This Largest Private Sector Non-Life Insurer in India offers Investor’s; Strong Growth Potential & Consistent Return on Equity

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ICICI Lombard General Insurance, India’s Largest Private Sector General Insurer, in the last quarter disclosed an 11 % jump in its net profit year-on-year (YoY) basis to Rs 912 crore in the first nine months of Financial Year 2020. Net earnings were majorly impacted by higher commission costs and lower investment yields which were 50 percent compensated by a lower tax rate.


ICICI Lombard’ muted reported earnings in 9M FY20 isn’t a matter of concern as accounting profits are usually not the barometer to examine insurance companies. As per accounting calculation funda, upfront expensing of acquisition cost (commission paid to agents) incurred to achieve higher business growth often brings down an insurer’s margin of profit.

However, the best way to study is evaluating by a 360 Degree view right from operating performance, market leadership, premium growth, and Insurance Leveraging. And as found all the parameters are strong and healthy in the case of ICICI Lombard.

Impressive Premium Growth

ICICI Lombard announced Gross Direct Premium Income (GDPI) of Rs 10,132 crore in 9M FY19, a negative growth of 8 percent Yearly basis. Be that as it may, in the event that we avoid the harvest section which isn’t a center development zone for the insurer, GDPI developed by solid 13.2 percent on annual basis, in accordance with the business development (barring crop segment) of 13.2 percent.

The insurer’s market share overall GDPI has plunged to 7.13 percent as at end of December 2019 from 8.94 percent a year back. This is on the grounds that it didn’t make sure about any yield protection tender in 9M FY20.

Regardless of in general misfortune in a piece of the pie, we are enthused by the company’s methodology of seeking after product development. It has intentionally pulled once more from portions like harvest protection where profitability was feeling the squeeze. This is reflected in the portion of yield protection in the product mix diminishing from 19 percent in 9M FY19 to 1 percent in 9M FY20.

Premium Growth Development Led by Motor & Fire Insurance

ICICI Lombard keeps up an expanded portfolio. The decrease in crop business was incompletely balanced by forceful development of GDPI in Fire and Motor Domains.

GDPI in the fire domain expanded by 39.1 percent in 9M FY20, supporting the development of property and loss fragment. The development in fire fragment was ensuing to GIC Re reexamining the endorsed least rates for eight divisions/inhabitances enduring the Fire Domain in March a year ago.

ICICI Lombard profited lopsidedly from the ordered longer residency approach in outsider (TP) engine protection by the Supreme Court, as its quality in the section is well over the business normal. Accordingly, a portion of TP engine protection in product mix expanded to 23 percent as at the end of December when contrasted with 19 percent the year prior.

Weaker Leveraging Inappropriate Underwriting Makes Dent on Profit Margins

ICICI Lombard’s consolidated proportion, a proportion of an insurance firm’s profitability expanded to 100.5 percent in 9M FY20 contrasted with 98.7 percent a year ago, prompting Weaker Leveraging and Underwriting Loss. The consolidated proportion of over 100 percent shows that the backup plan is paying out more cash in claims and working costs than in its receipts from premiums.

Consolidated proportion is the entirety of misfortune/claims proportion and cost proportion. While claims proportion declined by 280 bps YoY to 73.8 percent with progress across most fragments barring Motor business, Expense ratio (counting commissions) expanded 460 bps YoY to 26.7 percent prompting ascend in joined proportion. The expense ratio jumped because of the expensive sourcing cost of retail business.

Investment Income development was curbed at 7 percent YoY as acknowledged return declined in 9M FY20. In any case, increment in leverage to 4.16 times as at the end December contrasted with 3.92 times each year back invalidated the effect of falling rates investment book of Rs 24,845 crore as at the end of December.

Regardless of the control, speculation pays more than made up for guaranteeing misfortune prompting 5.8 percent development in pre-charge benefits in 9M FY20.

Industry tailwinds and Reforms in Regulations to boost Development

The general insurance sector is probably going to develop in the mid-teenagers in the coming next five years. This is because, regardless of high development lately, India keeps on being an underpenetrated market with non-life insurance or general insurance penetration of around 33% of the worldwide average in 2017. The density of insurance protection(non-life insurance premium per capita) additionally remains fundamentally lower than other created and developing business sector economies which present a humongous development opportunity.

The numerous sub-portions offer sufficient chances. For example, the significant expense of human services and rising rates of basic sicknesses will build medical coverage infiltration. Government activities like the Pradhan Mantri Fasal Bima Yojana have driven development in crop protection. Besides, guidelines keep on being dynamic and strong development in the part.

From Jan 2020, rates for most inhabitances/areas under the fire fragment have been expanded by GIC Re. The move expects to address the awkwardness between the premiums charged and guarantees history over various years. It will help the development of fire protection and improve gainfulness in the portion.

Motor insurance Domain is the biggest product segment for ICICI Lombard contributing 50 percent of GDPI as at the end of December and has been a major driver of development in 9M FY20.

Among the few measures, compulsory long tenure third party (TP) Motor protection was a key administrative advancement that prompted the high development in a year ago. It diminished the danger of non-reestablishment on vehicles.

The new Motor Vehicle Act, 2019 (which expanded traffic punishments on uninsured vehicles) is driving infiltration in Motor TP too. The Act expanded punishments for driving uninsured vehicles by 2-4 times. Following this, Google Trends demonstrated sharp ascent looking for the term ‘Motor Insurance’ proposing potential uptick in the market.

The ongoing droop in car deals can influence future development in Motor Insurance. In any case, given that ICICI Lombard appreciates a differentiated product portfolio alongside a profound appropriation come to, the massive auto sector slowdown can be repaid by development in different business lines, for example, fire and Health Protection domain.

Market Leadership and Sustainable Business Model helps achieve Premium Valuations

ICICI Lombard is well placed and managed for stable income development with an expansion in protection penetration, main targets on profitable domains and improvement in operating effectiveness and efficiency. Investors, nonetheless, need to realize that the hazard guaranteeing business is exceptionally unpredictable and can be unfavorably affected by disastrous occasions. Likewise, its gainfulness is exceptionally dependent upon investment execution. Outer elements like changes in financing costs or unfavorable developments in the equity or capital markets in India could influence the estimation of its venture portfolio.

The stock is up 57 percent in the previous year and has altogether beaten the Nifty. At the present it is trading at a market price of Rs 1,100, it is exchanging at a superior valuation of 6 to 7 times its trailing book of accounts. Due to ongoing market hammering in the last few weeks, the present valuation had become significantly reasonable after considering the high RoE at around 30 percent.

All things considered, driving organizations in areas with maintainable development potential will is usually traded in higher multiples for a moderately long period. However, investors who are seeking a long-term time view and looking to take entry in the non-life insurance sector’s growth story can think of buying the stock on dips in the range of Rs 900 to Rs 1100 in parts with a Long Term Target of 2500.

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