SBI Life, ICICI Lombard hit lofty IPO valuations

Insurance duo raise over $2 billion, boosting confidence for the long queue of public and private insurers slated to hit the market in India in the next couple of months.

SBI Life Insurance completed India’s biggest initial public offering this year on a high note on Tuesday, pricing the Rp83.9 billion ($1.3 billion) deal at the top of guidance and securing a valuation premium over its listed peer.

National Stock Exchange of India data shows the 120 million-share deal was 3.58 times oversubscribed. By category, institutional investors applied for over 12.56 times the number of shares on offer, while the retail portion was oversubscribed by 85%.

By fixing the offer price at the top of the Rp685 to Rp700 price band, SBI Life managed to strike a post-money valuation of $10.9 billion, or about 4.23 times its embedded value for the current financial year. That implies the life insurer will be listing at a 23% premium over ICICI Prudential, which listed a year earlier at 3.44 times embedded value.

SBI Life, a joint venture between State Bank of India and BNP Paribas Cardif, closed its deal soon after ICICI Lombard, which priced its $873 million IPO last week. Like SBI Life, the general insurance company priced its deal at the top of price guidance, which in its case was Rp651 to Rp661, implying an eye-catching price-to-book ratio of seven times on a one-year-forward basis.

SBI Life and ICICI Lombard’s aggressive pricing shows that investors are willing to pay a premium for exposure in a burgeoning and rapidly-growing sector. In China, which has the most comparable insurance market to India due to their similar population size, nearly all domestic insurers trade at a P/B ratio of below two times.

In particular, the lofty valuation for ICICI Lombard will serve as a benchmark for the planned government divestment of five state-owned general insurers, namely General Insurance Corporation of India, New India Assurance, National Insurance, Oriental Insurance and United India Insurance.

But while valuations may not be a concern, it remains to be seen whether there is sufficient demand to snap up the remaining $4 billion of new paper from both state-owned insurers and private companies like HDFC Standard Life and Reliance General.

Cause for concern comes from a sharp decline in demand for the two recent IPOs compared to deals last year. While SBI Life was 3.58 times oversubscribed and the figure was 2.97 times for ICICI Lombard. In contrast, ICICI Prudential’s IPO last year was oversubscribed by 10.44 times.

It is also worth paying close attention to whether foreign investors, which have subscribed for both SBI Life and ICICI Lombard’s IPO, will offer the same level of support for state-owned insurers which are often considered weaker and less efficient businesses compared to their private sector competitiors.

Prominent foreign investors for SBI Life’s IPO include Canada Pension Plan Investment Board (CPPIB), Government of Singapore, Abu Dhabi Investment Authority and Kuwait Investment Authority. ICICI Lombard counts Nomura Trust, Blackrock, Franklin Templeton and Goldman Sachs among its anchor investors.

Joint book-running lead managers for SBI Life’s IPO were Citigroup, BNP Paribas, Deutsche Bank, Axis Capital, ICICI Securities, JM Financial, Kotak and SBI Capital.

Joint book-running lead managers for ICICI Lombard’s IPO were Bank of America Merrill Lynch, ICICI Securities, IIFL, CLSA, Edelweiss and JM Financial.

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