GIC Re share issue is a shot in the dark for investors, but a good one

Anyone betting on the growing insurance market in India would be a fool not to go any further and bet on the reinsurance cake. This and the promise of a faster follow-up to the government to crop insurance and similar growth are sufficient reasons for the Government GIC Re to attract investors to its initial giant public offering (IPO) Rs11,370 -create. Overall, the reinsurance market is facing a lot of headwinds due to the series of natural disasters that have hit this year which has led to big gains and higher losses. It is expected that the Indian market in the current state and register a growth of 11-14% on the basis of a compound annual growth rate (CAGR), the prospectus by GIC Re would have us believe.

The reinsurer’s share issue is the second in history through which the government will dilute 14.2% stake and the company will offer 17.2 million new shares at the same time as the government’s offer. The proponent wants investors to cough Rs855-912 per share for a tranche of the reinsurer’s genealogical country evaluated at Rs80,000 crore at the upper end of the price range. So what is the share of the reinsurance market that investors will get? For practical reasons, GIC Re has retained a monopoly position in the reinsurance market. Having a monopoly gives an advantage over the price and the company has exploited that. His written gross premium increased to a CAGR of 32% for the fiscal year 17 from 15 to 17 years.

Since the non-life insurance sector is expected to grow by 15-20% CAGR over the next five years, growth in GIC Re is assured. It adds a steady reduction in the combined ratio and GIC Re seems a safe move to a profitable investment. the combined ratio is how well the company is able to milk out of business, while managing spending and payments and a downward ratio indicates an increase in profitability. But comparing the relationship with peers and GIC Re comes short. Alice G. Vaidyan, president and CEO of the reinsurer, believes that the company has the right to pricing and not improve from here. “We have a very strong investment policy and we invest according to the regulator’s guidelines,” Vaidyan told Mint. Even if the momentum of public plans stops, GIC Re will see strong double digit growth, he added.

The red flags in this convincing argument are the decline in the ratio of the company’s operating profit. The ratio of operating income is the profit realized by the underwriting risk as well as the investment income as a percentage of the net premium. This has decreased each year since fiscal 2014 to 7.07% for fiscal year 2017 to 12.14% for fiscal year 2014. In addition, there is the fact that there is no even-numbered comparison to determine the reasonableness of the valuation, so investors would shoot in the dark. But in about 4 times pound for fiscal year 2017 value, the GIC Re’s share is a quasi-sovereign role that yields a high return.

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