Implications of the surge in insurance IPOs

Insurance companies are tapping the market in droves. To be sure, the regulatory compulsion was always there to divest promoter holdings in a time-bound manner. But look at what is happening now.

The first ever insurance issue, that of ICICI Pru IPO, happened a year back. The debutant listed below par but now is riding high in in the stock market. ICICI Lombard hit the market last month, followed by SBI Life. GIC Re’s issue managed to draw subscriptions around 1.4 times but did not receive an encouraging response from retail investors.

This may be followed by New India and Reliance General .Not in the distant future will be HDFC Life. And then there will be several PSU issuers.

Apart from four new GI companies entering the market, there is the news of Shriram group's insurance companies likely to be subsumed by IDFC merger. Star Health is not left behind in reportedly seeking a billion dollar value realisation. Insurers are now in the menu card of capital markets.

This sort of thing hasn’t happened before. There are some interesting aspects to it.

Almost a decade and half after the insurance market opened up to private players, the realisation has now dawned that many of these hold embedded value, which they are attempting to release to the original promoters.

However, the capital market rush gives rise to questions.

Does it cater to a real need to lift capital adequacy levels or fund expansion costs? Many of the (re) insurers are underutilising their existing net worth with a less than ideal capital gearing, primarily because they are operating in a still emerging market. So, will expanding the capital base lead to sub- optimal capital servicing? Paradoxically, many could face solvency margin adequacy issues as their topline grows.

What is in it for retail investors? It remains to be seen if insurance stocks themselves become a standalone segment with sufficient trading volume and market cap, forcing bourses to track their performances through an NSE or BSE insurance index?

As for listing of public sector companies, this could usher in transparency and efficiency. One would hope that the experience of PSB banks is not repeated here. The whopping NPAs point to less than professional boards.

Life insurers have come full circle —from aggressive promotion of linked products to active pursuit of protection products. But in the case of general insurers, the common anxiety is whether can they continue to ride piggyback on investment income, abandoning the surplus in the core business. None of the general insurers, save one, makes money in core insurance/reinsurance operations.

For many of the institutional investors overseas, insurance presents as “an uncorrelated asset class”— not swayed by capital market volatility. But if there is extreme dependence among Indian insurers on investment income “to make up technical losses”, this asset class cannot be detached from the rest. It would present the same risk reward profile.

Refreshingly, there are green shoots in the pricing of general insurance products, of late.

The IPO s can also turn out to be the best way to acquire capital at a dream cost and arbitrage the same against yield in the investment portfolio. In a tangential manner, this will be very convenient for some PSU insurers who are on the cusp of capital adequacy and who resorted to Tier II capital to salvage the situation.

If the issues are subscribed well, the Government may infuse less fresh capital into them. This is because the Ministry of Finance is struggling with the capital adequacy issues of PSU banks.

There is an expectation that these issues bring about better awareness regarding insurance services among the investing public. That may translate into increase in insurance penetration (percentage of insurance premiums to GDP), in respect of which India’s level is one of the lowest in Asia. In a lighter vein, will someone who buys shares of Eicher Motors also eventually buy a Royal Enfield motorcycle?

Both, ICICI Lombard and SBI Life have been subscribed well and have listed decently over their issue prices. It will be interesting to see if their success is replicated by subsequent issues.

The writer is Chief Operating Officer of ITI Re. The views are personal

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