Insurance Article, The Insurance Times 2021, The Insurance Times December 2021

MAKING SENSE OF THE MANIA BEHIND INSURANCE IPOs

The insurance industry in India has visibly progressed since the time when businesses were tightly regulated and concentrated in the hands of a few public sector insurers. A well-developed and evolved insurance sector is a boon for economic development as it provides long-term funds for infrastructure development and concurrently strengthens the risk-taking ability of the country.

Currently the Finance Minister of India wants that the strategic disinvestment of BPCL, Air India, Shipping Corporation of India, Container Corporation of India, IDBI Bank, BEML, Pawan Hans, Neelachal Ispat Nigam Ltd, among others, and IPO of LIC would be completed in 2021-22. The IPO of Life Insurance Corporation of India (LIC) is the most awaited as it will be the largest in India’s corporate history. The company will be raising Rs.70,000 crore. However, they are yet to file the prospectus with SEBI. There are more than 65 companies that filed prospectus with SEBI this year. So far in 2021, more than 65 companies have filed their draft red herring prospectus (DRHP) with India’s market regulator Securities and Exchange Board of India (SEBI). DRHP is a document that outlines the business of the company, its financial position, and the reasons for which the company is raising money and how it will use it. Meanwhile, 41 initial public offerings (IPO) have already been listed on the BSE in 2021. From these — Tatva Chintan Pharma Chem, Clean Science and Technology, G R Infraprojects and Indigo Paints were some of the hits of 2021 as the IPOs of these companies got listed at about 75-105% premium over its issue price. The insurance business is a relatively defensive industry that typically remains stable during fluctuations in the overall economy. Insurance companies make money selling policies, but they also profit by investing the money they take in.

Amid global challenges, India has continued to develop as an emerging economy with a financial system that has matured, deepened and achieved scale. The needs of this emerging India are in many ways different, adding the insurance sector, over the two decades since the introduction of competition and regulation, has matured with 69 insurers today as against only eight in 2000. Fertile ground for cultivating innovative approaches to assess and manage such risks is already available in the form of ever-growing volumes and variety of data, coupled with the enhanced ability to connect secondary and tertiary data points across activities almost on real time basis. Actuaries can help raise a bountiful crop of new solutions by actively engaging with businesses and technologies to identify new opportunities, and address emerging challenges. Even within traditional areas like insurance and pension, actuaries can enrich risk management if based on inclination and aptitude, individual trained actuaries consider joining other departments like finance, marketing and underwriting. Perceptions of risk have heightened on account of the once-in-a-century pandemic. Other global risks are also looming, large climate change concerns and rising incidence of catastrophic events have sharply raised awareness of environmental risks. Further, with the increased pace of technological change and innovation, new ways of carrying on businesses and engaging in individual pursuits are constantly emerging. 2017 was technically the birth of major life insurance private players in the eyes of investors with a frenzy of IPOs hitting D-Street. Since then insurance has mostly been one of the niche sectors in the market. Insurance companies have a strong balance sheet, are well capitalised, have healthy operating metrics, and are well placed to ride over challenges. Now three companies from the insurance sector are on their way to boom into the primary market with IPOs worth Rs 10,000 crore.

Investing in Insurance Companies

Insurers are businesses first, meaning the same indicators that would apply to any company, apply here – like margins and revenues. Successful traders often follow an insurer’s results and news releases closely, and tread carefully if concerns arise around regulatory breaches or negative publicity. Some other factors to note:

  • Assets under management (AUM): more AUM means a larger client base and an increased potential for good returns. In some cases, it also means less uncertainty for the trader, as insurers with higher AUM tend to be older, well established institutions. These are often preferable for beginner traders as they are likely very stable
  • Earnings per share (EPS): increasing EPS means that the insurer’s profits are higher relative to the price of its shares. The higher the EPS, the more the insurer tends to return to shareholders or use for projects – such as growing their global footprint, which creates a positive cycle for EPS
  • Percentage of valid claims paid: choosing to trade the stocks of an insurer with most if not all of its valid claims paid out can be a prudent move , as these insurers are stable and far less susceptible to stock price-tumbling bad publicity
  • Combined ratio: two ratios are important to understanding insurers’ operations – loss ratio and expense ratio. Despite its name, the loss ratio isn’t bad – it’s just the number of payouts (valid claims paid out) each year. The expense ratio is how much it takes to run the company, collected from premiums charged. Put together, this gives the ‘combined ratio’, which shows an insurance company’s income versus expenditure

The insurance industry is at a critical inflection point. Key trends are reshaping the industry, including the rise of competition from an array of insurance and noninsurance digital players, rapidly changing customer expectations, the increasing importance of growth in valuations, and—in many markets—financial and interest-rate pressures. Given the potential for improvement and the prospect of attractive returns in insurance, private-equity and principal investors have been targeting attractive talent pools and deploying capital with the goal of rapidly driving and scaling the creation of new businesses.

 

Summary Table of Best Insurance Stocks in India

Company Name BSE Scrip Code NSE Symbol CMP (Rs.) June21 Rating
(Stars)
Industry
HDFC Life Insurance 540777 HDFCLIFE 692 2 Life Insurance
SBI Life Insurance 540719 SBILIFE 992 3 Life Insurance
ICICI Prudential Life Insurance 540133 ICICIPRULI 578 1 Life Insurance
Max Financial Services 500271 MFSL 1022 0.5 Life Insurance
New India Assurance 540769 NIACL 174 1 General Insurance
ICICI Lombard General Insurance 540716 ICICIGI 1516 3 General Insurance
General Insurance Corporation of India 540755 GICRE 201 0.5 Reinsurance

 

The Listing of LIC of India

The listing of LIC will be crucial for the government to meet its disinvestment target. Inviting bids from merchant bankers, the Finance Ministry had said the potential size of the IPO is expected to be far larger than any previous issue. The Budget Estimate for disinvestment in 2021-22 has been set at Rs 1.75 lakh crore. So far this fiscal, Rs 7,645.70 crore has been realized as disinvestment receipts. Several disinvestment transactions are expected to be completed during the year. The Cabinet Committee on Economic Affairs (CCEA) had in July given its in-principle approval for the listing of insurance behemoth Life Insurance Corporation of India (LIC). The IPO of the state-owned life insurer is part of the government’s efforts to raise Rs 1.75 lakh crore through disinvestment in the current financial year. The IPO of the state-owned life insurer is part of the government’s efforts to raise Rs 1.75 lakh crore through disinvestment in the current financial year. A majority of these have crossed their initial breakeven phase. Once the proposed listing of LIC happens, about 60 per cent of the insurance industry business would be with listed entities. The sector as a whole has been growing at a pace significantly higher than that of the overall economy. In LIC’s size and reach, market participants see great potential for future growth. As the largest life insurer in the country with a total first-year premium of over Rs 1.84 lakh crore in the year ended March 2021, LIC commands a market share of over 66%. It has 2.9 lakh employees, and a network of 22.78 lakh agents. As of March 31, 2020 it had total assets of Rs 37.75 lakh crore and equity AUM of Rs 6.63 lakh crore.

The LIC (Amendment) Rules, 2021 say that any reservation made by the Corporation in favour of its policyholders on a competitive basis in a public issue under Clause (a) of sub-section (9) of Section 5 should be made in a manner similar to that applicable to a reservation on a competitive basis for employees in a public issue under any regulation made and circular issued by the Securities and Exchange Board of India. The allotment of equity shares to life insurance policyholders against any reservation made in their favour should be made in consultation with the stock exchanges concerned. The government has amended the LIC Act of 1956 for the proposed IPO. The LIC has appointed Arijit Basu, former MD of State Bank of India and former MD & CEO of SBI Life, who had led the move to get LIC listed on stock exchanges, as a consultant to help launch the IPO

After the amendment, like any other listed company, the corporation, now governed by the Companies Act and SEBI Act (post-IPO), has to prepare its quarterly balance sheet with profit or loss figures and make public key developments. Budget amendments to the LIC Act have been notified and the actuarial firm will work out the embedded value of the insurer very soon. A listing could value LIC at as much as $261 billion, based on its assets under management and using private sector insurers as a benchmark. That would make it bigger than Reliance Industries Ltd., currently India’s largest listed company with a market value of about $199 billion. The mega-IPO of the country’s biggest insurer is expected to happen soon. The government, which owns 100% in LIC, will next determine the embedded value of the company to determine the stake sale details, including the amount and price band. The LIC IPO is expected to meet the shortfall in that target. For LIC, the challenge lies in bringing efficiency across the large agent network and also in maintaining its market share. Mega IPO of India’s biggest Insurer India approved the sale of shares in state-run insurer Life Insurance Corp. of India, a key step in moving ahead with the mega-listing. The administration plans to raise $24 billion by selling assets including Air India Ltd. and Bharat Petroleum Corp. as it attempts to revive an economy that’s been battered by the corona virus pandemic.

Three new entrants

The needs of this emerging India are in many ways different. The insurance sector, over the two decades since the introduction of competition and regulation, has matured with 69 insurers today as against only eight in 2000. A majority of these have crossed their initial breakeven phase. Once the proposed listing of LIC happens, about 60 per cent of the insurance industry business would be with listed entities. The sector as a whole has been growing at a pace significantly higher than that of the overall economy. Currently, there are four listed life insurers, and two in the non-life segment. Three insurance sector companies are entering the primary market with initial public offerings in coming months to mop up over Rs 10,000 crore. These companies are third-party administrator Medi Assist Healthcare Service, PB Fintech, which runs the insurance brokerage Policybazaar; and standalone health insurer Star Health & Allied Insurance Company. They have already filed their draft prospectus with markets regulator SEBI. These are:

 

  1. Medi Assist Healthcare

Medi Assist IPO will be the first primary market sale by an insurance third-party administrator in India; it will be an offer of sale of up to 28,028,168 equity shares by the promoters and existing shareholders. Medi Assist Healthcare Services has filed preliminary papers with capital markets regulator Securities and Exchange Board of India (SEBI) for an initial public offering (IPO). Medi Assist IPO will be the first primary market sale by an insurance third-party administrator (TPA) in India. The IPO will be an offer of sale of up to 28,028,168 equity shares by the promoters and existing shareholders, including Medimatter Health Management, Bessemer India Capital Holdings II, Bessemer Health Capital LLC and Investcorp Private Equity Fund I. TPAs are appointed by insurance companies for settlement of health policy claims. TPAs manage documentation and processing of claims for the insurer to make the final settlement. The Bengaluru-based Medi Assist is the largest health benefits administrator in India, in terms of revenue and premium services. Bessemer Ventures and Dr Vikram Jit Singh Chhatwal are the promoters of Medi Assist, with a stake of 45.51 per cent and 31.63 per cent respectively. Investcorp holds a 21.65 per cent stake in the company. Medi Assist is the country’s largest third-party insurance administrator in terms of revenue and premium serviced. It operates a pan-India network comprising over 11,000 hospitals across 722 cities and towns. Medi Assist has been the most popular third-party administrator (TPA) for most large hospital chains such as Apollo Hospitals, Manipal Hospital, Fortis Healthcare, Narayana Hrudayalaya and Max Healthcare, among others. It’s services are used by over 11,000 hospitals across 722 cities and towns. Medi Assist’s IPO will be made up of only OFS of 2,539,092 shares.

  1. Star Health & Allied Insurance

Star Health, the largest standalone private health insurer, is planning to raise Rs 3,000 crore; while Medi Assist, which is the largest third-party administrator, is lining up a Rs 840-1,000 crore issue, according to their draft red herring prospectus (DRHP) filed with the market watchdog. Star Health, backed by billionaire Rakesh Jhunjhunwala and Westbridge Capital, is the largest standalone private health insurer with a market share of 15.8 per cent in the health insurance market in the financial year 2021. Its public offering will consist of a fresh issue of shares aggregating Rs 2,000 crore and an offer-for-sale (OFS) of 60.1 million shares by shareholders. The Chennai-based standalone health insurance company’s IPO comprises equity shares of face value of Rs 10 each comprising a fresh issue aggregating up to Rs 2,000 crore and an offer for sale of up to 6.01 crore equity shares. The net proceeds from the fresh issue are proposed to be utilised for augmentation of the company’s capital base. Star Health and Allied Insurance Co (SHAICL), owned by a consortium of investorshas filed a draft red herring prospectus (DRHP) with the Securities and Exchange Board of India to raise funds via an initial public offering (IPO).

Star Health was founded by V Jagannathan, who earlier headed United India Insurance in 2006 and provides health insurance, overseas mediclaim and personal accident policies. A consortium led by Rakesh Jhunjhunwala and Westbridge Capital had acquired over 90% stake in the company in 2019. The Chennai-based standalone health insurance company’s IPO comprises equity shares of face value of Rs 10 each comprising a fresh issue aggregating up to Rs 2,000 crore and an offer for sale of up to 6.01 crore equity shares, including up to 3.06 crore equity shares by Safecrop Investments India LLP (promoter selling shareholder), up to 1.37 lakh equity shares by Konark Trust, up to 9,518 equity shares by MMPL Trust (promoter group selling shareholders) and up to 76.80 lakh equity shares by Apis Growth 6. The largest standalone private health insurer holds a market share of 15.8% in the health insurance market in 2021. Its IPO will consist of fresh issue of shares worth Rs 2,000 crore and OFS worth 60.1 million shares by shareholders.

 

Policybazaar Web Aggregator

PB Fintech, the parent company of online insurance distributor Policybazaar, is looking to raise Rs 6,017 crore, which will make it the second-biggest issue so far this year after the Rs 9,375-crore Zomato issue last month. PB Fintech is backed by Tiger Global and Tencent Holdings. PB Fintech has filed the DRHP. PB Fintech addresses the large and highly underpenetrated online insurance and lending markets in the country through its Policybazaar and online lending platform Paisabazaar, the largest digital insurance marketplace with a 93.4 per cent market share based on the number of policies sold. In the financial year 2020, 65.3 per cent of all digital insurance sales by volume was transacted through the Policybazaar platform. Its Rs 6,017.5-crore public issue comprises a fresh issue of Rs 3,750 crore and an offer-for-sale of Rs 2,267.5 crore by existing selling shareholders. The OFS consists of sale by investor SVF Python II (Cayman) for Rs 1,875 crore, and Rs 392.5 crore worth of shares by other shareholders. PolicyBazaar is one among a slew of tech IPOs to hit the Indian exchanges this year. It is also one of the country’s top fintech startups ⁠— the other one being Paytm ⁠— going for a public issue. 95% of PolicyBazaar’s revenue comes from commissions from insurance companies for selling policies.

Policybazaar, also backed by Tiger Global Management and Tencent Holdings Ltd., was founded in 2008 to tap the large population of under-insured in a country of 1.3 billion people. It joins an Indian tech funding boom that accelerated after Zomato Ltd.’s July debut received a rousing response from investors, who have since sent its stock soaring roughly 80 per cent. Policybazaar, based in Gurgaon outside of Delhi, allows users to compare prices and features of life, health, auto, travel and property insurance policies from dozens of providers. Customers side-step conventional agents or middlemen, who typically tout policies based on incentives. Policybazaar is in a competitive field. Paisabazaar holds 93.4% of the market share of the digital insurance marketplace, based upon the number of policies sold.  In FY2020, Policybazaar alone accounted for 65.3% of all digital insurance sales by volume. Paytm has also made a regulatory filing for its own stock market debut, expected later this year.

Insurers with targeted IT investments

In fact, insurers that invest more in technology outpace competitors that don’t pursue targeted investments in business measures such as gross written premium (GWP) growth, return to shareholders, and expense and loss ratio. As an example, in life insurance, companies that invested more in IT saw a greater reduction in expense ratios (by 2.0 percentage points) and higher returns on technical reserves2 (1.7 percentage points) when compared with insurers with lower IT investments. Insurers achieved these outcomes within three to five years of making their investments. Marketing technology solutions can increase sales and processing efficiency, improve the quality of core customer-facing processes such as policy inquiries and policy applications, and improve customers’ overall experiences. Investors are keen to know the embedded value of LIC and the value of its new business.

Fixing the Price band

Fixing the price band is vital here as past experiences have not been very good. In 2017, two general insurance companies, General Insurance Corporation of India and New India Assurance got listed. New India Assurance shares were offered in the range Rs. 770-800 while General Insurance Corporation shares were offered at Rs. 912. Both have fallen significantly since then. New India Assurance shares trade at Rs. 161 (after today’s 19% gain), while General Insurance at Rs. 140. Both companies issued one bonus share for every share held between June and July 2018 but even after that bonus, investors would suffer a loss of over 60% from their investment in the IPO. The government has given LIC policyholders a reason to cheer as 10% of the issue size would be reserved for them. What’s more, there could be a discount on the floor price too. At present, LIC policyholders have bought 289 m policies. According to IPO norms, an issuer company can offer the shares to employees at a discount of a maximum 10% on the floor price at which the shares are offered to other categories. LIC is the largest life insurer in India with a total first-year premium of over Rs. 1.84 lakh crore in the year ended March 2021. It commands a market share of over 66%. LIC is the biggest institutional investor in India and has a huge investment portfolio. It’s employee reach is huge with 2.9 lakh employees, and a network of 22.78 lakh agents. LIC is the biggest institutional investor in India and has a huge investment portfolio. Even if the 22 lakh agents sell one additional policy in a year, it will add huge volume. With its Rs. 31 lakh crore balance sheet, LIC is India’s second-largest financial services institution, next only to SBI with Rs. 39.5 lakh crore assets. The insurer still has over 70% share of all life insurance policies sold in the country. And its assets under management stood at Rs. 31 trillion in 2020. These facts alone make the IPO very enticing apart from its potential size.

 

60% of insurance business to be with listed entities

The Union Cabinet recently approved the disinvestment of equity in LIC and the process is on to appoint merchant bankers to launch the IPO. For LIC’s IPO, the centre amended the LIC Act of 1956. After the amendment, like any other listed company, the corporation, now governed by the Companies Act and markets regulator Act (post-IPO), has to prepare its quarterly balance sheet with profit or loss figures and make public key developments. The markets regulator has also amended the rules to allow a company with a valuation of more than Rs.1 lakh crore to go for IPO equivalent to 5% of the total value. The insurance sector as a whole has been growing at a pace significantly higher than that of the overall economy. After the initial public offering (IPO) of LIC, about 60 per cent of the insurance business will be with listed companies. The fintech firm, of late, has been focused on increasing its reach in the market and working on top-line numbers. The company recently launched a slew of products and services aimed at helping seasoned, as well as new-to-investment users. It aims to achieve over 10 million users and 75 million yearly transactions for Paytm Money, its stocks and mutual fund investment platform, in the financial year 2021-2022, with the majority of users from small cities and towns. In the development of new solutions needed by this emerging India and its maturing insurance sector, the actuarial profession have a key role to play. Perceptions of risk have heightened on account of the once-in-a-century .Other global risks are also looming, large climate change concerns and rising incidence of catastrophic events have sharply raised awareness of environmental risks. Further, with the increased pace of technological change and innovation, new ways of carrying on businesses and engaging in individual pursuits are constantly emerging.

According to IPO norms, an issuer company can offer the shares to employees at a discount of a maximum 10% on the floor price at which the shares are offered to other categories. The listing will be crucial for the government to meet its disinvestment target, especially when its plans to privatise two public sector banks and one insurance firm have not taken off yet. The government aims to mop up Rs 1.75 lakh crore in the current fiscal from minority stake sale and privatisation. Of this, Rs 1 lakh crore was to come from selling its stake in public sector banks and financial institutions, and Rs 75,000 crore as CPSE disinvestment receipts. The IRDAI is allowing Indian insurance companies to invest in fund of funds (FoFs), a move seen as giving a boost to the private equity sector. The central government will maintain a bare minimum presence in strategically important sectors. Banks, financial institutions, and insurance are identified as strategic sectors, which mean the government’s minimum presence will be there in insurance. The government would look to amalgamate or disinvest in financial institutions, after ensuring that it had a minimum presence. Over and above a bare minimum presence, if there is a need for me to identify those (entities), which are there but are probably not necessary for my bare minimum presence, I will think in terms of amalgamating, or disinvesting in them. The government, which has already listed the state-run GIC Re and The New India Assurance, plans to float the shares of state-owned life insurance giant LIC and other government-owned general insurers. The Indian insurance business sector has matured over the two decades since the introduction of competition and regulations. The sector as a whole has been growing at a pace significantly higher than that of the overall economy.

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