The main difference between life and general insurance businesses is that while the latter is a cost to safeguard assets, the former is a product of financial discipline and savings. Therefore, general insurance companies largely draw strength from their investment pool, whereas financials of life insurance business depend more on premiums garnered. Therefore, financials of a life insurer reflects its business and operating strengths, which may not be the case with the general insurance business and explains why analysts find more comfort in the former.
But it may not be fair to hold this against general insurers just because they draw their profits from investments. Investment float provides general insurers the comfort to meet any unforeseen claims (mostly caused due to natural calamities) without having to bear higher losses. It also determines their ability to grow their assets in a sustainable way. ICICI Lombard operated at 4 times investment leverage in FY19 and is superior to the competition in India.
General insurance is also a more predictable business as its growth can be gauged from key economic indicators, such as overall economic growth rate. Life insurance draws strength from stock market sentiments and the savings landscape.
But, putting aside these differences and gauging I-Pru Life
and ICICI Lombard on their individual merits, both are strong franchisees and make for compelling investment cases. While I-Pru Life
has refreshed its business plan, which may place it on a stronger growth mode, ICICI Lombard will be among the largest beneficiary of regulatory changes particularly for third-party (TP) motor insurance.
Decoding the strengths
Stock market vagaries in the last 18 months compelled I-Pru Life to reinvent its business model last year. While ULIP or unit-linked insurance policies which now account for 70 per cent (down from 80 per cent a year ago) of annual premium equivalent (APE) will remain its core strength, given its leadership and reach in the product, the insurer decided to tweak its offerings a bit. The renewed focus has been on improving the share of protection business, which almost doubled in a year to 15 per cent of APE in the June quarter. The company introducing small-ticket ULIPs has helped arrest the fall in APE growth. Analysts at JP Morgan forecast a further recovery in the next three quarters of FY20 too. “We expect margins to continue to improve from here and catch up to peers driven by an improvement in product mix (increase in protection sales) and agency channel-led productivity gains,” they note.
ICICI Lombard, which gets 45 per cent of its business from motor insurance, including third-party motor insurance, will continue to gain from higher premiums due to regulatory changes. Analysts at Edelweiss Research believe that it has the potential to grow at 20 per cent each year for the next 20 years while maintaining a return on equity ratio of 20 per cent.
In short, growth is clearly in the offing for I-Pru Life and ICICI Lombard. But will that be adequate to plug the gap in investor interest enjoyed by the two stocks, is something only time will tell.