ICICI Lombard IPO: A safe growth option

Nearly a year after listing its life insurance business, ICICI Bank will list its general insurance arm, ICICI Lombard General Insurance, the largest non-life private sector player based on gross direct premium income (GDPI). 

The initial public offering (IPO) has many advantages for investors. The most eye-catching one being the first-mover advantage among private players. The under-penetrated nature of general insurance in India and the diversified product offering, along with market leadership among private players across categories, supports the investment rationale in it. 

However,  at Rs 651-661, the IPO is at a significant premium to the price at which ICICI Bank’s joint venture partner, Fairfax, sold a 12.18 per cent stake in May. The deal had valued the insurer at Rs 20,300 crore, while the IPO pegs it at around Rs 30,000 crore. Nevertheless, given the growth potential and the company’s positioning in the business, the long-term investor could consider the offer.

Operations

Promoted by ICICI Bank and backed by Canadian private equity player Fairfax Financial Holdings, ICICI Lombard was the first private non-life insurer to commence operations, in 2000-01. Being the first mover, it has been able to successfully diversify its product offering to encompass segments such as motor, health, crop/weather, fire, personal accident, marine, engineering and liability insurance through multiple distribution channels. Currently, motor, health, fire and crop insurance account for 86 per cent of the GDPI.

The distribution network is also significantly diversified, with direct business and brokers accounting for 43 per cent and 32 per cent of the GDPI, respectively. ICICI Lombard is also the market leader in all categories among private players. However, it is important to take note of the recent rise in crop/weather insurance products from four per cent of total GDPI in 2014-15 to 21.8 per cent on June 30. This business is dependant on auctions by the government. Hence, expect the health and motor insurance products — 55 per cent of total GDPI— to remain the key focus.

Financials

Over the past five years, policyholders’ funds increased from Rs 58 crore in 2012-13 to Rs 503 crore in 2016-17, and policyholders’ investments from Rs 6,511 crore to Rs 11,096 crore. Net premium collected at Rs 6,158 crore in 2016-17 has grow at a nine compounded annual rate (CAGR) since 2012-13, while operating profits have clocked 17.2 per cent CAGR since 2012-13 to Rs 667 crore in 2016-17. Net profit, too, has risen from Rs 380 crore in 2012-13 to Rs 622 crore in 2016-17, a CAGR of 10.4 per cent. Analysts say this is impressive, given that ICICI Lombard is in the growth phase. Analysts at Macquarie Capital point out that the combined operating ratio at 104 per cent is ahead of its public sector peers,’ operating at over 120 per cent. Lower the ratio, the better.

Valuations

The IPO is expected to fetch Rs 5,600-5,700 crore. Being an offer for sale, ICICI Bank and Fairfax will offload seven per cent and 12 per cent of their stake in the insurer. Globally, the general insurance business is valued on the price to book for mature businesses and price to equity (PE) for growth businesses. The latter would be a better metric for ICICI Lombard, as it in growth mode. Valuations work out to 45 times the 2016-17 PE on a pre-issue basis. Extrapolating the June results, it stands at 35 times the  2017-18 PE on a post-issue basis. 

While there are no direct comparables in the Indian listed space, non-banking finance companies (NBFCs) seem the closest comparison. NBFC stocks trade at 35-45 times PE based on 2016-17 and at 30-35 times in 2017-18. Hence, the IPO seems to factor in near-term prospects. Thus, the offer might be more suitable for long-term investors wanting to mop up a unique business with good growth potential.  

Risks

The general insurance business in India is characterised by lack of pricing discipline, mainly due to customer behaviour. “There is not much customer loyalty in the business and distribution is highly fragmented. Such a structure is bound to have poor pricing discipline,” say analysts at Macquarie. While ICICI Lombard has maintained its top spot over the years, the systemic risk should be kept in mind.


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