Indian insurers launch $6 billion IPO wave

A sextet of large insurance IPOs kick off with the launch of an $890 million deal for ICICI Lombard. Are investors happy to be showered with up to $6 billion of highly valued paper?

India’s stock markets have been one of the world’s best performers in 2017 and their continuing strength could prove to be the swing factor, which helps clear a $6 billion wave of sizeable and richly valued initial public offerings from the country’s insurance sector by year-end.

The group of six companies are led by ICICI Lombard, which launches its IPO today (Friday).

Its $890 million deal is one of the smallest of the near-term pipeline, which breaks a seven-year drought in billion dollar offerings by dropping four onto the market all in one go. 

On a macro level, the flotations are eagerly awaited given the insurance sector provides one of the best proxies to capture the rising wealth of India’s young population and the country’s long-term economic dynamics.

As Kotak Securities recently wrote: “We find the life insurance sector in a sweet spot with high growth and improving profitability. Inflows to life insurance will remain strong at 18-20% CAGR [compound annual growth rate] between FY2016-20E as household savings, in a strong economic environment, shift to financial assets from physical assets.”

Most of the IPO candidates are also part of larger financial services groups, giving them strong backers and wide distribution channels.

However, as FinanceAsia previously reported, Indian equities are not cheap and the insurance sector’s existing benchmarks are among the market’s most expensive stocks.  

Indeed, one of the reasons listed insurers such as ICICI Prudential Life and Max Financial Services have been trading at such high valuations is because investors have limited choice.

One key consideration will, therefore, be whether the large pipeline can unfold without a dampening effect on valuations. ICICI Prudential's recent trading history suggests issuers might have to become more realistic about valuations. 

The stock is currently trading at 3.77 times 2017 embedded value (EV) of Rs162 billion compared to a regional average around the two times level (including China).

India’s largest private sector non-life insurance company was listed in October 2016. And initially its Rs60.57 billion ($902 million) flotation was, to quote one banker: “A victim of its own success.”

Very strong oversubscription ratios (11.83 times on the QIB tranche) prompted the company to push pricing to 3.44 times 2016 EV. This was beyond the 3 to 3.2 range foreign institutional investors had been happy with at the time and the stock was consequently punished in the immediate aftermarket.

Having been priced at Rp334 per share, it traded down around 15% to a low of 285.45 later that October.

Sentiment then turned and it proceeded to outperform the underlying market. It is still up 41.19% in the year-to-Thursday's close compared to 25.45% for the BSE 100 Index.

However, since mid-July it has dropped 12.2% from an Rs484.35 high point and is valued at about 8.8 times forward book, or 34.44 times forward earnings. 

ICICI Lombard

This Friday, its sister company, ICICI Lombard will launch an Rs56.1 billion to Rs57 billion ($876 million to $890 million) IPO.

This is being marketed on a price range of Rs651 to Rs661 per share, which represents 7.9 to eight times 2017 book value of Rs37.27 billion. 

This is almost double the level a group of investors, led by Warburg Pincus, paid for a stake as recently as May. Canada's Fairfax raised Rs24.7 billion ($383.41 million) by selling a 12.18% stake at 4.4 times book according to S&P Global Market Intelligence figures.

The deal comprises an 86.25 million secondary share sale, or a 18.99% stake. ICICI Bank is selling 31.76 million shares and Fairfax Financial Holdings, 54.85 million.

In its favour, ICICI Lombard is India’s largest general insurer and the first of its subsector to list.

Motor, health and crop insurance account for about 80% of gross premiums written. At the end of 2016, ICICI Lombard had an overall market share of 8.8% and reported a combined ratio of 103.5% at the end of its 2017 fiscal year, above the domestic industry’s 116.4% average.

Lead managers are Citic (CLSA India), DSP Merrill Lynch, Edelweiss, ICICI Securities, IIFL and JM Financial.

SBI Life

One week behind ICICI Lombard is SBI Life with an IPO that could raise Rs84 billion ($1.309 billion) at the top end of its Rs685 to Rs700 price range. 

The 120 million share offering constitutes a 12% sell down by State Bank of India (80 million shares) and BNP Paribas (40 million). It will open on September 20.

The group was most recently publicly valued in December 2016 when a group of investors led by Temasek and KKR purchased a 3.9% stake for Rs17.9 billon. This valued SBI Life at Rs460 billion ($7.19 billion), or 8.9 times book according to S&P Global Market Intelligence figures.

Last month, Macquarie assigned the company an Rs700 billion ($10.91 billlion) valuation, or 4.24 times 2017 EV of Rs165 billion. On this basis, SBI Life will command a higher valuation than ICICI Prudential (they both have 10% market shares).

Lead managers are BNP Paribas, Citi, Deutsche, Axis Capital, ICICI Securities, JM Financial, Kotak Mahindra Capital and SBI Capital.

HDFC Standard Life

HDFC Standard Life filed its preliminary prospectus in mid-August and is expected to raise in the vicinity of Rs96 biillion ($1.5 billion) one month after SBI Life according to bankers. 

The group is planning to sell 299.82 million shares, or a 14.97% stake, with Housing Development Finance Corp divesting 191.2 million shares, or a 9.55% stake and Standard Life a 5.42% stake. 

The IPO comes after the regulator rejected a merger plan with Max Life Insurance in June. Together the two would have a combined market share of 10% (6% HDFC and 4% Max Life), putting them on a par with ICICI Prudential and SBI Life.

HDFC Life is 60% owned by HDFC Corp.

Macquarie recently cited a 2017 EV of Rs124 billion, which would value the IPO on a very high EV of 5.19 times. The Australian bank itself assigns the company a lower Rs500 billion ($7.82 billion) overall market value, equating to 3.8 times 2017 EV, above ICICI Prudential and below SBI Life.

The securities house said a higher valuation than ICICI Prudential was justified by HDFC’s better ROEV metric. “On a new business multiple, this stands at 41 times compared to 52 times for SBI Life and 66 times of ICICI Prudential,” it wrote.

It further noted that the three-year CAGR of new business premiums for all three life insurance companies was similar at 26% to 29%. “The wide variation in new business multiples is due to the wide difference in new business margins,” it added.

Lead managers for the IPO are Morgan Stanley, HDFC, Credit Suisse, Nomura, Edelweiss, Haitong Securities, IDFC Bank, UBS and Karvy.

General Insurance Corp of India

State-owned General Insurance Corp of India also filed its preliminary prospectus in early August and is expected to raise north of $1 billion. 

The reinsurance company is selling 124.7 million shares, or 14.22% of its share capital. The government will divest 107.5 million shares, while the company will issue 17.2 million in new shares.

During the 2017 financial year, the group recorded huge growth in gross premiums written, up 82.2% to 33,585 crore, largely thanks to the government’s crop insurance scheme, Pradhan Mantri Fasal Bima Yojana.

Lead managers for the IPO are Citi, Axis Capital, Deutsche, HSBC and Kotak Mahindra.

New India Assurance

Slightly further behind still is government-owned New India Assurance, which has filed for up to $1 billion.

This has been structured as a 24 million new share offering and 96 million secondary share offering, equating to 14.56% of the company’s fully diluted equity capital. 

Lead managers are Kotak Mahindra, Axis Capital, IDFC Bank, Nomura and Yes Securities.

Reliance General

Never one to be left out, an Ambani brother (Anil) has also received approval in principle for an IPO of Reliance General Insurance. This is expected to raise in the vicinity of $300 million according to local media.

The group is a wholly owned subsidiary of Reliance Capital.

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