Stock call. ICICI Lombard: Driving promise

ICICI Lombard, that ranks No 1 in the general insurance space among private players, continues to be on a sound footing. A diverse product portfolio, healthy profitability, relatively lower loss ratio and well-balanced distribution mix, have helped the company retain its leadership position and deliver a sound performance in FY-18.

While the stock performance has been nothing-to-write-home about since its listing, for long-term-investors wanting a piece of the action in the general insurance space, ICICI Lombard holds promise. The company has been growing faster than the industry most of the time, over the last couple of years, gaining market share. In 2017-18, ICICI Lombard’s market share among private players (in terms of GDPI — gross direct premium income) stood at 18.8 per cent, a near lead of 5 percentage points over the next private player, Bajaj Allianz.

At the current price of ₹726, the stock trades at about 2.2 times the one-year forward gross written premiums and 32 times the one-year forward earnings. The other listed player, New India Assurance, trades at a lower 1.8 times gross written premium (GWP) and 22 times the one-year forward earnings. But the company’s earnings have been volatile over the last couple of years, incurring losses at the operating level in certain years.

While valuations for ICICI Lombard are not cheap, the company’s strong leadership position, sound solvency margins and focus on profitable businesses, are key positives that should drive healthy returns for investors in the long run.

Investors with a two to three-year horizon can invest in the stock.

 

 

Sound performance

Well-balanced distribution and customer mix is a key positive for ICICI Lombard. Over the years, the company has moved away from a largely corporate focussed business model.

The company’s solvency ratio is also sound at 205 per cent, above the mandatory 150 per cent level. The company’s return on equity has been above the industry average at 16-20 per cent levels over the past three years. ICICI Lombard has also been following conservative reserving (loss reserves are based on estimates as to future claims liabilities).

The company has delivered a sound performance in FY-18, thanks to healthy growth in premiums and an overall lower loss ratio (ratio of claims incurred to net earned premium) vis-à-vis 2016-17.

With the launch of the Pradhan Mantri Fasal Bima Yojana (PMFBY) in April 2016, players such as ICICI Lombard had witnessed a strong growth in premiums in 2016-17. After the sharp growth of 32.6 per cent in GDPI in 2016-17, ICICI Lombard delivered 15 per cent growth in 2017-18. This is slightly lower than the overall growth in premiums among private insurers . A conscious call to cap exposure to the mass health segment — which remains a lumpy business and crop where the underwriting risk remains uncertain — could have led to a relatively lower growth.

But the company’s selective approach in underwriting has helped it focus on more profitable businesses, auguring well for its earnings.

In motor insurance, for instance, the company focusses on the more profitable two-wheeler and private car segments. ICICI Lombard has seen a 15.6 per cent growth in motor premium in FY-18.

Within health, due to aggressive pricing and competition in the corporate health segment, the company has been selective in underwriting risk here. Instead, the focus has been on the retail segment. Retail, corporate and mass health contributed 63.2 per cent, 35.1 per cent and 1.7 per cent respectively of Health & PA GDPI in FY-18.

The company’s prudent risk selection has helped cap losses and bring down the overall loss ratio in FY-18, despite higher losses in crop and motor third party.

Given the lower claims ratio in crop due to normal monsoon in FY-17, an adverse movement in claims in FY-18 was in any case expected to impact insurers’ profitability. For ICICI Lombard too, adverse loss experience in kharif crops has been a dampener. Loss ratio — essentially the total incurred losses in relation to the total premiums — for crop rose from 84 per cent in FY-17 to 135 per cent in FY-18. In motor third-party too, losses increased from 97 per cent to 107 per cent in FY18.

However, lower losses in other segments such as motor own damage, health, fire and marine have helped more than offset the pain in crop and motor third-party, leading to an overall reduction in the loss ratio for FY-18 to 76.9 per cent from 80.4 per cent in FY-17.

Led by lower loss ratio, the combined ratio — the incurred losses and expenses in relation to the total premiums — has fallen from 104 per cent in FY-17 to 100 per cent in FY-18.

But aside from the loss and combined ratios, profitability for an insurer also depends on float management. Insurance companies collect premiums upfront and pay claims afterwards. This creates a float or investable asset base that can be deployed to generate returns for shareholders. ICICI Lombard has one the largest investment book among private players (was ₹18,193 crore as of March 2018). The realised return on this has been steady at around 10 per cent over the past three years.

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