ICICI Lombard General Insurance Co Ltd
Insurance - General
ICICI Lombard General Insurance Co Ltd
Insurance - General
Stock Info
Shareholding Pattern
Price performance
Indexed Stock Performance
A structural growth story of the largest non-life private insurer in the country
Profile
ICICI Lombard General Insurance (ILGI) is the 5th largest player in the general
insurance sector in India as on March 31, 2020 (Source: GI Council Report) and a
leader among private general insurers. Promoted by ICICI Bank, one of India’s
largest private sector banks, ILGI commenced operations in 2002. It offers a range
of products across non-life/general categories, including motor, health, crop/weather,
fire, personal accident, marine, engineering and liability insurance, through multiple
distribution channels.
Investment Rationale
Low Insurance Penetration in India
India’s non-life insurance coverage is significantly lower at 0.97% (premium
as % of GDP) as compared to its peers like Thailand at 1.7%, Singapore at 1.67%
and Malaysia at 1.62%. The reasons for low penetration are low awareness and low
propensity to spend on insurance, which does not deliver immediate benefit. However,
due to aggressive campaigning by insurance companies and online aggregators, government’s
focus on different insurance schemes, deregulation of the sector, easy payment options
and higher incomes have led to increased adoption of non-life insurance.
Industry Tailwind
As India continues to grow, the need for non-life insurance will continue to grow
at a robust pace led by rising penetration and growing awareness. The accessibility
to insurance has increased significantly in the recent past led by aggressive penetration
by private insurers, web-based aggregators and government’s efforts to ensure
insurance cover to those who cannot afford it.
Acquisition of Bharti AXA General Insurance
The Insurance Regulatory and Development Authority of India (IRDAI) on November
27 gave an in-principle approval to the acquisition of General Insurance business
of Bharti AXA General Insurance Company Limited by ICICI Lombard General Insurance
Company Limited. The stock exchanges and the Competition Commission of India (CCI)
had already approved the proposed acquisition by ILGI. The consolidated entity will
have a market share of 8.7% in the non-life business.
Market Leader with a Strong Brand
ILGI’s market share stood at 12% among private players and overall industry
share stood at 7% in FY20. The leadership position has been strengthened by its
strong brand and partnerships, robust and diversified product profile, strong promoter
pedigree and decent underwriting track record.
Diverse Product Portfolio with robust Distribution Network
Strong distribution across India has helped the company reach a diverse set of customers,
including large and mid-sized corporates, SMEs, central and state governments, and
individuals.
Technological Edge
During FY2020, around 96.5% of the policies were processed electronically. It uses
technology extensively from providing quotes for policies to settling claims. It
also uses various mobile applications, chatbots, and telematics interfaces to help
customers and channel partners.
Outlook & Valuation
We believe the sector will continue to witness high growth going forward led by
a number of factors such as huge under penetration, high economic growth, higher
disposable incomes, increased awareness, digital penetration and favourable regulations.
We believe the current pandemic will lead to increased penetration of health insurance
segment. At the current market price of Rs. 1470, the stock trades at 35x/30x
FY22/23 E EPS.
Consolidated Financial Statements
| Rs. in cr. | NPE | Total Revenue | Operating Profit | PAT | EPS | Expense Ratio | ROE |
|---|---|---|---|---|---|---|---|
| FY18 | 6912.00 | 8481.00 | 1338.00 | 862.00 | 18.98 | 103.30% | 20.80% |
| FY19 | 8375.35 | 10226.54 | 1705.73 | 1049.27 | 23.11 | 101.70% | 21.30% |
| FY20 | 9404.00 | 11533.24 | 2024.24 | 1194.24 | 26.30 | 101.10% | 20.80% |
| FY21E | 9534.56 | 11805.30 | 2175.39 | 1417.39 | 31.22 | 101.00% | 21.30% |
| FY22E | 10411.82 | 13121.87 | 2710.05 | 1869.14 | 41.17 | 100.00% | 23.70% |
| FY23E | 11973.59 | 15114.86 | 3141.27 | 2175.89 | 47.93 | 100.00% | 23.10% |
Investment Rationale
Low Insurance Penetration in India
India’s non-life insurance coverage is significantly lower at 0.97% (premium
as % of GDP) as compared to its peers like Thailand at 1.7%, Singapore at 1.67%
and Malaysia at 1.62%. The reasons for low penetration are low awareness and low
propensity to spend on insurance, which does not deliver immediate benefit. However,
due to aggressive campaigning by insurance companies and online aggregators, government’s
focus on different insurance schemes, deregulation of the sector, easy payment options
and higher incomes have led to increased adoption of non-life insurance. With only
10% of the economic losses being insured in India, we believe that the sector will
continue to grow at double digit growth rates going forward led by the structural
changes like rapid urbanization, high GDP growth, favourable dynamics, rising incomes
and higher loss aversion. Private insurers are expected to grow at a faster rate
than public insurance, and thereby gain market share.
Non-life Insurance Penetration across the Globe
Motor Insurance:
Despite being more advanced than other forms of non-life insurance in India, motor
insurance remains underpenetrated relative to global levels. According to CRISIL
Research, only 60% of cars older than three years are insured in India as against
the global benchmark of 90%, and only around 25% of two wheelers are insured as
against a global benchmark of over 90%. This leaves enough headroom for growth in
the Motor Insurance category. The growth will be led by renewal premiums of old
vehicles due to awareness of regulatory requirements and increase in sales of new
vehicles. The segment will also get a boost from the government as the cumbersome
third-party motor insurance rules are simplified.
Health Insurance:
Health insurance in India is also expected to pick up pace going forward driven
by growing proportion of ageing population, rise in incidence of lifestyle related
diseases/critical illness/pandemic, higher income levels and higher awareness. Currently
health insurance is at an inflection point, as covid-19 pandemic has accelerated
the need for health insurance. Till FY18, only 35% of the Indian population had
some or the other form of health insurance as against 90% in some of the advanced
economies.
Industry Tailwind
As India continues to grow, the need for non-life insurance will continue to grow
at a robust pace led by rising penetration and growing awareness. The accessibility
to insurance has increased significantly in the recent past led by aggressive penetration
by private insurers, web-based aggregators and government’s efforts to ensure
insurance cover to those who cannot afford it.
The insurance industry is going through structural changes which will continue for the longterm. The industry will gain from both new policies and renewals. While the industry will grow at an accelerating pace, insurers which have an established brand and right underwriting skills like ILGI will benefit and grow faster than the industry.
Acquisition of Bharti AXA General Insurance
The Insurance Regulatory and Development Authority of India (IRDAI) on November
27 gave an in-principle approval to the acquisition of General Insurance business
of Bharti AXA General Insurance Company Limited by ICICI Lombard General Insurance
Company Limited. The stock exchanges and the Competition Commission of India (CCI)
had already approved the proposed acquisition by ILGI. The consolidated entity will
have a market share of 8.7% in the non-life business.
We believe a lot of synergistic benefits will be visible over 1-2 year period as Bharti AXA is a strong franchise and the merger will benefit the policyholders through deeper customer connect touch points and an enhanced product suite.
Market Leader with a Strong Brand
ILGI’s market share stood at 12% among private players and overall industry
share stood at 7% in FY20. The leadership position has been strengthened by its
strong brand and partnerships, robust and diversified product profile, strong promoter
pedigree and decent underwriting track record.
Diverse Product Portfolio with robust Distribution Network
Strong distribution across India has helped the company reach a diverse set of customers,
including large and mid-sized corporates, SMEs, central and state governments, and
individuals. With its distribution strength, the company can reach out to a diverse
mix of prospective customers in urban as well as rural India. Key distribution channels
are direct sales, individual agents, corporate agents - banks, other corporate agents,
Motor Insurance service providers (MISPs), brokers and digital.
Strong risk management framework
The insurer, helped by its huge data, has managed its risk in an efficient manner
over the past decade and a half. This data has helped the company get into profitable
segments and close down or avoid loss-making segments. It also has a high-quality
panel of reinsurers including GIC Re, Scor Re, Munich Re, Hannover Re, Swiss Re,
Lloyds, Fm Global, and XLCatlin, which it uses to comply with the reinsurance requirements
and also transfer risk to maintain product-wise retention limits on a per-risk and
per-event basis.
Technological Edge
During FY2020, around 96.5% of the policies were processed electronically. It uses
technology extensively from providing quotes for policies to settling claims. It
also uses various mobile applications, chatbots, and telematics interfaces to help
customers and channel partners. The company engages millennial customers through
its digital platforms and third-party platforms and helps them speed up the process
of price discovery, issue of policy, support and claims settlement.
Business Model
Understanding the Insurance Business
The insurance business is primarily a risk transfer business, which involves pooling
risk from individuals (the insured) and redistributing it across a larger portfolio.
Insurance companies generate revenue in two ways: 1) Charging premiums in exchange
of insurance coverage and 2) reinvesting those premiums into other interest/income
generating assets. These companies then manage their administrative costs to be
profitable.
The most important part of the insurance business is good underwriting. The insurer needs to price the risk and charge a premium for assuming the risk. An insurer that is consistently paying out higher amount in claims and expenses as compared to its earnings in premiums will continually dip into its investment assets to sustain business. This will reduce its solvency position and increase the risk to its capital. Good underwriting ensures that the company, most times, pays lower in claims and expenses than it earns in premium.
Product Offerings
Motor Insurance: Motor insurance is the biggest product category for ILGI
constituting 51% of Gross Direct Premium Income (GDPI) in FY20. Under motor insurance,
the company insures third party liabilities (i.e. injury or loss of life of a third
party in the event of an accident) and own damages for private cars, 2-wheelers
and commercial vehicles (CVs). Private cars and 2-wheelers formed 56.7% and 28.5%
respectively of the total motor insurance premiums in FY20, while CVs formed 14.8%.
Health and Personal Accident (PA): ILGI is one of the country’s leading health insurers providing a range of benefit-based and indemnity-based policies. Under benefit-based policies, the insurer pays a fixed amount (irrespective of the actual amount of losses/expesnes) when the event occurs. Under indemnity-based policies, the insurer pays the actual expenses incurred (limited to sum assured) by the insured. Most of the health policies fall under the indemnity category. Health, Travel and PA formed 25% of the company’s GDPI in FY20.
Corporate health: This segment consists of policies purchased by corporations to cover the medical health of their employees. These policies are further categorized based on the size of the corporate. Premiums are charged differently to small, mid and large sized corporates.
Mass Health: Under this segment, the company participates in government health programmes. These plans are not very remunerative and hence, are not the focus area of the company.
Corporate Insurance: Corporate insurance includes fire, marine, engineering, group health and liability insurance. IGLI derived 22% of its GDPI from corporate insurance in FY20.
Government Business Group: The company serves rural India under this category and includes various government programmes such as Rashtriya Swasthya Bima Yojana (health insurance).
Revenue Break-up
Industry
India is the 11th largest non-life insurance market in the world and 4thlargest market in Asia in terms of gross premiums. Non-life insurers include general insurers, standalone health insurers and specialized insurers. The industry received gross direct premiums (GDP) of Rs. 1.8 lakh crores, of which 38% and 26% came from Motor and Health, respectively. Private players accounted for more than 50% of GDPs generated in the non-life insurance sector in FY20. Major private players in the industry are ICICI Lombard, Bajaj Allianz, IFFCO Tokio, HDFC Ergo, Tata-AIG, Reliance, Cholamandalam, Royal Sundaram and other regional insurers. There are also specialized insurers like AIC, STAR Health, Apollo Munich, with single line of focus such as agriculture and health.
The industry has grown at a CAGR of 17% in the past 17 years due to higher penetration and increased awareness. The growth was also because of the proliferation of private players in the space after deregulation of the sector. The number of companies in the sector increased from 15 in 2004 to 33 in 2020.
Risks & Concerns
Market Risks: As ILGI derives almost all its profits from investment income, factors that affect the financial markets may impact the company’s profitability.
Regulatory Risks: Any adverse change in regulations affecting the industry as a whole or the company in particular, may impact the company’s performance.
Catastrophic Events: including natural disasters increase ILGI’s liabilities for claims and could have a significant adverse effect on its business and financial condition.
Increase in claims: A second wave of Covid-19 may result in significant increase in claims.
Outlook & valuation
We believe the sector will continue to witness high growth going forward led by a number of factors such as huge under penetration, high economic growth, higher disposable incomes, increased awareness, digital penetration and favourable regulations. We believe the current pandemic will lead to increased penetration of health insurance segment. We expect improvement in ILGI’s combined ratio over the years driven by business efficiencies and better underwriting. We expect the profit before tax (PBT) to be solely driven by investment returns in the coming 1-2 years before the combined ratio improves consistently below 100%. At the current market price of Rs. 1470, the stock trades at 35x/30x FY22/23 E EPS.
Financial Statement
Profit & Loss statement
| Income statement (Rs. Crore) | FY17 | FY18 | FY19 | FY20 | FY21E | FY22E | FY23E |
|---|---|---|---|---|---|---|---|
| Gross Premium Written (GPW) | 10961.00 | 12600.00 | 14789.00 | 13592.00 | 14136.00 | 16256.00 | 18695.00 |
| YoY Growth (%) | 32.10% | 15.00% | 17.40% | -8.10% | 4.00% | 15.00% | 15.00% |
| Reinsurance Ceded | 4366.00 | 4755.00 | 5251.00 | 3942.00 | 4099.00 | 5121.00 | 5889.00 |
| Net premium written (NPW) | 6595.00 | 7845.00 | 9539.00 | 9641.00 | 10037.00 | 11136.00 | 12806.00 |
| % of GPW | 60.20% | 62.30% | 64.50% | 70.90% | 71.00% | 68.50% | 68.50% |
| Change in Provisions | (431) | (933) | (1,163) | (237) | (502.00) | (724) | (832) |
| % of NPW | 6.50% | 11.90% | 12.20% | 7.50% | 6.50% | 6.50% | 6.50% |
| Premium Earned (NPE) | 6164.00 | 6912.00 | 8375.00 | 9404.00 | 9535.00 | 10412.00 | 11974.00 |
| Income from Investments (net) | 1001.00 | 1127.00 | 1336.00 | 1542.50 | 1666.00 | 1923.00 | 2237.00 |
| % of Policyholder's Account Investments | 9.90% | 9.20% | 9.30% | 8.60% | 7.80% | 8.00% | 8.00% |
| Other Income | 46.00 | 36.00 | 41.00 | 107.00 | 107.00 | 112.00 | 118.00 |
| Core Business revenue | 7211.00 | 8075.00 | 9752.00 | 11053.00 | 11307.00 | 12446.00 | 14329.00 |
| Income from Investments (net) | 309.00 | 406.00 | 474.00 | 480.00 | 498.00 | 675.00 | 786.00 |
| % of Shareholder's Account Investments | 9.70% | 9.30% | 9.40% | 8.60% | 7.30% | 8.00% | 8.00% |
| Total Revenue | 7520.00 | 8481.00 | 10227.00 | 11533.00 | 11805.00 | 13122.00 | 15115.00 |
| Total Expenses (Including Claims) | 6502.00 | 7143.00 | 8521.00 | 9509.00 | 9630.00 | 10412.00 | 11974.00 |
| Expense Ratio (%) | 105.50% | 103.30% | 101.70% | 101.10% | 101.00% | 100.00% | 100.00% |
| Operating Profit | 1018.00 | 1338.00 | 1706.00 | 2024.00 | 2175.00 | 2710.00 | 3141.00 |
| Provision and other expenses | (108) | (142) | (107) | (327) | (192) | (211) | (232) |
| Profit before tax | 910.00 | 1196.00 | 1598.00 | 1697.00 | 1983.00 | 2499.00 | 2909.00 |
| Tax | 208.00 | 334.00 | 549.00 | 503.00 | 566.00 | 630.00 | 733.00 |
| Tax Rate (%) | 22.90% | 27.90% | 34.40% | 29.60% | 28.50% | 25.20% | 25.20% |
| Profit after tax | 702.00 | 862.00 | 1049.00 | 1194.00 | 1417.00 | 1869.00 | 2176.00 |
| Growth (%) | 39.30% | 22.80% | 21.70% | 13.80% | 18.70% | 31.90% | 16.40% |
| EPS | 15.60 | 19.00 | 23.10 | 26.30 | 31.20 | 41.20 | 47.90 |
Balance Sheet
| Balance Sheet | FY16 | FY17 | FY18 | FY19 | FY20 | FY21E | FY22E | FY23E |
|---|---|---|---|---|---|---|---|---|
| Cash and bank balances | 195.00 | 194.00 | 592.00 | 592.00 | 33.00 | 33.00 | 33.00 | 33.00 |
| Other assets | 4850.00 | 7608.00 | 10348.00 | 10348.00 | 9700.00 | 10185.00 | 10694.00 | 11229.00 |
| DTA | 144.00 | 87.00 | 211.00 | 211.00 | 306.00 | 306.00 | 306.00 | 306.00 |
| Investments | 11563.00 | 15079.00 | 18193.00 | 20614.00 | 26327.00 | 30110.00 | 34839.00 | 40750.00 |
| Policy holder's account | 9174.00 | 11096.00 | 13465.00 | 15255.00 | 20467.00 | 22282.00 | 25781.00 | 30155.00 |
| % of Total Investments | 79.30% | 73.60% | 74.00% | 74.00% | 77.70% | 74.00% | 74.00% | 74.00% |
| Shareholder's account | 2389.00 | 3983.00 | 4728.00 | 5360.00 | 5860.00 | 7829.00 | 9058.00 | 10595.00 |
| Fixed assets | 383.00 | 383.00 | 406.00 | 418.00 | 677.00 | 697.00 | 718.00 | 740.00 |
| Total assets | 17134.00 | 23351.00 | 29750.00 | 32183.00 | 37043.00 | 41331.00 | 46590.00 | 53058.00 |
| Share capital | 448.00 | 451.00 | 454.00 | 454.00 | 454.00 | 454.00 | 454.00 | 454.00 |
| Reserves and surplus | 2808.00 | 3274.00 | 4088.00 | 4875.00 | 5680.00 | 6743.00 | 8145.00 | 9777.00 |
| Share application money-pending allotment | - | 1.00 | - | - | - | - | - | - |
| Shareholders' equity | 3255.00 | 3727.00 | 4542.00 | 5329.00 | 6134.00 | 7197.00 | 8599.00 | 10231.00 |
| Loss and LAE Reserves | 3110.00 | 3549.00 | 4478.00 | 4926.00 | 5872.00 | 6459.00 | 7105.00 | 7816.00 |
| Fair value change account | 309.00 | 677.00 | 734.00 | 734.00 | (429) | 734.00 | 734.00 | 734.00 |
| Borrowings | - | 485.00 | 485.00 | 485.00 | 485.00 | 485.00 | 485.00 | 485.00 |
| Current liabilities | 10460.00 | 14914.00 | 19511.00 | 20710.00 | 24980.00 | 26456.00 | 29667.00 | 33793.00 |
| Total liabilities | 17134.00 | 23351.00 | 29750.00 | 32183.00 | 37042.00 | 41331.00 | 46590.00 | 53058.00 |