ICICI Lombard IPO Note

– Report by Aman Jain

Nearly a year after listing its life insurance business, ICICI Bank will list its general insurance arm, ICICI Lombard General Insurance, which is the largest private sector multiproduct non-life insurer in India founded in 2001 as a joint venture between ICICI bank ltd and Fairfax Financial Holdings Limited. It has maintained the leading position since fiscal 2004.

Product range varies from motor, health, crop/weather, fire, personal accident, marine, engineering and liability insurance.

Issue Details

  • No of shares offered 8,62,47,186 Shares
  • Offer for sale (No fresh issue )
  • -3,17,61,478 Shares by ICICI bank
  • -5,44,85,709 Shares by FAL Corporation
  • Issue Size-Aggregating up to 5700.94 Crore at the upper band price of Rs 661
  • Opening Date- 15th Sept 2017
  • Closing Date- 19th Sept 2017
  • Face Value Rs 10 per share
  • Price Band: Rs 651-661/per share
  • Lot Size:22 Shares
  • Book Running Managers- Edelweiss Financial Services, CLSA India, JM Financial
  • Registrar to the offer- Karvy Computershare Pvt Ltd

Total of 4,312,359 shares are reserved for ICICI bank shareholders that is 5% of the total IPO size.

Share Holding Pattern

The shareholding of ICICI bank will become 55.92% and that of FAL will become 9.91% after the IPO. A total of 19% shares are being offered in the IPO.

Objective of the offer

  1. Achieve the benefits of listing on stock exchange
  2. Carry out the sale of 86,247,187 equity shares by the selling stacks holders
  3. Enhance the brand name of “ICICI Lombard” and provide liquidity to existing shareholder

Industry analysis

  • The Indian non-life insurance sector has been regulated by the Insurance Regulatory and Development Authority of India.
  • The size of the Indian non-life insurance sector was Rs 1.28 trillion on a GDPI basis as of 31st March 2017. Indian non-life insurance sector GDPI grew at a CAGR of 17.4% between FY01-17.
  • India was also amongst the fastest growing non-life insurance markets over 2011-2016, growing at 14.5% (as per Swiss Re).
  • Despite its size and growth profile, India continues to be an underpenetrated market with a non-life insurance penetration of 0.77% in 2016, as compared to 1.81% in China, 1.70% in Thailand, 1.67% in Singapore and 1.62% in Malaysia and a global average of 2.81% in 2016. At US$13.2 in 2016, insurance density also remains significantly lower as compared to other developed and emerging market economies.

A total of 30 Non-life insurers are there in India as of 31st March’17. These can be classified as

Other that third party Motor insurance, all the other types of non-life insurance products has been de-tariffed in India. This means that based on the risk analysis, previous years claims and other parameters insurers can decide premium amount on majority of the products. This helps in improving profitability of these companies.

Growth Drivers of Industry

 

According to Crisil research, GDPI of non-life insurance company is expected to grow at a CAGR of 15-20% over next 5 years. The penetration of non-life insurance in India is only 0.8% of GDP which is quite lower than the global average of 2.8%. Increase in working population, rising affluence, rapid urbanization, higher disposable income, emergence of new risks such as cyber fraud and rising awareness towards risk are the major factor which will help in sustaining the high growth in this industry in coming years.

Motor insurance

Other than two wheeler segment all the other segments are expected to have higher growth rate in next 5 years in comparison to last 5 years actual growth rate. This will lead to high market size for motor insurance

Crop Insurance

The Indian government intends to increase coverage to 50% of farmers by the end of fiscal 2019 from 30% in FY17. According to CRISIL Research, government has budgeted Rs 90 billion towards the PMFBY in FY18. This will increase the industry size of crop insurance.

Marine Insurance

The opening up of trade blocs and potential growth in the Indian manufacturing sector as a result of labor cost advantages, improving infrastructure and ease of doing business, are expected to improve India’s world trade position. Increased trade is expected to improve demand for marine insurance.

Fire Insurance

Growth in manufacturing and the logistics sector are expected to be key drivers of growth in fire insurance as demand for coverage increases. Additionally, the recent implementation of the Goods & Service Tax (GST) is expected to further boost growth in modern warehousing and therefore expand the market opportunity.

About The Business

With 17.7 million policies and a gross direct premium of Rs 107.25 Billion in FY17, ICICI Lombard has a market share of 8.4% among the non-life insurers and 18.0% among the private non-life insurers. ICICI Lombard initiated 87.5% of the policies electronically in FY17 and the employee productivity (GDPI/Employee) increased at a CAGR of 20.7% in last 3 years.

Market Share in various products

Already ICICI Lombard has highest market share in all the products among the Non-life private insurance companies but the growth in market share is expected due to

Positive about ICICI Lombard

 Consistent market leadership and demonstrated growth

Since FY04 when they gained the market leader spot in non-life insurance industry, they have maintained the top position over the years. Not only have they maintained the market leader position their business growth has been faster than the industry growth. Market share in FY17 was 8.4% w.r.t 7.9% in FY15

Diverse product line with multi-channel distribution network

To sell its policies ICICI Lombard has 20,775 individual agents. Other than this they have 51 corporate agents, including ICICI bank which gives them access to 4,850 branches. They also have strong electronic platform through which they sold 1.6 million policies last year.

Strong investment returns on a diversified portfolio

With total investment assets of Rs 164.64 billion, ICICI Lombard has the largest investment assets among all the private non-life insurers. The investment leverage, net of borrowing for ICICI Lombard is 4.07X as of 30th June’17.

Strategies

 Leverage and enhance market leadership

  • Enhance product offerings and distribution channels
  • Capture new market opportunities
  • Further improve operating and financial performance
  • Continue to invest in technology and innovation

Risk Factors

 Their loss reserves are based on estimates as to future claims liabilities and if they prove inadequate, it could lead to further reserve additions and materially adversely affect their results of operations.

  • Catastrophic events, including natural disasters, could materially increase their liabilities for claims by policyholders; result in losses in their investment portfolios.
  • A significant portion of their business comes from working with the government which subjects them to risks which could result in litigation, penalties and sanctions including early termination, suspension and removal from the approved panel of insurers.
  • Their reliance on motor vehicle manufacturers and ICICI Bank and other key distribution partners subjects us to a concentration risk

Financial Analysis

The gross direct premium which can be considered as a top line for insurance companies has increased over the past 5 years at a CAGR of 15%. In FY17 it crossed the Rs 100 Billion mark.

PAT has also grown with a significant CAGR of 16.14% in last five years.in Q1FY18 the PAT was 214.34 Crore which was 65% higher than the PAT in Q1FY17.

EPS has been 14.32 in FY-17 and the growth in EPS was 27% YOY. The Q-1 F-18 EPS was Rs. 4.74  v/s  Rs.2.87  in the same quarter last year which is a growth of 65.2%.

The company has the largest investment asset base of Rs 16,446 Crore as of June 30, 2017 among all the private non-life insurance companies in India. The investment leverage has also grown from 3.54 in FY15 to 4.07 as of Q1FY18.

Cash flow from operating activities in FY17 has become more than thrice of that of FY16. Of the incoming cash flow company has most used in investment assets.

 Author’s Note

ICICI Lombard is not only the market leader in the non-life insurance market but also has increased the market share over the years. Along with being the overall market leader it is also the market leader in all the products offered by the private non-life multiproduct insurers.

The Combined Ratio has improved from 107.1% in FY16 to 104% in FY17 and further to 102.4% in Q1FY18. The company has managed to clock healthy returns on equity (ROE) in excess of 15.5% for each fiscal year since FY15. For the year ended March 31, 2017, the ROE was at 16.7%.

It has a strong capital position with a solvency ratio of 2.10x as on March 31, 2017, as against the regulatory requirement of 1.50x.

This is the first private company which is coming with an IPO in non-life insurance market. On the upper price band of Rs 661 with EPS of Rs 14.32 for FY17, PE is coming out to be 46.15x. All said and done considering given the high growth prospect in coming years due to very low penetration of non-life insurance in India and other factors, ICICI Lombard gets a thumbs up for long term investment. Listing day gains aspirants may avoid the issue.