Neha Dave Moneycontrol Research
ICICI Lombard General Insurance, India’s largest private sector non-life insurer, reported 23 percent year-on-year (YoY) growth in FY18 net profit to Rs 862 crore. The net profit growth is higher at 30 percent if adjusted for a one-off tax write back in FY17.
While there is inherent volatility in its core risk-underwriting business, ICICI Lombard is better positioned in the segment with 8.2 percent market share among all non-life insurance companies, making it a stock worth looking at.
Healthy growth in premiums
The company reported a strong of 15.72 percent YoY growth in gross direct premium income (GDPI) to Rs 12,357 crore. Growth was across product lines. Motor insurance contributed 43 percent of GDPI, followed by health and personal accident, crop and property insurance each contributing 19 percent of GDPI.
Financial snapshot
Improvement in operating metrics
The combined ratio, measure of insurance company’s profitability expressed as total cost to total revenue, improved to 100.2 percent for FY18 from 103.9 percent in FY17. The improvement in combined ratio was aided by fall in claims/loss ratio to 76.9 percent in FY18 from 80.4 percent in FY17, while operating expense ratio was flat for the year. Overall performance was dragged lower by adverse experience in the crop and third-party motor insurance segments, with claims ratio for the year at 135 percent and 107 percent, respectively. All other segments showed an improvement in claims ratio. Following the weak performance, the management is consciously pulling back growth from the crop segment.
The investment assets grew 22 percent YoY to Rs 18,193 crore but the realised return on the book was slightly less at 9.7 percent versus 10 percent last year. The unrealised gain was Rs 660 crore as on March 31. The solvency ratio at 205 percent was comfortably above the regulatory requirement of 150 percent.
Sectoral tailwinds 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 next few years as well. India continues to be grossly underpenetrated market with a non-life penetration at one-fourth of 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.
We see multiple tailwinds for underlying segments as well. Higher cost of healthcare and rising incidences of critical illness is likely to increase health insurance penetration. Increase in new vehicle sales will be a key growth driver for the motor insurance segment. The passage of the Motor Vehicles (Amendment) Bill, 2016, a legislation which is currently being evaluated by Parliament is expected to improve the long-term profitability of insurers in the motor segment.
Premium valuations to sustain
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 is up 14 percent since its listing in September 2017. The current valuation appears rich as the stock is currently trading at 7.5 times its trailing book with a return on average equity at 21 percent.
Leading companies in the secular growth sector tends to trade at 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 price is limited. For investors with a long-term horizon and wanting to participate in the growth in the non-life insurance sector, the stock is worth a consideration.
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