valuation of Rp753 billion to Rp803 billion. This means the reinsurer will be valued at anywhere between 4.18 times to 4.46 times its Rp180 billion book value as of the end of March this year.

Global reinsurance companies are trading nowhere near that level. For instance, the shares of Swiss Re, Munich Re and China Re are trading at 0.95, 0.94 and 0.87 times their respective book values, suggesting that GIC India’s implied valuation is over four times richer than its peers.

In its preliminary prospectus, GIC India also highlighted as many as 85 risk factors for its business including strong competition from foreign reinsurers, ongoing litigations and its heavy reliance on a number of insurance clients.

At the same time it is unclear how much buying power is left in the market after ICICI Lombard and SBI Life soaked up more than $2 billion of liquidity less than a month ago.

Value proposition

Prospective investors could nonetheless find value in GIC India due to its dominance in the domestic market, with a 60% share for the 2017 fiscal year. This means the company is poised to benefit the most from a booming reinsurance market that is expected to grow at a compound rate of 11% to 14% over the next five years.

GIC India underwrites business in 162 countries but it is increasingly focused on its domestic market, looking to capitalise on a rapidly expanding market that is supported by a young population and by growing household income.

The company’s overseas gross premiums accounted for 30.5% of its total in the current fiscal year, down from 45% last year and 43.3% in 2015, according to the preliminary prospectus.

GIC India could also some rarity value because it is the only reinsurer among the five state-owned insurance companies that the government is planning to divest.

Similar to other Indian IPOs, GIC India will allocate about half of the shares to qualified institutional buyers, 35% to retail investors and 15% to non-institutional investors.

Bookbuilding is expected to take place between October 11 and October 13, and the company is expected to make its market debut on October 25.

Joint bookrunning lead managers of the IPO are Citigroup, Axis Capital, Deutsche Bank, HSBC and Kotak.

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