Neha Dave Moneycontrol Research
ICICI Lombard General Insurance, India’s largest private sector non-life insurer, reported better-than-expected earnings, with Q2 FY19 net profit up 44 percent year-on-year (YoY) at Rs 293 crore. Even after adjusting for a one-off item, net profit growth was a healthy at 25 percent
The insurance industry is estimated to experience gross insured losses of Rs 2,000 crore due to excessive floods in Kerala in Q2. The company’s share in gross insured loses is estimated to be around Rs 66 crore. On a net basis, after reinsurance, loss to the insurer would be Rs 25 crore.
ICICI Lombard’s share at 3.3 percent of gross industry losses from Kerala floods is much lower than its market share. This demonstrates its ability to grow profitably despite the inherent volatility in its core risk underwriting business, making it a stock worth considering.
Healthy growth in premiums Gross direct premium income (GDPI) grew 11.3 percent YoY as against industry growth rate of 13.3 percent in Q2 FY19. Consequently, its market share declined marginally to 8.9 percent in H1 FY19. Its lower-than-industry growth doesn’t bother us much as it was in line with management’s stated strategy to pursue only profitable growth. The insurer has let go of business in certain segments, where competition has adopted an aggressive pricing strategy.
Despite the slightly lower-than-industry growth, it remains India’s largest private non-life player and fourth largest player in the general insurance industry.
Growth in premium was broad-based as the insurer maintains a diversified portfolio across motor, health and personal accident insurance, crop insurance and property insurance.
The management expects to continue to grow at 15-20 percent in the medium to long term. It sees profitable growth opportunities in the retail segment (especially in health), which will remain its key focus area. The insurer remains cautious on government-related business segments like crop insurance and mass health.
Improvement in operating metrics The combined ratio, a measure of an insurance company’s profitability expressed as total cost-to-revenue, improved to 101.1 percent in Q2 FY19 from 102.9 percent during the same period last year. The improvement was aided by a fall in expense ratio to 20.7 percent in Q2 from 24.4 percent YoY. Loss/claims ratio deteriorated to 80.4 percent (up 190 bps YoY) due to Kerala floods.
Overall performance was also dragged down by adverse experience in the crop segment, with claims ratio at 117 percent for H1 FY19. All other segments reported moderate claims ratio (below 100 percent). Following the weak performance, the management is consciously pulling back from the crop segment.
The underwriting loss was offset by investment income. Investment assets grew 15 percent to Rs 19,272 crore and realised return on the book was almost stable at 5.2 percent in H1 FY19. Investment income increased to Rs 447 crore, up 20 percent YoY.
Going forward, rising interest rates will benefit the insurer as almost 80 percent of its book consists of fixed income securities. As the portfolio is mainly held till maturity, the insurer doesn’t have to take a mark-to-market hit, while its investment income improves with rising rates.
Capitalisation remains adequate as reflected in its solvency ratios at 210 percent, which is comfortably placed above the regulatory requirement of 150 percent.
Sectoral opportunities and progressive regulations to drive growth The general insurance industry in India has witnessed compounded annual growth rate (CAGR) of 17.5 percent in GDPI from 2001 to 2016. There are several growth levers that will drive the high-teen growth over the next few years as well. India continues to be grossly underpenetrated market, with a non-life penetration at one fourth the global average in 2016. The insurance density (non-life insurance premium per capita) also remains significantly lower than other developed and emerging market economies.
Regulations continue to be progressive and supportive of growth in the sector. For instance, following the Supreme Court’s order, the regulator (Insurance Regulatory Development Authority of India) made third party (TP) insurance cover for new cars and two-wheelers mandatory for a period of three years and five years, respectively, from September 1. This is a positive development as it will address the problem of non-renewal of motor insurance in case of older vehicles. Since long term policies will reduce the uncertainty related to renewal premium, we can expect strong growth in TP motor insurance premiums and this should benefit well entrenched players like ICICI Lombard. Read: SC third party motor insurance ruling: Here’s how it impacts general insurance companies.
Competitive advantage aids premium valuations ICICI Lombard is well poised for earnings growth with an increase in insurance penetration, focus on profitable segments and improvement in operating efficiency. The stock outperformed Nifty year-to-date and is trading at 7.3 times its trailing book. The current valuation is rich even after considering high return on average equity at more than 21 percent.
We have seen that leading companies in the secular growth sector tends to trade at a higher multiples for a long period in time. In the absence of suitable and comparable listed peer, ICICI Lombard trades as a proxy for the sector, commanding a higher valuation. While the premium valuation will sustain, the near term upside in the stock is limited. Nevertheless, for investors with long term horizon and wanting to participate in the growth in non-life insurance sector, the stock is worth a consideration.
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