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ICICI Lombard General Insurance IPO: A long term investment opportunity

India Notes 2017-09-13 00:00:00

ICICI Lombard General Insurance Company Ltd. (ILGIC) was founded as a joint venture between ICICI Bank Ltd., India’s largest private sector bank (in terms of consolidated total assets) and Fairfax Financial Holdings Ltd., a Canadian based holding company engaged in property and casualty insurance and re-insurance and casualty management. ILGIC is the largest private sector non-life insurer in India based on gross direct premium income since FY04 after commencing operations in FY02. ILGIC offers its customers a wide range of products including motor, health, crop/weather, fire, personal accident, marine, engineering and liability insurance.

Objects Of The Issue

Entire issue is offer for sale from existing investors.

Investment Rationale

- Consistent market leadership – ILGIC is the largest private sector non-life insurer in India, a position it has maintained since FY04.ILGIC continues to grow faster than the industry, with Gross Direct Premium Income (GDPI) growing at 26.7% from FY15 to FY17 while the non-life insurance industry grew at 22.8% during the same period. As a result, ILGIC’s market share (on GDPI basis) improved from 7.9% in FY15 to 8.4% in FY17 which further improved to 10% in the three months ended June 30, 2017. Among private sector non-life insurers, ILGIC’s market share was 20.2% as on June 30, 2017.

- Diverse product line with multi-channel distribution network – ILGIC offers a diversified composition of insurance products including motor, health and personal accident, crop/weather, fire, marine and engineering insurance which contributed 42.3%, 18.9%, 20.1%, 6.9%, 3.2% and 2.1% respectively to its revenues as of FY17. ILGIC also offers customised products suited to the requirement of its customers, e.g. it was among the first Indian insurers to offer weather-based crop insurance and long term two-wheeler motor vehicle insurance policies. Through a multi-channel distribution network, ILGIC offers its products to a diverse set of customers, including large and mid-sized corporates, small and medium sized enterprises, Central and State Governments and individuals. In FY17, retail (including SME), corporate and Government business groups contributed 60.4%, 17.5% and 22.1% of its GDPI respectively.

- Delivering excellence in customer value – ILGIC’s customer-centric approach to delivering value focuses on providing convenience and superior claims settlement. This is reflected in the fact that ILGIC paid 92.2% of motor damage insurance claim within 30 days, as compared to Indian non-life private sector average of 81.9% and 99.3% of health and personal accident insurance claims within 30 days in FY17 as compared to an Indian non-life private sector average of 85.2%. The number of grievances also reduced from 5,704 in FY15 to 3,515 in FY17 despite the increase in number of policies written during the same period.

- Focus on investments in technology and innovation – ILGIC’s varied and diversified products and services is backed by a robust technology infrastructure, and user-friendly web and mobile applications for customers, employees and distributors from sales to claims settlement. In FY17, 87.5% of the total approximately 17.7mn policies were initiated electronically, either by distributors or customers. This has helped improve employee productivity, measured in terms of GDPI per employee, from Rs11.4mn in FY15 to Rs16.6mn in FY17, representing a CAGR of 20.7%.

- Strong investment returns on a diversified portfolio – ILGIC’s asset allocation strategy ensures liquidity, security and diversification. It is determined by two important factors: achieving superior total returns and liquidity management for claim obligations. ILGIC’s investments include debt, equities, mutual funds, real estate and other alternative investments with 30.6% of the total investment assets being held in Government securities, 43.5% in corporate bonds, 15.7% in equities and the remaining in other investments. ILGIC has achieved a total portfolio return (including unrealised gains) of 18.0%, 8.8% and 13.0% in FY15, 16 and 17 respectively. Since FY04, listed equity portfolio of ILGIC has returned an annualized portfolio return of 30.8% as compared to an annualized return of 17.5% on the S&P Nifty Index.

Valuation And Investment Argument

ICICI Lombard is the largest private-sector non-life insurer in India, a position the company has maintained since FY04 after being one of the first few private-sector companies to commence operations in the sector in FY02. The company has a market share of 18% in the private sector and an overall industry market share of 8.4% in FY17. ICICI Lombard has set a new standard by servicing 17.7 million policies in FY17, an increase of 12% and in terms of claim settlement response time, the company anchored set standards, settling 99.4% health claims and 92.2% motor claims (own damage) within 30 days.

At the price band of Rs651-661 the asking valuations for the issue are ~46-47x its FY17 EPS of Rs14.1/- & ~8x P/BV for FY17. As a macro space we believe insurance sector can witness high growth as awareness of risk cover as well as shift of savings to financial assets accelerates over the next decade. Being a leader in the space & having superior operating metrics we believe the company is well poised to take up the opportunity of increase in penetration over the next few years. We advice investors with a long-term investment horizon to SUBSCRIBE to the issue.

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