General insurance can be the next hot spot

The initial public offering (IPO) of ICICI Lombard General Insurance launches this week. The Rs 5,700 crore offering is the second in the insurance sector. ICICI Bank and Fairfax, will together sell roughly 86 million shares at a price band of Rs 651-661. ICICI Bank is selling 7.15 per cent stake, while Fairfax is selling 12.3 per cent. No new shares are being issued. Fairfax will retain a stake of just under 10 per cent post-IPO, while ICICI Bank will hold 58 per cent.

The band implies a valuation of roughly Rs 30,000 crore, if the upper end is hit. The last private deal in the company came in May, at a valuation of about Rs 20,000 crore, when Fairfax sold 12.2 per cent stake for a realisation of about Rs 2,400 crore. So, the IPO is at 50 per cent premium to the last valuation and, assuming the IPO sells at the top of the band, it would be at a price-book value of 1.9x.

This is the first general insurance IPO. The first life insurance IPO, that of ICICI Prudential Life Insurance, launched just a year ago. The IPO sold for Rs 334/share in mid-September 2016, raising around Rs 6,000 crore. The ICICI Prudential Life Insurance stock had a roller-coaster ride, dropping to a low of Rs 273 during demonetisation. It is now trading at Rs 432, which is a return of 29 per cent over the issue price. That's a big premium over the Nifty's return of 12.5 per cent during the same period. 

How does one value an insurance company? This is not easy even in highly-evolved markets. Insurers literally take bets. An insurer figures out how probable a given disastrous event may be and then charges a small percentage of the losses it would cover if the said event occurred. If it gets the estimates wrong, it could be wiped out.

On the other hand, the premium cash is interest-free if the event does not occur. The insurer invests the premium received to earn returns. Typically, insurance companies can invest in very long-haul projects since there is no asset-liability mismatch worries for them, unlike with banks. The biggest general insurance and reinsurance company in the world is Berkshire Hathaway, controlled by the legendary Warren Buffett. Buffett has used that free cash to generate huge returns over decades. 

ICICI Lombard had gross written premium (GWP) of Rs 10,960 crore for 2016-17. It offers products such as motor, health, crop/weather, fire, personal accident, marine, engineering and liability insurance. It holds about 8.5 per cent of the Indian market. General insurance used to be a government monopoly and the Insurance Regulatory and Development Authority of India (Irdai) used to fix rates for key sectors like fire, engineering, and automobile. Together, those add up to about 70 per cent of the non-life business. Rates have now been decontrolled in most areas.

India is extremely under-penetrated in general insurance so growth potential could be high. According to Ms Chanda Kochhar, the gross premium for the general insurance is about 0.8 per cent of GDP, which is about one-third the global average. Insurance per capita is nominal $13 for India and around $285 globally. India’s nominal per capita ($1,709 in 2016, according to World Bank data) is also much lower than the global average ($10,150) but adjusting for that, India’s insurance cover is 25-27 per cent of what it could be.

Given the high capital gains from the ICICI Prudential IPO and the prevailing optimism, the IPO could possibly go into over-subscription at the top end of the price band. There are several more insurance IPOs in the works, so the sector could see a spate of listings over the next six months to a year.