ipo review rating : unrated price band |...
TRANSCRIPT
September 13, 2017
IPO Review
ICICI Securities Ltd | Retail Equity Research
ICICI Lombard (Lombard) was founded as a joint venture between ICICI
Bank Ltd and Fairfax Financial Holdings Ltd. Lombard is the largest
private-sector non-life insurer in India based on gross direct premium
income (GDPI) in FY17. Its market share, by GDPI, increased from 7.9% in
FY15 to 8.4% in FY17. Lombard offers a comprehensive and well-
diversified range of products, including motor, health, crop/weather, fire,
personal accident, marine, engineering and liability insurance, through
multiple distribution channels.
As of June 30, 2017, ICICI Lombard had 20,775 agents, 51 corporate
agents including bank partners, giving access to 4850 branches. Lombard
had | 150.79 billion in total investment assets, which is the largest among
private-sector non-life insurers in FY17. PAT and RoE were at | 6.42
billion and 17.2%, respectively, in FY17. Capital position remained strong
with solvency ratio of 2.10x compared to IRDAI-prescribed control level of
1.50x and an Indian non-life private-sector average of 1.96x.
Key business aspects
Consistent market leadership; demonstrated growth
ICICI Lombard has maintained a leadership position among private sector
non-life insurers in India across motor (own damage & third party liability),
health, crop/weather, fire, engineering and marine insurance, since FY15.
This leadership has been reinforced by a comprehensive and diverse
portfolio of insurance products, which have continuously evolved to
adapt to customer needs and changing industry dynamics. GDPI has
grown faster than industry at a CAGR of 26.7% in FY15-17 vs. a CAGR of
22.8% for the industry. As a result, its market share, by GDPI, increased
from 7.9% in FY15 to 8.4% in FY17.
Diverse product line with multi-channel distribution network
ICICI Lombard offers a diversified composition of insurance products with
motor, health and personal accident, crop/weather, fire, marine and
engineering insurance contributing 42.3%, 18.9%, 20.1%, 6.9%, 3.2% and
2.1%, respectively, of GDPI in FY17. It has a strong direct sales channel,
which contributed 43.2% of its GDPI in FY17. Further, it has 48 corporate
agents including ICICI Bank, 20383 individual agents and a strong digital
platform through which it issued 1.6 million policies in FY17.
Strong investment returns on diversified portfolio
Investments include debt, equities, mutual funds, real estate and other
alternative investments. As of March 31, 2017, 29.7% of total investment
assets, by carrying value, were held in government securities, 41.8% in
corporate bonds, 17.0% in equities and the remaining in other
investments. Investment assets were at | 150.79 billion, leading Lombard
to report the largest total investment assets in industry in FY17.
Concerns
Termination of, or adverse change of relationship with motor vehicle
manufacturers and ICICI Bank
Significant proportion of government business via crop and health
Geographical concentration
Market risk may impair the value of the investment portfolio
Priced at 46x P/E (post issue FY17 earnings) on higher band
At the IPO price band of | 651-661, the stock is available at a P/E multiple
of 46x FY17 (post issue) at the upper end of the price band. Post issue
market capitalisation is at ~| 30000 crore.
ICICI Lombard General Insurance Co Ltd
Price band | 651-661
Rating matrix
Rating : Unrated
Issue Details*
Issue Opens 15-Sep-17
Issue Closes 19-Sep-17
Issue Size (| Crore) 5615-5701
Price Band (|) 651-661
No of Shares on Offer (crore) 8.6
QIB (%) 50
Non-Institutional (%) 15
Retail (%) 35
Minimum lot size (No. of shares) 22
*Reservation for ICICI Bank shareholders for up to 5%
of the offered shares
Objects of the Issue
To achieve benefits of listing equity shares on Stock Exchanges and
sell up to 86,247,187 equity shares by the selling shareholders.
Listing of the equity shares will also enhance brand name and
provide liquidity to the existing shareholders
1997-98 2001-04 2006
HUL acquires 23% stake. Mitsubishi Corporation and
Shareholding Pattern Pre-Issue Post-Issue
Promoter & promoter group 63.0% 56.0%
Public 37.0% 44.0%
Financial Summary
| Crore FY14 FY15 FY16 FY17
Premiums earned - Net 4352 4234 4826 6158
Income from Investments 122 175 270 297
Claims Incurred (net) 3629 3446 3939 4966
PAT 520 585 505 642
Valuation Summary (at | 661; upper price band)
(x) FY14 FY15 FY16 Pre Post
P/E 53.9 50.7 58.5 46.2 46.2
P/BV 12.2 10.2 9.1 8.0 8.0
FY17
Research Analyst
Kajal Gandhi
Vishal Narnolia
Vasant Lohiya
Page 2 ICICI Securities Ltd | Retail Equity Research
Company Background
ICICI Lombard offers a comprehensive and well-diversified range of
products, including motor, health, crop/weather, fire, personal accident,
marine, engineering and liability insurance, through multiple distribution
channels. ICICI Lombard was founded as a joint venture between ICICI
Bank Ltd and Fairfax Financial Holdings Ltd, a Canada based holding
company which, through its subsidiaries, is engaged in property and
casualty insurance and reinsurance & investment management with
US$43.38 billion of total assets as of December 31, 2016.
Lombard is the largest private-sector non-life insurer in India based on
gross direct premium income (GDPI) in FY17. This position has been
maintained since FY04 after being one of the first few private sector
companies to commence operations in the sector in FY01. Lombard
continued to grow faster than the industry, with GDPI growing at 26.7%
CAGR from FY15 to FY17, as compared to 22.8% CAGR for the Indian
non-life insurance industry in the same period. As a result, its market
share, by GDPI, increased from 7.9% in FY15 to 8.4% in FY17. In FY17,
Lombard issued 17.7 million policies with GDPI at | 107.25 billion, thus
becoming the first private-sector non-life insurer in India to reach the
| 100.00 billion mark in GDPI in FY17.
As of March 31, 2017, Lombard had | 150.79 billion in total investment
assets, which is the largest total investment asset among private sector
non-life insurers in India. PAT and return on equity were at | 6.42 billion
and 17.2%, respectively in FY17. The capital position stayed strong with
solvency ratio of 2.10x as of FY17 compared to IRDAI-prescribed control
level of 1.50x and an Indian non-life private-sector average of 1.96x.
Exhibit 1: Product wise gross direct premium income (ICICI Lombard)
Produt wise GDPI FY15 FY16 FY17
Own Damage 21.3 25.2 27.6
Third-party 12.8 16.3 17.8
Total Motor 34.2 41.5 45.4
Health 13.2 13.8 16.7
Personal Accident 2.3 2.8 3.6
Total Health and Personal Accident 15.5 16.6 20.3
Crop/Weather 2.8 5.9 21.5
Fire 5.5 6.3 7.5
Marine 2.5 3.0 3.4
Engineering 1.7 2.0 2.3
Other 4.7 5.6 7.0
Total 66.8 80.9 107.3
Source: RHP, ICICIdirect.com Research
In terms of products, ICICI Lombard has a diversified composition of
insurance products with motor, health and personal accident,
crop/weather, fire, marine, and engineering insurance contributing 42.3%,
18.9%, 20.1%, 6.9%, 3.2% and 2.1%, respectively, of GDPI in FY17. From
a customer point of view, in FY17, retail (including SME), corporate and
government business groups contributed 60.4%, 17.5% and 22.1% of
gross direct premium income, respectively.
Page 3 ICICI Securities Ltd | Retail Equity Research
Exhibit 2: Channel wise gross direct premium income (ICICI Lombard)
Distribution Channels FY15 FY16 FY17
Digital 1.6 2.0 2.2
Others 27.6 32.5 44.1
Direct-Total 29.2 34.5 46.3
Broker 19.0 26.1 32.7
Banks partners 5.8 6.0 7.2
Others 1.4 1.5 8.1
Corporate agents-Total 7.2 7.4 15.4
Individual agents 11.4 12.9 12.9
Total 66.8 80.9 107.3
Source: RHP, ICICIdirect.com Research
On the geographical front, Lombard has operations across 28 states and
eight union territories in India through 249 offices, which are operated
from leased premises. Key distribution channels include direct sales,
individual agents, bank partners, other corporate agents, brokers and
digital, through which services are provided to customers. As of March
31, 2017, Lombard had 20,383 agents and bank partners, which gave it
access to 5,935 branches.
Exhibit 3: Geographical distribution of gross direct premium income (| billion)
Location FY15 FY16 FY17
Maharashtra 19.5 23.9 28.0
Madhya Pradesh 1.3 1.8 14.1
Delhi 8.3 8.3 8.9
Gujarat 5.8 7.1 8.1
Uttar Pradesh 4.5 6.5 6.4
West Bengal 2.6 2.9 6.0
Tamil Nadu 4.2 4.6 5.9
Karnataka 5.2 5.2 5.8
Telangana 0.6 2.6 5.7
Kerala 1.2 1.3 2.7
Odisha 0.8 1.1 2.5
Haryana 1.7 2.0 2.1
Andhra Pradesh 3.2 1.8 1.9
Bihar 1.0 1.3 1.5
Rajasthan 1.4 5.1 1.4
Punjab 1.1 1.3 1.4
Chandigarh 0.6 0.9 0.7
Chhattisgarh 1.5 0.5 0.6
Others 2.2 3.0 3.5
Total 66.8 80.9 107.3
Source: RHP, ICICIdirect.com Research
Product profile
ICICI Lombard offers customers a comprehensive and well-diversified
range of products, including motor, health, crop/weather, fire, personal
accident, marine, engineering and liability insurance catering to individual
as well as corporate customers.
Motor insurance
Motor insurance consists of coverage of private motor cars, two-wheelers
and commercial vehicles. Motor insurance in India can be broadly divided
into two categories: own damage and third-party. Own damage motor
insurance protects a vehicle owner from damage or theft to his/her own
motor vehicle and is optional. On the other hand, third-party motor
insurance, which protects all third parties from damages suffered due to
Page 4 ICICI Securities Ltd | Retail Equity Research
an accident involving a motor vehicle, must be purchased by every motor
vehicle owner in India pursuant to the Motor Vehicles Act, 1988, as
amended.
ICICI Lombard’s GDPI from motor insurance increased from | 34.16 billion
in FY15 to | 45.42 billion in FY17, representing a CAGR of 15.3%. Motor
insurance accounted for 51.2%, 51.3% and 42.3% of GDPI in FY15, FY16
and FY17, respectively.
Health insurance
The health insurance portfolio consists of corporate health, mass health
and retail health insurance. The corporate health segment consists of
policies purchased by corporates, including SMEs, as employee benefits.
The mass health segment consists of participation in central and state
government health programmes including Rashtriya Swasthya Bima
Yojana (RSBY). The retail health segment consists of sales to individuals
broadly divided into two categories - benefit-based and indemnity-based
policies.
Lombard’s GDPI from health insurance increased from | 13.18 billion in
FY15 to | 16.68 billion in FY17, representing a CAGR of 12.5%. Health
insurance accounted for 19.7%, 17.1% and 15.5% of GDPI in FY15, FY16
and FY17, respectively.
Personal accident insurance
Personal accident insurance provides benefit-based coverage to
policyholders for accidents suffered by them. This insurance is offered to
corporate as well as retail customers. For Lombard, personal accident
insurance GDPI increased from | 2.33 billion in FY15 to | 3.58 billion in
FY17, representing a CAGR of 24.0%. Personal accident insurance
accounted for 3.5%, 3.4% and 3.3% of GDPI in FY15, FY16 and FY17,
respectively.
Crop/weather insurance
Crop/weather insurance is purchased by farmers to protect themselves
against a reduction in their crop yield or loss of their crops due to natural
phenomena like inadequate or excessive rainfall, hailstorm, landslides
and variation in temperature and humidity.
Lombard participates in two major crop-insurance related government
programmes, the Pradhan Mantri Fasal Bima Yojana (PMFBY) and the
Restructured Weather Based Crop Insurance Scheme (RWBCIS).
Crop/weather insurance accounted for 4.1%, 7.3% and 20.1% of GDPI in
FY15, FY16 and FY17, respectively. GDPI from crop/weather insurance
increased from | 2.76 billion in FY15 to | 21.51 billion in FY17,
representing a CAGR of 179.3%. The large growth in FY17 was due to
implementation of PMFBY programme by central and state governments.
Fire insurance
Fire insurance covers damage or loss to property because of fire, riot,
strike, earthquake, storm, flood, and certain other natural catastrophes.
For Lombard, GDPI from fire insurance increased from | 5.45 billion in
FY15 to | 7.45 billion in FY17, representing a CAGR of 16.9%. Fire
insurance accounted for 8.2%, 7.8% and 6.9% of GDPI in FY15, FY16 and
FY17, respectively.
Other insurance products
Apart from the above-mentioned, other insurance products by Lombard
consist of marine insurance (insures goods that are being transported, by
land or by sea, and the insurance of ships, boats and offshore structures),
Engineering insurance (insurance that provides coverage for risks faced
by an ongoing construction project, installation project, and machines
and equipment used in such project), travel insurance, aviation insurance,
etc.
Page 5 ICICI Securities Ltd | Retail Equity Research
Financial Performance
ICICI Lombard’s GDPI has grown at a healthy pace of 17.7% CAGR in
FY13-17. During FY15-17, Lombard’s GDPI grew at 26.7%, faster than the
industry. As a result, its market share, by GDPI, increased from 7.9% in
FY15 to 8.4% in FY17. AUM growth remained healthy at 19.1% CAGR in
FY13-17 at | 15079 crore. PAT was at | 642 crore in FY17, with return on
net worth exceeding 16% for each year since FY13. The capital position
remains strong with solvency ratio at 210% as on March 31, 2017
compared to the IRDAI prescribed level of 150%.
Exhibit 4: Net earned premium growth remains healthy
5582.3
6475.4
6370.6 8090.7 10725.2
16.0%
-1.6%
27.0%
32.6%
-10%
0%
10%
20%
30%
40%
0
2000
4000
6000
8000
10000
12000
FY13 FY14 FY15 FY16 FY17
| b
illion
Premiums earned - Net YoY growth (RHS)
Source: RHP, ICICIdirect.com Research
Exhibit 5: Trend in AUM
930910200
11563
15079
24.1%
9.6% 13.4%
30.4%
0%
10%
20%
30%
40%
0
2000
4000
6000
8000
10000
12000
14000
16000
FY14 FY15 FY16 FY17
(%)
| b
illion
AUM YoY growth (RHS)
Source: RHP, ICICIdirect.com, Research
Exhibit 6: PAT growth trend
353
520
585
505
642
-20%
0%
20%
40%
60%
0
200
400
600
800
FY13 FY14 FY15 FY16 FY17
| c
rore
PAT YoY growth (RHS)
Source: RHP, ICICIdirect.com, Research
Exhibit 7: Return on net worth above 16%
19.9
21.720.3
15.617.2
0
10
20
30
FY13 FY14 FY15 FY16 FY17
(%)
Source: RHP, ICICIdirect.com, Research
Exhibit 8: Solvency ratio remains prudent (%)
155.0
172.0
195.0182.0
210.0
0
100
200
300
FY13 FY14 FY15 FY16 FY17
(%)
Source: RHP, ICICIdirect.com, Research
Page 6 ICICI Securities Ltd | Retail Equity Research
Indian non-life insurance industry – Quick snapshot
The Indian non-life insurance size was at | 1.28 trillion on a GDPI basis as
of March 31, 2017, making it the 15th largest non-life insurance market in
the world and fourth largest in Asia (Source: Swiss Re and Crisil
Research, Analysis of general insurance industry in India, July 2017). In
FY01-17, Indian non-life insurance GDPI grew at a healthy pace of
~17.4% CAGR. India was also among the fastest growing non-life
insurance markets over 2011-16, growing at 14.5% (Source: Swiss Re).
Despite this, India continues to be an underpenetrated market with a non-
life insurance penetration (Insurance penetration refers to premiums as a
percentage of GDP) of 0.77% in 2016, compared to 1.81% in China,
1.70% in Thailand, 1.67% in Singapore and 1.62% in Malaysia and a
global average of 2.81% in 2016. Similarly, insurance density (per capita
premium or premium per person) also remains very low compared to
other developed and emerging market economies at US$13.2 in 2016.
Exhibit 9: Insurance penetration (as percentage of GDP) - 2016
4.29
2.742.58
2.37
1.81 1.76
1.36
0.77
0.51
0
1
1
2
2
3
3
4
4
5
5
US South
Africa
UK Japan China Brazil Russia India Indonesia
(%)
Source: RHP, ICICIdirect.com Research
Exhibit 10: Non-life insurance density (2016)
2449
1031928
147 151 147 10018 13
0
500
1000
1500
2000
2500
3000
US UK Japan S.Africa Brazil China Russia Indonesia India
(U
SD
)
Source: RHP, ICICIdirect.com Research
The Indian non-life insurance sector offers different products such as
motor, health, crop, fire, marine, liability, travel, aviation and home
insurance aimed at meeting different protection needs of retail customers,
government as well as corporate customers. The industry operates under
a “cash before cover” model under which insurers are not required to
assume underwriting risk until premiums are received except in the case
of government sponsored schemes like mass health and crop insurance.
Page 7 ICICI Securities Ltd | Retail Equity Research
The Indian non-life insurance sector holds significant growth potential
because of its under-penetration and low insurance density compared to
other economies. According to Crisil Research, GDPI for non-life insurers
are projected to grow at 15-20% CAGR in FY17-22. India’s large working
population, rising affluence, rapid urbanisation and rising awareness of
risk with higher disposable incomes is expected to continue to propel the
growth of the non-life insurance industry in India. In addition, improving
economic growth, emergence of new risks such as cyber frauds and a
strong regulatory focus on improving insurance coverage are expected to
be the key catalysts among others for this growth.
Recent catastrophic events have also highlighted the importance of
insurance in India. With only around 10% of economic losses being
insured in India, significant market potential exists for insurance as people
seek to obtain protection to reduce the impact of uninsured losses in the
event of a catastrophe.
Exhibit 11: Extent of uninsured losses in recent catastrophe events in India
Date Event Place of event
Economic
Losses
(USD bn)
Insured
Losses
(USD bn)
Un-insured
loss of
total loss
Dec, 2015 Floods Tamil Nadu and Andhra Pradesh 2.2 0.8 66%
Oct, 2014 Cyclone Hudhud Odisha and Andhra Pradesh 7.1 0.6 91%
Sept, 2014 Severe Monsoon Floods Jammu and Kashmir 6.0 0.2 96%
Sept, 2014 Severe Monsoon Floods
Assam, Bihar, Meghalaya, Uttar
Pradesh and West Bengal 6.1 0.2 96%
Oct, 2013 Cyclone Phailin Odisha 4.5 0.1 98%
Jun, 2013 Floods Uttarakhand 1.1 0.5 54%
Sept, 2009 Floods Andhra Pradesh and Karnataka 5.3 0.1 99%
Source: RHP, ICICIdirect.com Research
Market structure
The Indian non-life insurance industry comprises 30 companies as of
March 31, 2017. These can be classified as per their domain or product
offering as under;
Multi-product insurers:
Four public sector companies offering multiple products –
National Insurance Company, The New India Assurance, Oriental
Insurance Company and United India Insurance
18 private sector companies – including ICICI Lombard, Bajaj
Allianz, HDFC Ergo, IFFCO Tokio and Tata AIG
Single Product Insurers:
Six standalone private health insurance companies – Apollo
Munich, Cigna TTK, Max Bupa, Religare Health, Star Health and
Aditya Birla
Two public sector specialised single product non-life insurance
companies – Agriculture Insurance Company (AIC), and Export
Credit Guarantee Corporation (ECGC)
Besides these 30 companies, the state owned General Insurance
Corporation of India (GIC) operates as the main Indian reinsurer. The
regulator has recently allowed foreign reinsurers to set up branch offices
in India. This is expected to lead to an increase in reinsurance capacity
thereby increasing the market depth.
Page 8 ICICI Securities Ltd | Retail Equity Research
Exhibit 12: GDPI by product segment and insurer (FY17)
Source: RHP, ICICIdirect.com Research
Structural strength to drive life insurance industry
Demographics strength: India currently has one of the youngest
populations in the world, with a median age of 28 years. It is estimated
that 90% of Indians will still be below the age of 60 by 2020 (according to
Crisil Research). Rapid urbanisation coupled with a high share of working
population with rising affluence and labour mobility is expected to
provide an impetus to growth in the Indian non-life insurance sector.
Exhibit 13: Indian working population
34.727.5 30.8
6.9
30.9
27.6
33.7
7.8
27.5
26
37
9.5
0
20
40
60
80
100
120
0-14 15-29 30-59 60+
(%
)
2000 2010 2020E
Source: RHP, ICICIdirect.com Research
Page 9 ICICI Securities Ltd | Retail Equity Research
Exhibit 14: Urban proportion of total population (2016)
94.1
8681.8
74.1
65.3
56.2 54.5
33.1
0
10
20
30
40
50
60
70
80
90
100
Japan Brazil US Russia S.Africa China Indonesia India
(U
SD
)
Source: RHP, ICICIdirect.com Research
Recent product innovations: Non-life insurers have been continuously
innovating with new product offerings and services in response to market
needs. In FY17, 165 products were cumulatively introduced across
insurers, compared with 101 products in FY16. Products launched include
long term health insurance, long term two wheeler insurance, cyber
liability, crop insurance through PMFBY and railway accident insurance.
Add-on products such as engine protect, road assistance, zero
depreciation, return to invoice have also been introduced in recent times
to offer additional services to the customers.
Improved penetration in motor insurance to boost growth: In India, motor
insurance forms the largest pie in the Indian non-life insurance sector
contributing ~40% of industry GDPI in FY17. Among the segment, own
damage motor insurance forms ~19% of industry GDPI, while third party
motor insurance forms ~21% of industry GDPI in FY17. Despite being
more advanced than other forms of non-life insurance, motor insurance in
India continues to be underpenetrated relative to global levels. As per
Crisil Research estimates, only 60% of cars, older than three years, are
insured in India against the global benchmark of 90%. In two wheelers,
only ~25% are insured in India against global benchmark of over 90%.
Exhibit 15: Projected growth rates for individual segments in motor insurance
Source: RHP, ICICIdirect.com Research
Increased commission rates for comprehensive auto insurance policies
and third party insurance has been adopted aiming to improve renewal
rates. Improving adoption of telematics is expected to improve own
damage motor insurance performance. Passage of Motor Vehicles
(Amendment) Bill 2016, a legislation that is currently being evaluated by
the Indian parliament is expected to bring in long term changes in the
industry.
Historical evolution of Indian non-life insurance industry
The Indian non-life insurance sector has experienced three phases of
growth since FY02, when the sector was opened to private companies,
Page 10 ICICI Securities Ltd | Retail Equity Research
and to foreign companies, subject to a shareholding cap of 26%. The tariff
regime applicable to pricing of products offered by non-life insurance
companies primarily determined the historical evolution in the industry.
IRDA has, at periodic interval, modified the tariff structure in the industry
to reach the current regime.
Exhibit 16: Evolution of tariff regime for key product segments
Source: RHP, ICICIdirect.com Research
Currently, third party motor insurance remains the only tariffed product
segment. IRDA has de-tariffed the health insurance segment. However,
the premiums filed can ordinarily not be changed for a period of three
years, after a product has been cleared. Thereafter, based on the product
experience and approval of IRDAI, premiums are allowed to be revised.
The Indian non-life insurance industry has undergone various growth
phases as depicted in the exhibit below.
Exhibit 17: Phases of growth in non-life insurance industry
Source: RHP, ICICIdirect.com Research
Private insurer gaining market share: In the initial phase (FY02-07), post
opening up the sector for private participation, industry GDPI grew at
17.2% CAGR with private insurers gaining market share at ~33%. Post
de-tariffing of premium (second phase from FY08-11) except for third
party motor insurance, industry GDPI grew at 15.8% CAGR in FY07-11.
Private insurer market share, in terms of GDPI, reached 37% by FY11
increasing ~400 bps over the previous phase. Improvement in growth
enabled by proactive regulatory steps presented new avenues for growth
Page 11 ICICI Securities Ltd | Retail Equity Research
and eased restrictions on existing product lines. Industry GDPI grew at
18.1% CAGR in FY11-17. Since inception, the private multi-product sector
has grown significantly and currently accounts for ~42% (46.7%
including private standalone health insurers) of GDPI of non-life insurance
industry in FY17. Market share growth was driven by superior customer
service and claims settlement.
Exhibit 18: Market share of private insurer on the rise (GDPI basis)
36.1 36.7 35.6 36.1 37.3 39.3 40.0 40.3 40.0 42.1
58.4 56.9 55.7 54.8 53.9 52.1 51.3 51.7 51.0 46.8
0
20
40
60
80
100
FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17
(%
)
Private Multi-Product Insurers Public Multi-Product Insurers
Private Standalone Health Insurers Specialised Insurers
Source: RHP, ICICIdirect.com Research
Channel mix shift towards direct and broker: Indian non-life insurers
employ a multi-channel approach to market and sell their products,
including individual agents, bank partners, other corporate agents,
brokers, direct sales and online channels.
In FY11-16, the proportion of broker and individual agent has been on the
rise increasing from 17% to 26.1% and 30.2% to 34.9%, respectively.
However, a shift in channel mix has been witnessed from earlier agency
only model towards direct business. This shift can be partially attributed
to incremental crop insurance business (that is clubbed under direct
business) and increased usage of online & mobile platform by retail
customers. Consequently, the share of direct business increased ~6.6%
from 25.1% in FY16 to 31.7% in FY17.
With advantages such as ability to cross-sell products and collect more
detailed customer data while encouraging better renewal rates through
ease of access and not involving any commission payments to
intermediaries, the online channel is increasingly emerging as a key
distribution channel. Products commonly sold through this channel are
motor, travel and health insurance.
Page 12 ICICI Securities Ltd | Retail Equity Research
Exhibit 19: Channel wise GDPI of Indian non-life insurance
17.0 18.522.7 22.9 22.1 26.1 25.8
11.6 7.37.4 7.3 8.3
8.0 6.3
35.2 40.7 33.2 32.0 26.825.1
31.7
30.2 30.532.8 34.0
36.7 34.930.0
0
20
40
60
80
100
FY11 FY12 FY13 FY14 FY15 FY16 FY17
(%
)Brokers Corporate Agents - Banks Corporate Agents - Others Direct Business Individual Agents
Source: RHP, ICICIdirect.com Research
Key strengths and strategies:
Consistent market leadership, demonstrated growth
ICICI Lombard has maintained a leadership position among private sector
non-life insurers in India across motor (own damage and third party
liability), health and personal accident, crop/weather, fire, engineering and
marine insurance, since FY15. This leadership has been reinforced by a
comprehensive and diverse portfolio of insurance products, which have
been continuously evolved to adapt to the needs of customers and
changing industry dynamics.
Exhibit 20: Market share comparison (FY17)
18
12.8
9.89.2
7
8.4
6
4.6 4.43.3
0
4
8
12
16
20
ICICI Lombard Bajaj Allianz HDFC Ergo IFFCO Tokio Tata AIG
(%
)
Market share - private Market share - overall
Source: RHP, ICICIdirect.com Research
GDPI has grown faster than industry at a CAGR of 26.7% from FY15 to
FY17, compared to a CAGR of 22.8% for the Indian non-life insurance
industry. As a result, its market share, by GDPI, increased from 7.9% in
FY15 to 8.4% in FY17.
Page 13 ICICI Securities Ltd | Retail Equity Research
Exhibit 21: Market share of non-life insurer as per GDPI (FY17)
New
India,
15%United India, 12%
National , 11%
Oriental, 9%
ICICI-lombard, 8%Bajaj Allianz, 6%
AIC (crop), 6%
IFFCO-Tokio, 4%
HDFC ERGO, 5%
Tata-AIG, 3%
Reliance General, 3%
Others, 18%
Source: RHP, ICICIdirect.com Research
Diverse product line with multi-channel distribution network
Lombard continued to reinforce its industry leadership by offering
products and solutions that address the untapped and evolving needs of
customers. The company has established itself as a reliable one-stop
insurer for diverse customer requirements. Lombard offers diversified
composition of insurance products with motor, health and personal
accident, crop/weather, fire, marine, and engineering insurance
contributing 42.3%, 18.9%, 20.1%, 6.9%, 3.2% and 2.1%, respectively, of
GDPI in FY17. The company was among the first Indian insurers to offer
parameterised weather-based crop insurance and long-term two-wheeler
motor vehicle insurance policies.
Exhibit 22: Premium channel mix (9MFY17)
30.5 35.9
1832.4 36.7
75
200.05
6.5
0
40
80
120
ICICI
Lombard
Bajaj Allianz HDFC Ergo IFFCO Tokio Tata AIG
(%
)
Brokers Corporate Agents - Bank
Corporate Agents - Others Individual Agents
Direct Business (incl. Others)
Source: RHP, ICICIdirect.com, Research
Exhibit 23: GDPI channel mix (ICICI Lombard)
43.828.5
10.8 17.0
42.7
32.2
9.216.0
43.2
30.5
14.3
12.0
0
20
40
60
80
100
120
140
Direct-Total Broker Corporate
agents-Total
Individual
agents
(%
)
FY15 FY16 FY17
Source: RHP, ICICIdirect.com, Research
It has a strong direct sales channel, which contributed 43.2% of its GDPI
in FY17. Further, it has 48 corporate agents including ICICI Bank, 20383
individual agents and strong digital platform through which it issued 1.6
million policies in FY17.
Strong investment returns on diversified portfolio
The investment management philosophy of the company is to earn
investment returns commensurate with the risks undertaken, following
the principle of capital preservation and a total income approach.
Investments include debt, equities, mutual funds, real estate and other
alternative investments. As of March 31, 2017, 29.7% of total investment
assets, by carrying value, were held in government securities, 41.8% in
corporate bonds, 17.0% in equities and remaining in other investments.
Page 14 ICICI Securities Ltd | Retail Equity Research
Investment assets increased from | 102.00 billion on March 31, 2015 to |
150.79 billion on March 31, 2017, making ICICI Lombard the private-sector
non-life insurer with largest total investment assets in India. Investment
leverage, net of borrowings, has increased from 3.51x in FY015 to 3.92x
in FY17 while net worth increased 28.2% in the same period.
Exhibit 24: Investment return (ICICI Lombard)
10.4 10.3 10.0
18.0
8.8
13.0
0
20
FY15 FY16 FY17
(%
)
Realised return (annualised) Total portfolio return (including unrealised gains)
Source: RHP, ICICIdirect.com Research
ICICI Lombard has achieved an annualised total portfolio return (including
unrealised gains) of 18.0%, 8.8% and 13.0% and an annualised realised
return of 10.4%, 10.3% and 10.0% for FY15, FY16 and FY17, respectively.
Since FY04, the listed equity portfolio has returned an annualised total
return of 30.8%, compared to an annualised return of 17.5% on the
benchmark S&P Nifty index.
Exhibit 25: Solvency ratio (Q3FY17)
210.3
261.2
170.7160
178.6
0
100
200
300
ICICI Lombard Bajaj Allianz HDFC Ergo IFFCO Tokio Tata AIG
(%
)
Source: RHP, ICICIdirect.com, Research
Exhibit 26: Three year average RoE
19.3
24.8
15
21.3
10.8
0
20
40
ICICI
Lombard
Bajaj Allianz HDFC Ergo IFFCO Tokio Tata AIG
(%
)
Source: RHP, ICICIdirect.com, Research
Focus on investments in technology and innovation
ICICI Lombard is one of the insurers at the forefront of leveraging
technology in the Indian non-life insurance industry. Its ability to integrate
multiple distribution partners seamlessly into its systems & processes has
helped increase its efficiency in business. Lombard has directly integrated
point of sale systems of certain bus companies, railways and airlines with
its policy booking and issuance systems to provide low-coverage travel
insurance for customers. For example, it is one of the three non-life
insurance partners of Indian Railway Catering and Tourism Corporation
(IRCTC), covering over 300,000 trips per day as of March 31, 2017.
In FY17, 87.5% of total 17.7 million policies were initiated on the digital
platform, either by its distributors or customers. This has led to an
improvement in its employee productivity, measured in terms of GDPI per
employee, from | 11.4 million in FY15 to | 16.6 million in FY17,
representing a CAGR of 20.7%.
Page 15 ICICI Securities Ltd | Retail Equity Research
Key risks and concerns
Termination of, or any adverse change to relationship with motor vehicle
manufacturers and ICICI Bank
A significant proportion of GDPI is derived from sales to customers of
motor vehicle manufacturers (MVM). Any disruption in relationship with
distributors through whom the company sells policies to customers of
MVMs as a result of termination or otherwise could substantially impact
future growth opportunities. The company also has bank partner
relationship with various banks, including ICICI Bank. ICICI Bank
accounted for 7.2%, 6.5% and 6.0% of GDPI in FY15, FY16 and FY17,
respectively. Currently, ICICI Bank exclusively distributes the company’s
insurance products in India. Thus, any termination of, disruption to, or
any other adverse change in relationship with MVMs and/or banks could
significantly reduce product sales and growth opportunities.
Higher dependence on selected types of insurance
In FY17, motor insurance, crop/weather insurance and health insurance
accounted for 42.3%, 20.1% and 15.5% of GDPI, respectively. Any
constraint in selling these products due to future regulatory changes
restricting or limiting the sale or marketing of these products, changes in
customer preference or any other factor could have a material adverse
effect on the company.
Significant proportion of government business
In FY17, 22.1% of GDPI was derived from central and state government
programmes, in relation to crop/weather, mass health and mass personal
accident insurance. Occurrence of any risk including delay or non-
payment of obligations by the government, changes in government
policies or regulations, investigations by various law enforcement
agencies upon allegations of misconduct or irregularities, etc, could
materially impact business, financial condition, results of operations and
cash flows.
Catastrophic events, including natural disasters, may materially increase
liabilities for claims
Fire, engineering, crop/weather, motor and health insurance businesses
expose the company to risks of liabilities for insurance claim payments
relating to catastrophic events, which are covered by insurance.
Catastrophes can be caused by various natural hazards, including
earthquakes, typhoons, floods, drought, windstorms, hailstorms, severe
weather and forest fires. Catastrophes may also be man-made, such as
terrorist attacks, explosions and industrial or engineering accidents.
Catastrophes could also result in losses in our investment portfolios, due
to, among others, the failure of counterparties to perform their obligations
or significant volatility or disruption in financial markets, and could, in
turn, have a material adverse effect on the company’s business, financial
condition, results of operations and prospects.
Geographical concentration
In FY17, Maharashtra, Madhya Pradesh and the National Capital Territory
of Delhi, together accounted for 47.6% of GDPI. Given geographic
concentration, risk pertaining to any catastrophic event in such locations,
decline in local economic conditions and/or change in local regulations
could have a material adverse effect on the business, financial condition,
results of operations and prospects.
Market risk may impair value of investment portfolio
As of March 31, 2017, 81.8%, 17% of total investment assets, by carrying
value, were invested in fixed income assets and equity markets. Volatility
in prevailing interest rates and equity markets affect investment returns,
Page 16 ICICI Securities Ltd | Retail Equity Research
in turn, could have a material effect on investment income, financial
condition, results of operations and prospects. As the combined ratio is
over 100%, higher reliance upon investment income for profitability could
materially affect overall performance.
Reliant on ‘ICICI Lombard’ brand
Business is, to a large extent, reliant on the strength of the ‘ICICI Lombard’
brand and its reputation, and that of its promoter, ICICI Bank. It is critical
to the business that consumers continue to recognise and trust the ICICI
Lombard brand. Business may be subject to periodic negative publicity,
which could have a material adverse effect on its business, financial
condition, results of operations and prospects.
Page 17 ICICI Securities Ltd | Retail Equity Research
Financial Summary
Exhibit 27: Policyholders Account
(| Crore) FY13 FY14 FY15 FY16 FY17
Premiums earned - Net 4,012.3 4,352.3 4,234.1 4,826.3 6157.78
Income from Investments 57.5 121.7 175.4 270.4 297.0
Other income 14.6 21.5 31.5 48.3 26.9
Interest, Dividend & Rent- Gross 403.0 532.9 603.8 659.2 698.9
Total 4,487.4 5,028.4 5,044.8 5,804.3 7180.49
Claims Incurred (net) 3350.2 3628.9 3445.6 3939.1 4965.6
Commission (net) -183.1 -229.1 -346.3 -328.0 -434.1
Operating expenses related to insurance business 1019.4 1215.8 1387.1 1711.2 1982.0
Premium deficiency -1.7 0.0 0.0 0.0 0.0
Transfer to Shareholders' account 302.7 412.8 558.4 482.0 667.01
Source: RHP, ICICIdirect.com Research
Exhibit 28: Shareholders Account
(| Crore) FY13 FY14 FY15 FY16 FY17
Operating profit/(loss)
(a) Fire Insurance 39.5 62.2 44.8 110.4 99.6
(b) Marine Insurance 0.4 -25.0 -29.4 -28.4 -15.0
(c) Miscellaneous Insurance 262.9 375.7 543.0 400.0 582.4
Income from investments 111.2 136.0 182.0 227.8 314.6
Other income 2.4 7.5 2.1 14.4 2.0
Total revenue 416.2 556.3 742.4 724.2 983.65
Provisions 56.1 12.5 21.7 1.0 5.1
Other expenses 8.8 10.4 15.7 18.4 98.4
Profit before tax 351.4 533.4 705.1 704.8 880.1
Tax -28.7 -18.0 119.3 200.7 258.0
PAT 380.1 551.5 585.8 504.1 622.1
Source: RHP, ICICIdirect.com Research
Exhibit 29: Balance Sheet
(| Crore) FY13 FY14 FY15 FY16 FY17
Sources of Funds
Share capital 437 445 447 448 451
Reserves and Surplus 1422 1969 2460 2808 3274
Share application money-pending allotment 100 0 0 0 1
Net worth 1959 2414 2907 3255 3727
Shareholders funds 12 18 69 61 175
Policyholders funds 58 95 287 249 503
Borrowings 0 0 0 0 485
Total Liabilities 2029 2528 3263 3564 4889
Applications of Funds
Investments - Shareholders 1289 1508 2089 2389 3983
Investments - Policyholders 6511 7782 8111 9174 11096
Loans 0 0 0 0 0
Fixed assets 400 389 390 383 383
Deferred tax asset 38 56 118 144 87
Net current assets -6309 -7207 -7445 -8525 -10660
Debit balance in profit and loss account 100 0 0 0 0
Total 2029 2528 3263 3564 4889
Source: RHP, ICICIdirect.com Research
Page 18 ICICI Securities Ltd | Retail Equity Research
Exhibit 30: Key Ratios
(Year-end March) FY13 FY14 FY15 FY16 FY17
Valuation
No. of Equity Shares (Crore) 43.7 44.5 44.7 44.8 45.1
Diluted EPS (|) 8.6 12.3 13.1 11.3 14.3
BVPS (|) 40.2 54.2 65.1 72.7 82.6
P/E 76.9 53.9 50.7 58.5 46.2
P/B 16.4 12.2 10.2 9.1 8.0
Efficiency Ratios (%)Expense of Management to Net Written
Premium Ratio 30.6 33.6 38.1 37.9 36.7
Net Incurred Claims to Net Earned Premium 83.5 83.4 81.4 81.6 80.6
Combined ratio 103.7 105.3 104.9 107.1 104.1
Operating Profit Ratio 7.5 9.4 13.0 9.5 10.8
Return Ratios and capital (%)
Return on Net worth 19.9 21.7 20.3 15.6 17.2
Solvency Ratio 155 172 195 182 210
Source: RHP, ICICIdirect.com Research
Page 19 ICICI Securities Ltd | Retail Equity Research
RATING RATIONALE
ICICIdirect.com endeavours to provide objective opinions and recommendations. ICICIdirect.com assigns ratings to its
stocks according to their notional target price vs. current market price and then categorises them as Strong Buy, Buy, Hold
and Sell. The performance horizon is two years unless specified and the notional target price is defined as the analysts'
valuation for a stock.
Strong Buy: >15%/20% for large caps/midcaps, respectively, with high conviction;
Buy: >10%/15% for large caps/midcaps, respectively;
Hold: Up to +/-10%;
Sell: -10% or more;
Pankaj Pandey Head – Research [email protected]
ICICIdirect.com Research Desk,
ICICI Securities Limited,
1st Floor, Akruti Trade Centre,
Road No 7, MIDC,
Andheri (East)
Mumbai – 400 093
Page 20 ICICI Securities Ltd | Retail Equity Research
ANALYST CERTIFICATION
We /I, Kajal Gandhi, CA, Vasant Lohiya, CA and Vishal Narnolia, MBA, Research Analysts, authors and the names subscribed to this report, hereby certify that all of the views expressed in this research
report accurately reflect our views about the subject issuer(s) or securities. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s)
or view(s) in this report.
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Limited is a Sebi registered Research Analyst with Sebi Registration Number – INH000000990. ICICI Securities is a wholly-owned subsidiary of ICICI Bank which is India’s largest private sector bank and has
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and other business relationship with a significant percentage of companies covered by our Investment Research Department. ICICI Securities generally prohibits its analysts, persons reporting to analysts
and their relatives from maintaining a financial interest in the securities or derivatives of any companies that the analysts cover.
The information and opinions in this report have been prepared by ICICI Securities and are subject to change without any notice. The report and information contained herein is strictly confidential and
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preceding twelve months.
Compensation of our Research Analysts is not based on any specific merchant banking, investment banking or brokerage service transactions.
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Since associates of ICICI Securities are engaged in various financial service businesses, they might have financial interests or beneficial ownership in various companies including the subject
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ICICI Securities Limited has been appointed as one of the Global Coordinators and Book Running Lead Managers to the initial public offer of ICICI Lombard General Insurance Company Limited. This mailer
is prepared on the basis of publicly available information.