Insurance firms continue to disappoint: GIC Re ends 1.5% lower on debut

Poor performance was due to a dilemma regarding the valuation of these companies, market participants say

General Insurance Corporation (GIC Re) made a lacklustre stock market debut on Wednesday, as its shares declined as much as 14.5 per cent. The country’s biggest reinsurer managed to recoup most of the losses but the stock still ended the day 1.5 per cent lower at Rs 898, over the issue price of Rs 912.
 
The tepid debut is not a surprise. The state-owned company’s Rs 11,300-crore initial public offering (IPO) had only seen 1.37 times subscription and more than half had come from Life Insurance Corporation.
 
GIC Re joins a list of insurers that disappointed with their post-listing performance. ICICI Prudential Life, first with an IPO in the domestic market, had seen its shares slip 11 per cent on debut last year. ICICI Lombard and SBI Life’s initial offers this year did manage slight listing day gain but their shares later slipped below the issue price.
 
Experts say the poor listing-day performance is partly due to dilemma overvaluing companies in this sector, a new space to enter the stock market. Also, the large-sized issuances also make it difficult to generate huge investor demand before and after the listing, say bankers.
 
“It is difficult to have a fixed benchmark to value insurance companies. Return on equity, price to book and price to adjusted book are some of the metrics investors look at. However, every company is unique and has to be valued based on its business model,” says Utpal Oza, head of investment banking at Nomura India.
 
Market players say the eco-system of research analysts and investors for insurance companies is still nascent. Until recently, the sector wasn’t actively tracked by brokerages, as no standalone insurer was publicly traded.
 
A notable feature of most insurance IPOs is that the bulk of demand has come from institutional investors. Both small ('retail') investors and wealthy individuals largely kept away.
 
“Most insurance IPOs have seen healthy participation from institutional investors. Insurance being a new sector, the market is yet to understand how to properly value the companies in this sector. Insurance is a complicated business. Domestically, the sector was not covered (in terms of equity research) for a very long time. In the SBI Life IPO, we saw a lot of foreign investors participate. They understand the business better,” said Amishi Kapadia, global head of merchant banking at Yes Securities.
 
“When the issue size is in excess of Rs 5,000 crore, it is difficult to get 15-20 times demand. Also, it is difficult to generate huge demand post listing to generate a huge day-one pop,” said a banker.
 
The size of insurance company IPOs to hit the domestic market has been between Rs 5,700 crore and Rs 11,300 crore. In comparison, the average deal size for IPOs this year has been around Rs 1,000 crore. Also, the market value of companies in the sector is between Rs 31,000 crore and Rs 76,000 crore, putting these in the large-cap space.
 
Globally, insurance is second biggest in the financial space, after commercial banking. Several insurance companies feature in the list of the top 500 global companies. Most insurance companies are rich in generating cash.