IGIC - International General Insurance: A Stock For The Long Term

2023-03-17 11:08:17 ET

Summary

• Despite significant improvement in operating performance, the stock is still trading below the price of its initial public offering.
• Currently, the company is trading for nearly $400 million. In contrast, it has produced over $85 million in FY 2022, which gives it a PE multiple of about five.
• A combined ratio of 78.5% provides significant stability to the business model.

International General Insurance Holdings (IGIC) is a global provider of insurance and reinsurance solutions. With a diversified, underwriting portfolio of specialty risk among the various industries, the company operates in over 200 countries.

In the last year, the company has entered into a contingency line of business, acquired Malta subsidiaries, and expanded into Kuala Lumpur; these initiatives might help the company expand its operations in the upcoming years, which can further drive cash flows.

As the business performance is improving consistently, the stock might provide significant value to the long-term investor; at the current market price of $400 million, the stock offers a substantial margin of safety. As the market has yet to understand the company's value, I believe it is the best time for the investor to invest in the growing company at a very cheap valuation.

Historical performance

In 2001, Wasef Jabsheh (current CEO) founded IGI Dubai; since then, the company has expanded into various segments and has produced considerable returns. Over the last 13-year period, gross written premiums have increased with a rate of 11% CAGR while keeping the average combined ratio at a level of 90%, which seems a substantially attractive result compared to the industry average.

In March 2020, IGI Dubai combined with Tiberius to form a new public company called International General Insurance Holdings Ltd; since then, the business has improved significantly, which is not yet reflected in the stock price.

From 2020 revenue has touched a new level , increasing from $283 million in FY 2020 to about $395 million by FY 2022, resulting from the business combination, acquisition, and strategic expansion. In the same period, the company's float has increased significantly, providing the company with considerable capital to invest.

During the crash of 2020, the stock price lost over 44% of its value; since then, it has increased by over 38%, reaching $8.31 per share. Despite significant improvement in the operating performance, the stock is still trading below the price of its initial public offering, which provides an excellent opportunity for value investors.

Strength in the business model

Due to its presence in over 200 countries, the company has a vast market to search for a profitable niche; having a well-diversified portfolio of gross written premiums provides significant stability to the business model. Also, the company derives its reinsurance services from the top and highly rated reinsurers, which provides significant cushion to the adverse conditions; as a result, historically, the business has not faced any significant backdrops during the industry down cycle.

In the last year, over 71% of total business has been underwritten individually while considering risk and profitability requirements. Management's focus on strict underwriting policies has been playing a big role in the success of the company. Such strict underwriting policies might be a reason behind an efficient combined ratio compared to its peers.

In the insurance business, the performance of investment vehicles plays a vital role; in the case of IGIC, the investment side looks pretty conservative and has produced desirable returns over time while keeping risk at considerably lower levels. Although, due to the conservative structure, the yield might stay at lower levels, I expect the investment side to produce consistent returns on invested capital.

Risk factors

While there seems to be a substantial opportunity in owning the stock, investors must consider the risk factors before making any decision; currently, I do not see any significant risk that can hurt the business operations, but there are some concerns that I think should be noted.

Although the combined ratio for the entire year seems very low, in the recent quarter, the company posted a combined ratio higher than the last year of about 92.4% (still below the industry average), which might be an indicator showing that the upcoming year, losses might increase; historically the company has effectively tackled such situations, but still, the risk persists; therefore, the investor must keep an eye on the loss ratios.

As the company derives a significant net premium from the UK, the inflationary environment in the country might affect the operating performance and loss ratio.

Recent development

In the recent quarter, the net premium earned increased from $86 million in the same quarter last year to about $97 million, which has led to increase in net income (also attributed to one-time gains). Overall FY 2022 result seems attractive as compared to the previous year; investments and deposits have increased resulting from consistently increasing float while keeping the combined ratio at a low level of 78.5%.

Our business profile including our well-diversified and profitable book of business, along with our strong capitalization, among other factors, led to "A" (Excellent)/Stable and "A-"/Stable ratings by A.M. Best and S&P Global Ratings, respectively.

Annual report - 2022

The debt-free balance sheet has been providing substantial strength to the financial position; as a result, the company has been enjoying solid ratings from rating agencies.

As the company has been expanding its business reach consistently, cash flow might see significant improvement in the upcoming years, which can result in stock price appreciation. During the growth phase, most insurance providers struggle to maintain their loss ratios which significantly affects their operating results, but this is not the case with IGIC; the combined ratio seems attractive and might remain attractive in the distant future due to the strict underwriting policies that management have been implementing since its inception.

Currently, the company is trading for nearly $400 million; In contrast, it has produced over $85 million in the FY 2022, which gives it a PE multiple of about five. I believe IGIC has become substantially undervalued despite producing a solid result; I assign buy ratings to the stock.

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