ICICI Lombard General Insurance: A good claim

Healthy financials and strong leadership position should continue to drive the insurer’s valuation

ICICI Lombard General Insurance ended FY19 on a strong note and is a good long-term bet for investors. Despite the 47-odd per cent rally in stock price over the past year, the company’s healthy prospects, leadership position and a sound business model will continue to draw investor interest. In 2018-19, while the general insurance industry grew 12.9 per cent (in terms of GDPI — Gross Direct Premium Income), ICICI Lombard reported 17 per cent growth, after clocking 15 per cent in the previous fiscal.

The company’s right focus on profitable businesses has been paying off, too. Led by a lower loss ratio, the combined ratio — the incurred losses and expenses in relation to the total premiums — fell from 104 per cent in FY17 to 98.5 per cent in FY19. The company’s return on equity inched up by 100 basis points to 21.3 per cent during this period.

 

In the coming year, multiple factors are likely to impact general insurers’ business. For one, General Insurance Corporation of India (re-insurer) has prescribed minimum rates to be charged for certain occupancies (industries) under the fire segment.

These rates are higher than the prevailing market rates. This should improve the fire segment’s profitability of primary insurers such as ICICI Lombard. But given that fire constitutes a relatively lower proportion of business (7-8 per cent of GDPI), the overall impact will not be very significant.

Two, the regulator has notified that insurance companies should continue to charge the prevailing rates for Motor Third Party from April 1, 2019 — this could have a negative impact on the loss ratio for now.

The directive on long-term third-party cover is already impacting insurers’ profitability to some extent. However this could be offset by a higher investment income on the increased float or investable asset base following the directive.

Lastly, for ICICI Lombard, its conscious call to cap its exposure to the crop segment — where the underwriting risk remains uncertain — could weigh somewhat on growth but will lead to improvement in claims/loss ratio (ratio of claims incurred to net earned premium).

Overall, this implies that a sharp improvement in the underwriting or combined ratio is unlikely hereon. That said, ICICI Lombard ranks number one in the general insurance space among private players.

Its well-balanced distribution mix, diversified product portfolio, strong execution in profitable businesses and sound financials are key positives that augur well for the long-term profitability of the company.

At the current price of ₹1,082, the stock trades at about 2.8 times one-year forward gross written premiums and about 38 times one-year forward earnings.

The other listed player, New India Assurance, trades at a lower 13 times one-year forward earnings, but has a higher combined ratio and lower return on equity.

While valuations for ICICI Lombard may not be cheap, its healthy financials and strong leadership position should continue to drive valuations.

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

Profitable growth

ICICI Lombard’s decision to remain selective in businesses it underwrites has paid off handsomely. In motor insurance, for instance, the company focusses on the more profitable two-wheeler (27 per cent of motor GDPI in FY19) and private-car segments (50 per cent).

While ICICI Lombard has seen a 22.4 per cent growth in motor GDPI in FY19, the loss ratio in the motor own-damage (OD) moved up notably in the March quarter owing to pricing pressure on implementing the long-term insurance directive. This should normalise going ahead.

Within the health segment, too, the company has been selective in underwriting risk. There has been a conscious call to cap exposure to the mass health segment. Instead, the focus has been on the retail and group (SME and mid-corporate) segments.

Retail, group and mass health contributed 38 per cent, 61 per cent and 0.4 per cent, respectively, to the Health & PA GDPI in FY19.

When the Pradhan Mantri Fasal Bima Yojana (PMFBY) was launched in April 2016, players such as ICICI Lombard witnessed a strong growth in premiums in FY17.

But given the uncertain underwriting risk and aggressive bidding by players in the segment, the company took a call to cap its exposure to the segment. Hence, in FY19, it registered only 3 per cent growth in crop GDPI.

A sharp reduction in the share of crop business in future could have a bearing on the overall growth in premiums. But other segments growing at a healthy clip should aid growth. In fact, despite the slowdown in crop business, the company managed 17 per cent GDPI growth in FY19 (ex-crop 20.5 per cent).

The company’s prudent risk-selection has helped cap losses and bring down the overall loss ratio — from 80.4 per cent in FY17 to 75.3 per cent in FY19. Led by a lower loss ratio, the combined ratio has fallen notably during this period, driving the overall profitability.

Apart from the loss and combined ratios, profitability for an insurer is also dependent 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 a large investment book of ₹22,231 crore as of March 2019.

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