The New India Assurance Company Primary Offer: Expensive assurance

The opportunity for this general insurance leader is big, but profit is patchy and the offer pricey

For New India Assurance, the largest general insurance company in India and a leader across segments, growing business over the next couple of years will not be a challenge.

The company’s diverse product portfolio, wide distribution network and strong relationship with large corporates are key positives that will help it benefit from the growing opportunities in the general insurance space.

New India Assurance’s gross written premium has grown by 15 per cent annually between FY-13 and FY-17. Its market share has been inching up in key segments — motor and health — that contribute 65 per cent of its gross written premiums (as of FY-17). The fact that the company derives just 5.3 per cent of its premium from crop insurance, also lends comfort.

Thanks to the Centre’s Pradhan Mantri Fasal Bima Yojana scheme, a few private insurers such as HDFC Ergo and ICICI Lombard saw a sharp increase in the share of premiums from crop insurance in FY-17.

While the lower claims ratio in agriculture (ratio of claims incurred to net earned premium) due to normal monsoon in FY-17 aided insurers’ profitability, there is uncertainty over future losses. For New India Assurance, its relatively lower exposure to crop insurance until now, could work in its favour.

That said, the company’s profit has been volatile over the last couple of years, making it difficult to chart its earnings trajectory.

The company has incurred losses at the operating level in four out of the past five fiscals including FY17. Operating profit moved into the black in the June 2017 quarter, mainly on account of a fall in claims ratio. It is still early days to ascertain the sustainability of this profitability, which will be key to future earnings growth. The company’s net profit has contracted by 2 per cent (CAGR) between FY-13 and FY-17.

Pricey issue

Against this backdrop, the asking price for the IPO issue is expensive. At the upper end of the price band of Rs 800, New India Assurance’s issue is priced at about 78 times the FY-17 earnings and around 32 times the FY-18 earnings (based on annualised earnings of June 2017 quarter which has seen a sharp turnaround). This compares to 44 times and 37 times the FY-17 and FY-18 earnings (annualised first half of FY-18 earnings) that ICICI Lombard trades at.

Given that the earnings for New India have been volatile in the past, it may be difficult to evaluate the valuations purely on price-to-earnings basis. A better metric would be the price/earnings to growth — PEG ratio that takes into account the earnings growth of the company. On that count, ICICI Lombard, that has managed to grow its profit by 16 per cent annually over the past four years, appears cheaper.

On a price-to-book basis too, New India Assurance does not appear cheap. On FY-17 and annualised June 2017 book value (excluding fair value change — unrealised gains/losses arising due to changes in the fair value of listed equity shares and mutual funds), the issue is priced at 5.2 times and five times respectively. Though this is lower than the 7-8 times that ICICI Lombard trades at, it is nonetheless pricey.

Hence, spectacular gains over the short term are unlikely. Given the somewhat patchy earnings track record in the past, investors can wait for better earnings visibility before investing. Growing opportunity in the general insurance space and possible unlocking of value from New India’s large legacy investment book are still key positives to bet on for the long run, though investors can await a better entry point.

The offer comprises a fresh issue of 2.4 crore shares and offer for sale of 9.6 crore shares by the Union Government. There is a ₹30 discount on the offer price for retail investors and employees.

Diverse product portfolio

New India Assurance has been in business for nearly a century and its well-entrenched presence in the Indian general insurance market is a key positive.

Despite the influx of private players, the company has been able to maintain its leadership position in most key segments such as motor, health, marine and fire.

As of FY-17, motor, health, fire, crop and marine constituted 38.8 per cent, 26 per cent, 15.3 per cent, 5.3 per cent and 3 per cent of New India Assurance’s gross written premium.

This is broadly in line with the product mix within the industry where health and motor still constitute a chunk of the business.

Going ahead, motor and health should continue to drive growth in the general insurance space on the back of increase in vehicle sales, rising medical costs and increased awareness. New India Assurance, given its leadership position in these segments, should continue to deliver steady growth.

Operating metrics

Insurance companies collect premiums upfront and pay claims later. This creates a float or investible asset base that can be deployed to generate returns for shareholders. Additionally, if premiums exceed the total expenses and the eventual losses, the underwriting profit adds to the investment income.

Hence two ratios — loss and combined ratio — are used to measure the profitability of an insurance business.

Loss ratio is the ratio of claims incurred to net earned premium. Combined ratio measures the incurred losses and expenses in relation to the total premiums.

While New India Assurance sports one of the lowest expense ratio among general insurance players (20-22 per cent over the past three years), its higher loss/claims ratio is a dampener.

The insurer’s claims ratio has been in the 84-92 per cent range over the last three years, higher than ICICI Lombard’s 80-81 per cent. Hence New India Assurance’s higher combined ratio in the 116-119 per cent range (versus ICICI Lombard’s 104-107 per cent) has hurt operating performance.

In the June 2017 quarter, the company reported profit at the operating level due to fall in claims ratio, driven by its health insurance business in which it took price increases. Motor insurance however saw a rise in claims ratio.

On balance, vagaries in the health and motor business, make it difficult to predict the sustainability of the recent turnaround in the company’s operating performance.

However, since profitability also depends on float management, New India Assurance’s large investment book has helped it offset the tepid operational performance.

The company’s large investment book (around ₹36,000 crore book value and ₹60,056 crore — market value as of FY-17) is a key positive; ICICI Lombard has an investment book of about ₹15,000 crore (market value) as of FY-17. The gross investment yield for New India Assurance is higher at a little over 15 per cent compared with ICICI Lombard’s 9.7 per cent in FY-17.

Nonetheless for New India Assurance’s net profit to show a steady and sustainable growth, a significant turnaround in operating performance is imperative.

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