ICICI Lombard Leader with strong growth prospects 10 September 2018 INDIA | INSURANCE| COVERAGE INITIATION Largest private non-life insurer in the country Initiate with BUY and TP of INR 1,050 Investments in technology driving efficiencies Robust risk-selection procedures in place
51
Embed
ICICI Lombard - Moneycontrol.comstatic-news.moneycontrol.com/static-mcnews/2018/09/ICICIGI_110918.pdfICICI Lombard General Insurance Ltd (ICICIGI or ICICI Lombard) is the 4th largest
This document is posted to help you gain knowledge. Please leave a comment to let me know what you think about it! Share it to your friends and learn new things together.
Transcript
ICICI LombardLeader with strong growth prospects
10 September 2018
INDIA | INSURANCE| COVERAGE INITIATION
Largest private non-life insurer in the country
Initiate with BUY and TP of INR 1,050
Investments in technology driving efficiencies
Robust risk-selection procedures in place
JM Financial Institutional Securities Limited Page 2
RECENT INITIATIONS
We like the ICICIGI franchise given its granular retail portfolio, strong underwriting and robust return ratios. The 4th largest non-life insurer is on track to leverage its presence in 90% of the districts across India through on-boarding of experienced agents, scaling up of its digital assets and making further improvements to its “best-in-class” claims management process. Thus, ICICI Lombard is positioned to be a major beneficiary of the ongoing shift in market share towards service-oriented and efficient players.
JM Financial Institutional Securities Limited Page 3
Retail lines to drive growth and underwriting performance: ICICI Lombard’s retail lines share rose to 61% in FY18 from under 50% in FY06. Most of this growth has come from less-riskier segments such as a) Motor: private cars, 2Ws, preferred commercial vehicles (CVs) like 3Ws, trucks, tractors & CE and b) Health: retail health indemnity, SME group health, etc. Corporate lines make up 20% of its premiums, with the rest coming from crop insurance. Focus on retail and exits from loss-making large corporate/mass health insurance segments resulted in loss ratios improving from 81% in FY15 to 76.9% in FY18. The insurer plans to cap exposure to crop insurance in light of unfavourable pricing. Going forward, it aims to focus on granular risks while opportunistically entering property/other CV segments as pricing and structural factors improve therein
One of the most operationally efficient, digital-savvy insurers: ICICI Lombard’s expense ratio (ex-commissions) was one of the lowest among peers at 27% in FY18 (vs. the peer average of 30%). It has improved 440bps since FY15, led by continued investments in automation/digitisation. These include: a) robotics for faster turnaround times, b) AI for risk management and speedy claims processing, c) assisted sales using chat bots, d) drones for crop surveys and e) plug-and-play infrastructure for seamless onboarding of distribution partners.
High-quality investment book; no default since inception: The insurer’s investment book reached INR 182bn in FY18 – c.12% of total private sector AUM (incl. standalone health) - with 83% invested in sovereign and AAA securities. While the FI book has experienced zero defaults since inception, the equity book too, has posted robust annualised returns (incl. unrealised gains) of 30% since FY04 vs. 17% for the benchmark. Moreover, its “cash-before-cover” model implies zero asset quality risks.
ICICI Lombard General Insurance Ltd (ICICIGI or ICICI
Lombard) is the 4th largest non-life insurer (8.2% GDPI market share in FY18) and a leader among private players (18.9% share ex-standalone health) . Over FY15-18, it has recorded a 23% GDPI CAGR, outperforming the industry (20%) by leveraging its a) parent’s brand equity, b) retail-focused, diversified product mix and c) strong, multi-channel distribution in 638 of 716 districts in India. Superior risk selection, micro-segmentation and the flexibility to opportunistically enter/exit business lines has resulted in significant improvement in the insurer’s underwriting performance. Loss ratios have moved from 81% in FY15 to 77% in FY18. After pioneering online sales in FY05, digitisation and automation remain the key to its operating efficiencies as scale builds.
ICICI Lombard is well-positioned to deliver 15% GDPI growth – in line with the industry – over FY18-20E ,enabled by i)structural factors: a) non-life under-penetration and lowdensity as well as b) urbanisation and rising asset ownership; ii)granular focus on niche segments within Motor and Healthinsurance and iii) a strong, productive distribution network.
We value the stock at 28x Mar’21E EPS for a PAT CAGR of 24% over FY18-21E and ROE of 21% by FY21E. We initiate with a BUY rating and a TP of INR 1,050. Key risks to our call: disruptions in distribution and regulatory/government risks.
ICICI Lombard General Insurance LtdLeader with strong growth prospects
JM Financial Research is also available on: Bloomberg - JMFR <GO>, Thomson Publisher & Reuters S&P Capital IQ and FactSet. You can also access our portal: www.jmflresearch.com. Please see Appendix I at the end of this report for Important Disclosures and Disclaimers and Research Analyst Certification.
Recommendation and Price Target
BUY
1,050
21%
NA
Current Reco.
Previous Reco.
Current Price Target (12M)
Upside/(Downside)
Previous Price Target
Change NA
Key Data – ICICIGI IN
INR876
INR397.5/US$5.5
31%
454.1
INR184.9/US$2.6
889/619
38,390/11,589
Current Market Price
Market cap (bn)
Free Float
Shares in issue (mn)
Diluted share (mn)
3-mon avg daily val (mn)
52-week range
Sensex/Nifty
INR/US$ 71.7
Price Performance
% 1M 3M 6M
Absolute 14.3 20.0 10.8
Relative* 12.4 11.7 -5.4
* To the BSE Sensex
Financial Summary (INR mn)
Y/E March FY17A FY18A FY19E FY20E FY21E
Net Profit 6,418 8,618 11,049 13,657 16,588
Net Profit (YoY) (%) 27% 34% 28% 24% 21%
Assets (YoY) (%) 36% 27% 16% 16% 16%
ROA (%) 3.2% 3.3% 3.5% 3.7% 3.9%
ROE (%) 15.8% 17.5% 19.3% 20.4% 21.0%
EPS 14.2 19.0 24.3 30.1 36.5
EPS (YoY) (%) 26% 33% 28% 24% 21%
P/E (x) 61.2 45.9 35.8 28.9 23.8
BV 97.6 113.2 132.4 156.5 185.7
BV (YoY) (%) 23% 16% 17% 18% 19%
P/BV (x) 10.8 9.3 7.9 6.7 5.7
Source: Company data, JM Financial. Note: Valuations as of 07/Sep/2018
ICICI Lombard 10 September 2018
JM Financial Institutional Securities Limited Page 4
ICICI Lombard – Key charts
Industry to clock double digit premiums growth Exhibit 1.
0%
5%
10%
15%
20%
25%
30%
35%
0
500
1,000
1,500
2,000
2,500FY
02
FY0
3
FY0
4
FY0
5
FY0
6
FY0
7
FY0
8
FY0
9
FY1
0
FY1
1
FY1
2
FY1
3
FY1
4
FY1
5
FY1
6
FY1
7
FY1
8
FY1
9E
FY2
0E
FY2
1E
GDPI (INRbn) YoY (%)
1st phase: Growth phase during tariff
regime
2nd phase: Post de-tariffing and
Motor Pool
3rd phase: Dismantling Motor pool and
Declined Risk Pool
Source: IRDA, JM Financial
Significant under-penetration and low density Exhibit 2.
5.0%
4.3%3.4% 3.4%
2.7%2.4% 2.3%
1.9%
0.9%
0
500
1,000
1,500
2,000
2,500
3,000
0%
2%
4%
6%
South
Korea
USA Taiwan Hong
Kong
South
Africa
UK Japan China India
Non life Insurance penetration Insurance Density (USD)
Source: SwissRe
Rising incomes fuelling ownership of insurable assets Exhibit 3.
0
20,000
40,000
60,000
80,000
1,00,000
1,20,000
FY12 FY13 FY14 FY15 FY16 FY17 FY18E
Per Capita NNI (INR)
Source: CMIE
Accelerated rate of urbanisation raising awareness Exhibit 4.
0.9% 0.8% 1.0%
0.1%
1.8%
2.0%2.1%
1.6%
2.4%
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
0%
20%
40%
60%
80%
100%
Brazil UK USA Russia South
Africa
China Indon-
esia
Thai-
land
India
2016 Urban Population (as % of Total) Urbanisation Rate CAGR (2018-23E)
Source: UN database, CRISIL
ICICIGI to benefit from industry growth Exhibit 5.
-3%
29%
21%19%
12%
-3%
21%
33%
15%15%15%15%
-5%
0%
5%
10%
15%
20%
25%
30%
35%
0
50
100
150
200
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19E
FY20E
FY21E
GWP (INR bn) Growth (YoY, %) Source: Company, JM Financial
Consolidating its leadership position Exhibit 6.
8.4
%
8.8
%
8.6
%
8.6
%
8.6
%
7.7
%
8.4
%
8.4
%
8.2
%
8.1
%
8.1
%
8.1
%
23.6
%
24.4
%
23.1
%
21.9
%
21.4
%
19.0
%
20.4
%
19.9
%
18.9
%
18.4
%
18.0
%
17.7
%
0%
5%
10%
15%
20%
25%
30%
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19E
FY20E
FY21E
Market share (industry) Market share (pvt. ex standalone)
governance for commercial vehicles and data analytics to identify accident hotspots.
Motor TP has seen meaningful price increases Exhibit 55.
0
5
10
15
20
25
30
35
FY15 FY16 FY17 FY18
Motor OD - GDPI (INRbn) Motor TP - GDPI
18%
9%11%
27%10% 23%
Source: Company, JM Financial
Divergence in CORs of motor OD and motor TP Exhibit 56.
84%97% 97%
87%
137% 131% 130% 135%
0%
20%
40%
60%
80%
100%
120%
140%
160%
FY15 FY16 FY17 FY18
Motor OD - COR Motor TP - COR
Source: Company, JM Financial
Favourable loss experience in Motor OD keeps COR low Exhibit 57.
60% 62% 63%
51%
1% 3% 1% 2%
0%
10%
20%
30%
40%
50%
60%
70%
FY15 FY16 FY17 FY18
Loss ratio - Claims paid Loss ratio - Chg in reserves
Source: Company, JM Financial
Motor TP COR remain high in line with long-tail reserving Exhibit 58.
167%
26% 30% 30%
-62%
72% 67% 77%
-100%
-50%
0%
50%
100%
150%
200%
FY15 FY16 FY17 FY18
Loss ratio - Claims paid Loss ratio - Chg in reserves
Source: Company, JM Financial
After robust price increases of FY17-18, the regulator reduced rates for select Exhibit 59.categories of private cars, private carriers and 2Ws for FY19
Motor TP Premium (in INR) FY17 FY18 FY19
YoY%
FY17 FY18 FY19
Private Cars
less than 1,000cc 2,055 2,055 1,850
40% 0% (10%)
> 1,000cc and not exceeding 1,500c 2,237 2,863 2,863
40% 28% 0%
> 1,500cc 6,164 7,890 7,890
25% 28% 0%
Goods carrying vehicle public carriers A1
Not exceeding 7,500kg 14,390 14,390 14,390
0% 0% 0%
> 7,500 kg but not exceeding 12,000kg 15,365 19,667 24,190
0% 28% 23%
> 12,000kgs but not exceeding 20,000 kg 22,577 28,899 32,367
15% 28% 12%
> 20,000kg but not exceeding 40,000 kg 24,708 31,626 39,849
25% 28% 26%
> 40,000 kgs 25,800 33,024 38,308
30% 28% 16%
Goods carrying vehicle private carriers A2
Not exceeding 7,500 kg 7,849 7,938 7,144
(10%) 1% (10%)
> 7,500 kg but not exceeding 12,000 kg 11,528 14,330 15,620
30% 24% 9%
> 12,000kgs but not exceeding 20,000 kg 9,390 9,871 9,871
5% 5% 0%
> 20,000 kg but not exceeding 40,000 kg 12,821 14,805 15,397
15% 15% 4%
> 40,000 kgs 16,655 21,318 21,318
20% 28% 0%
Two Wheelers
Not exceeding 75cc 569 569 427
10% 0% (25%)
> 75 cc but not exceeding 150 cc 619 720 720
15% 16% 0%
> 150cc but not exceeding 350 cc 693 887 985
25% 28% 11%
> 350cc 796 1,019 2,323
(10%) 28% 128%
Source: IRDA, JM Financial
ICICI Lombard 10 September 2018
JM Financial Institutional Securities Limited Page 21
Positive catalysts for an improvement in Motor TP underwriting performance are a)
passage of the Motor Vehicle Amendment Act, currently pending in Rajya Sabha, which
aims to introduce a 6-month time limit for claim filing to aid faster, more accurate claims
processing, thus reducing uncertainty and capping claims inflation and b) improving
expense ratios following MISP guidelines (effective from Nov’17) that bring erstwhile un-
regulated motor dealers selling policies within IRDA supervision. This will aid in i) reducing
dealer pay-outs as historically non-life insurers were paying dealers infrastructure and/or
outsourcing expenses with resulting commission rates at 25-30%. After MISP, they will be
capped at 22.5% for 2Ws and 19.5% for four-wheelers and SUVs, ii) better claims
management especially at the dealer-end; c) robust outlook for new motor sales given
low personal vehicle penetration (19 cars / 1,000; 127 two-wheelers/1,000); d) other
provisions of the Motor Vehicle Amendment Act such as, i) higher penalties for traffic
violations, ii) stricter licensing norms; and e) Supreme Court Committee on Road Safety
recommendation resulted in a mandatory 3-year motor TP policy for cars and 5-year
policy for motorbikes at the time of sale and registration to tackle poor renewals (number
of registered but uninsured vehicles currently stands at c.60% of total vehicles). Although
positive from a penetration/ compliance viewpoint, the price adequacy still needs to be
tested given that the proposed tariffs vary from adjusted existing prices in the range of
+3% to –51% for cars and 2Ws.
Long-term motor TP for private cars – 3 years Exhibit 60.
Private car 1-yr (INR)
3-yr (INR)
3*(1-yr) (INR)
Diff %
Less than 1,000cc 1,850 5,286 5,550 -5%
1,000cc to 1,500cc 2,863 9,534 8,589 11%
Exceeding 1,500cc 7,890 24,305 23,670 3%
Source: IRDA
Long-term motor TP for 2Ws – 5 years Exhibit 61.
2Ws 1-yr (INR)
5-yr (INR)
5*(1-yr) (INR)
Diff %
Less than 75cc 427 1,045 2,135 -51%
75cc to 150cc 720 3,285 3,600 -9%
150cc to 350cc 985 5,453 4,925 11%
Exceeding 350cc 2,323 13,034 11,615 12%
Source: IRDA
Health insurance: Retail heath continues to be the largest sub-sector (>60% of total
health GDPI) and is also most profitable in terms of underwriting performance. Within
retail health, both indemnity portfolio (60% loss ratio as of Dec’18) and benefit portfolio
(45.7% loss ratio) have been profitable. Problematic corporate/group health premiums
have witnessed 20% YoY growth in FY18 driven by price corrections initiated in the
industry for both retail and corporate/group lines. Loss ratios in the group health segment
improved to 88% in FY18 vs. 104% last year driven by, a) change in expense allocation
method and b) higher share of SME business. Mass health segment premiums should
continue to shrink as the insurer is very cautious on the whole government segment. As
such, loss ratios for this product would continue to improve.
Total health GDPI YoY growth Exhibit 62.
0
2
4
6
8
10
12
14
FY15 FY16 FY17 FY18
Retail Health - GDPI (INRbn) Corporate - GDPI Mass - GDPI
8%19%
29%
18% (2%) 20%
(50%)197% (86%)
Source: Company, JM Financial
Total health – quarterly underwriting performance Exhibit 63.
U/W result (INRmn) 1QFY18 2QFY18 3QFY18 4QFY18 1QFY19
Retail Health 957 1,228 1,285 969 939
Corporate Health (12) (316) (204) (437) (1,029)
Mass/Govt. Health (186) 36 (127) 136 (40)
Source: Company, JM Financial
ICICIGI is sourcing the business at a viable
loss ratio as tracked internally. U/W loss is
optically higher as bulk of business sourced
at quarter-end thus requiring up-fronting
of acquisition costs.
ICICI Lombard 10 September 2018
JM Financial Institutional Securities Limited Page 22
Corporate/group health insurance witnessed meaningful price correction
The corporate health segment, which represents 35% of health GDPI has historically
impacted profitability due to the lack of pricing discipline among insurers given strong
bargaining power of corporate customers. Insurers have historically used the more
profitable retail health to offset losses in the corporate health portfolio. However, since
the Sep’17 public listing of industry leaders, ICICI Lombard (#1 in private sector) followed
by New India Assurance (NIA) (#1 in public sector), the non-life industry has benefitted
from the price correction initiated by them in the group/corporate health portfolio. From
exhibit 64/65, it is evident that premiums growth is stronger in recent quarters vs. last
year.
Listed public peer, New India Assurance, witnessed group health (24% market share as of
YTD-Jul’18) loss ratios falling to 110% in FY18 vs. 125% last year largely due to price
corrections. The management expects this ratio to further decline to c.100% by FY19.
Moreover, even the retail health (14% market share as of YTD-Jul’18) loss ratio has
declined to c.78% vs. 85% last year largely owing to price increases effected for both
new policies (effective Apr’17) and for renewal policies (effective Aug’17). The full benefit
of retail price increases is expected over 2018-19. Price corrections have ranged from 20-
40% depending on the claims experience of the individual corporate/group accounts.
Using its dominant position in government/mass health (34% market share as of YTD-
Jul’18) business, New India has been able to push some price correction even in those
accounts. Overall, the management is targeting a total health portfolio loss ratio of
c.95% by FY19 vs. 103% in FY18. Moreover, NIA along with other PSU insurers invested
in a captive TPA which has in-house doctors to curb medical costs inflation and improve
health claims management. All this augurs well for private players in general and ICICIGI
in particular.
Contribution of health premiums is higher for public Exhibit 64.insurers given higher participation in group/mass health schemes Total Health GDPI share %
1Q18 2Q18 3Q18 4Q18 1Q19
ICICI Lombard 15% 13% 14% 18% 17%
HDFC Ergo 12% 12% 14% 39% 18%
BAGIC 19% 12% 18% 17% 30%
SBI Gen 12% 10% 13% 17% 12%
Reliance Gen 25% 15% 9% 11% 30%
New India Assurance 33% 25% 30% 27% 36%
Source: IRDA, JM Financial
Premiums YoY growth is coming from both higher no. of Exhibit 65.policies and higher pricing in the corporate/group policies Total Health GDPI YoY %
1Q18 2Q18 3Q18 4Q18 1Q19
ICICI Lombard -18% 18% 29% 34% 26%
HDFC Ergo 16% >100% >100% 56% 39%
BAGIC 44% 7% 41% 63% 103%
SBI Gen 71% 46% 35% 3% 44%
Reliance Gen >100% >100% 82% 47% 45%
New India Assurance 21% 6% 26% 18% 23%
Source: Company, JM Financial
Crop insurance dynamics changing with rising competition and hardening reinsurance
commissions rates
For ICICI Lombard, growth in crop insurance premiums (10% YoY growth in FY18) has
been slower than the overall company (15% YoY growth) and the industry (19% YoY
growth) in keeping with the cautious stance adopted by the management. The business
line has become less attractive as increasing competition erodes pricing and the largest
reinsurer, GIC Re tones down commission rates and introduced EOL clauses. In FY18,
adverse loss experience in Kharif underwriting in Tamil Nadu resulted in 8% escalation in
loss ratio to 78.5% in 4QFY18 (ex-crop, loss ratio was 70.5%). For FY18, crop loss ratio
increased to 135% vs. 84.2% last year. Going forward, the company plans to cap
contribution of crop insurance at 15-20% and as such premiums growth is set to be
muted for this segment.
ICICI Lombard Market share:
7% - Retail Health;
6% - Corporate/Group Health;
1% - Government/Mass Health
New India Market share:
14% - Retail Health;
24% - Corporate/Group Health;
34% - Government/Mass Health
ICICI Lombard 10 September 2018
JM Financial Institutional Securities Limited Page 23
Crop insurance: contribution to total GDPI & retention Exhibit 66.
Other income/Avg assets 0% 0% (1%) (1%) (1%) (1%) (1%)
PBT/Avg assets 5% 4% 4% 4% 5% 5% 5%
Tax/Avg assets (1%) (1%) (1%) (1%) (1%) (2%) (2%)
PAT/Avg assets (ROA) 4% 3% 3% 3% 3% 4% 4%
ROE 19% 14% 16% 17% 19% 20% 21%
Source: Company, JM Financial
Negative drag from underwriting to come down driven by lower loss ratios
ICICI Lombard’s underwriting performance has improved in line with IRDA’s efforts such
as de-tariffication, dismantling pooling arrangements and shifting to annual, inflation
linked pricing for Motor TP. Loss ratios have improved from 96% in FY11 to 76.9% for
FY18 – driven by increasing retailisation of the product mix and superior risk-selection
using the company’s loss experience across product lines accumulated over last 15 years.
ICICI Lombard 10 September 2018
JM Financial Institutional Securities Limited Page 30
Underwriting profit has improved significantly even as Exhibit 84.ICICIGI continues investing into retail lines
-2% -2% -2%-3%
-2% -1%
5% 6% 7% 7% 6% 6%
-4%
-2%
0%
2%
4%
6%
8%
FY13 FY14 FY15 FY16 FY17 FY18
U/W P&L / Avg assets Invt income / Avg assets
Source: Company, JM Financial
Peer trend for contribution of investment and Exhibit 85.underwriting income to total profitability
-1%
2%
0%-5%
2%6%
7%
7% 7%7%
-10%
-5%
0%
5%
10%
ICICILombard
BAGIC HDFCErgo
RelianceGen
SBIGeneral
U/W P&L / Avg assets Invt income / Avg assets
Source: Company, JM Financial
ICICI Lombard 10 September 2018
JM Financial Institutional Securities Limited Page 31
Strong solvency to support growth
Healthy solvency margin of 205% as of Mar’18; 4-year average dividend pay-out of 26%
Currently, solvency ratio stands at 205% as of Mar’18 vs. IRDA requirement of 150%.
The company strengthened its solvency in FY17 to 210% from 182% in FY16 becoming
the first Indian non-life insurance company to raise non-convertible debentures
amounting to INR 4.85bn. This amount is available to be included as tier I capital.
Regarding dividend policy, a dip in payout ratio in FY18 signals the investment phase for
the insurer as it builds its distribution network and incurs acquisition costs to on-board
SME clients to prepare for profitable growth.
ICICIGI: Solvency ratio Exhibit 86.
155% 172%195% 182% 182% 183% 183%
27% 22%
0%
50%
100%
150%
200%
250%
FY12 FY13 FY14 FY15 FY16 FY17 FY18
Core capital Other capital
Source: Company, JM Financial
Dividend pay-out ratio Exhibit 87.
FY14 FY15 FY16 FY17 FY18
ICICI Lombard
0% 18% 32% 29% 27%
BAGIC 0% 0% 0% 0% 12%
HDFC Ergo 16% 47% 54% 33% 36%
Reliance General
0% 0% 0% 0% 0%
SBI General 0% 0% 0% 0% 0%
Source: Company, JM Financial
ICICI Lombard 10 September 2018
JM Financial Institutional Securities Limited Page 32
Initiate with BUY and a TP of INR 1,050
We have valued ICICIGI using P/E approach. We expect ICICIGI to generate GWP CAGR of
15% over FY18-21E, with a market share of 8% in the industry and 18% amongst private
insurers (ex. standalone health). With COR of 97% by FY21E and PAT CAGR 24% over FY18-
21E, we value ICICIGI at 28x Mar’21E EPS, implying a value of c.INR 475bn and per share
value of INR 1,050. We initiate coverage on the stock with a BUY rating.
ICICIGI – valuation summary Exhibit 88.
FY17 FY18 FY19E FY20E FY21E
EPS (INR) 14.2 19.0 24.3 30.1 36.5
EPS (YoY) (%) 26% 33% 28% 24% 21%
P/E (x) 73.8 55.3 43.1 34.9 28.7
BV (INR) 97.6 113.2 132.4 156.5 185.7
BV (YoY) (%) 23% 16% 17% 18% 19%
P/BV (x) 10.8 9.3 7.9 6.7 5.7
P/BV (ex FV chg a/c) 12.7 10.8 9.0 7.5 6.2
Source: Company, JM Financial
Key risks
Any disruption in key motor vehicle relationships, bank distribution partnerships could adversely impact the motor portfolio and overall business of the company: One big broker (sourced 8.1% premiums in FY17) and one big corporate agent (sourced 5.9% premiums in FY17) make a significant contribution to gross premiums. Similarly, the
insurer has a key distribution partnership with ICICI Bank (7% of gross premiums). Any
disruption or adverse change in relation to such key distribution partners could
adversely impact the company’s business.
Risks to crop insurance business: i) reduction in government support: In India, crop insurance is experiencing growth due to significant subsidies recently offered by the central and state governments, as such any reduction in support towards this program could adversely impact growth of crop insurance. ii) selection and pricing of risks: since crop insurance is a relatively new product line for the private general insurance industry, there is a limited data-set to substantiate assumptions based on which the company selects and prices risk consequently if ICICI Lombard misprices risk or is unable to select better risks then this could result in significantly higher claims. iii) Reinsurance risk: a major portion of crop reinsurance is available from GIC Re and this portfolio is unavailable for reinsurance at a suitable price from other reinsurers consequently any change in the terms of reinsurance provided by GIC Re could impact ICICI Lombard. Further, there is increased amount of credit risk in this portfolio due to concentration of reinsurance with one entity. iv) non-payment / delay in payments: a major part of the crop insurance premiums are borne by the central and state governments consequently any delay / non-
payment due to dispute or political headwinds can adversely impact the company.
If loss reserves which are based on estimates as to future claims liabilities prove inadequate, it could lead to further reserve additions and have an adverse impact on the company’s financial position.
Catastrophe risks: Any heightened incidence of catastrophic events, including natural disasters, could materially increase the company’s claim liabilities and have a material adverse effect on its business.
Reinsurance risk: Any negative development in company’s relationship with its major reinsurance partner, GIC Re can have an adverse effect on the company’s business.
Any adverse change in interest rates or adverse movements in the Indian equity markets could potentially impair the company’s investment portfolio value and have a material adverse effect on the company’s business, financial condition and results of operations.
Credit risks related to the investment portfolio may expose the company to significant losses: As of Mar’18, over 80% of the total debt portfolio was invested in sovereign and domestic AAA rated securities. As such, any negative development in the issuer’s credit rating can adversely impact the company’s results.
ICICI Lombard 10 September 2018
JM Financial Institutional Securities Limited Page 33
Any change in the regulatory framework of motor insurance in India could have a
material adverse effect on the company’s business: From Apr’16, both motor pools have
been dismantled by IRDAI which put an end to loss-sharing within the segment. Any
attempt by IRDAI to again set up a third-party insurance pool may force the company to
assume some of the shared risk, which could have a material adverse effect on its
financial condition and operating results.
Changes in the regulatory environment: Any change in policies issued by the IRDAI,
including foreign investment, interest rates, liquidity, capital adequacy, investments,
marketing and selling practices may adversely impact the company.
ICICI Lombard 10 September 2018
JM Financial Institutional Securities Limited Page 34
Company background
ICICI Lombard is the 4th largest non-life insurer in India (on GDPI basis as of FY18) and the
leader among private non-life insurers. The insurer commenced operations in 2002 and is
promoted by ICICI Bank, one of India’s largest private sector banks. It offers a comprehensive
and well-diversified range of products, including motor, health, crop/weather, fire, personal
accident, marine, engineering and liability insurance, through multiple distribution channels.
It currently operates in 638 of 716 districts across India.
Shareholding pattern Exhibit 89.
55.91%
9.91%
9.01%
1.59%
1.68%
21.9%
ICICI Bank
Fairfax
Warburg Pincus
Clermont Group
MOSL Asset Management
Public
Source: Company, JM Financial
Product mix Exhibit 90.
42% 44% 47% 51% 51%42% 42%
28% 26% 22% 19.7% 17.1%
15.5% 15.0%
6% 6% 7% 8.2% 7.8%
6.9% 7.4%
7.3%20.1% 19.2%
15% 14% 15% 11.2% 6.9% 6.5% 7.3%
0%
20%
40%
60%
80%
100%
FY12 FY13 FY14 FY15 FY16 FY17 FY18
Motor Health Fire Marine Eng PA Crop Others Source: Company, JM Financial
Market share Exhibit 91.
8.4
%
8.8
%
8.6
%
8.6
%
8.6
%
7.7
%
8.4
%
8.4
%
8.2
%
8.1
%
8.1
%
8.1
%
23.6
%
24.4
%
23.1
%
21.9
%
21.4
%
19.0
%
20.4
%
19.9
%
18.9
%
18.4
%
18.0
%
17.7
%
0%
5%
10%
15%
20%
25%
30%
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19E
FY20E
FY21E
Market share (industry) Market share (pvt.) Source: IRDA, JM Financial
ICICI Lombard 10 September 2018
JM Financial Institutional Securities Limited Page 35
Experienced senior management team
Management profile Exhibit 92.
Person Designation Profile
Chanda Deepak
Kochhar Chairperson
She is the Non-Executive Chairperson and Nominee Director of ICICI Bank on the Board. She has obtained a
bachelor’s degree in Arts from the University of Mumbai and a master’s degree in Management Studies from
Jamnalal Bajaj Institute of Management Studies, Mumbai. In addition, she has received an honorary doctorate
of law from Carleton University, Canada. She has been associated with ICICI Lombard since 1 Sep’08. She has
been the managing director and chief executive officer of ICICI Bank since 2009 and has experience in the
fields of corporate credit, infrastructure financing, e-commerce strategy and retail business. She is the recipient
of the Padma Bhushan Award, 2011, the third highest civilian honour awarded by the Government of India
and has been a member of the Prime Minister’s Council of Trade and Industry and High-Level Committee on
Financing Infrastructure. Currently, she is a member of the Board of Trade.
Bhargav Dasgupta Managing Director and
Chief Executive Officer
He has been serving as Managing Director and Chief Executive Officer of the company since 2009. He holds a
bachelor’s degree in Mechanical Engineering from Jadavpur University and a post graduate diploma in
Business Administration from the Indian Institute of Management, Bengaluru. He has been associated with the
ICICI Group since 1992 with stints in project finance and corporate banking, e-commerce & technology
management, international banking and life insurance. Prior to ICICI, he worked with TATA Motors.
Alok Kumar Agarwal
Executive Director and
Chief Marketing Officer,
Wholesale
He holds a bachelor’s degree in Chemical Engineering from Jadavpur University and a post graduate diploma
in Business Administration from the Indian Institute of Management, Calcutta. He has been associated with
ICICI group since 1993, spending close to 9 years within the project finance division. Previously, he worked
with Reliance Industries Ltd as an engineer from Jul’89 to Apr’91.
Sanjeev Radheyshyam
Mantri
Executive Director and
Chief Marketing Officer,
Retail
He has over 20 years of experience in the BFSI sector and joined ICICI group in 2003 with stints across
corporate banking and the SME space. He spearheaded the group’s expansion into rural markets. Prior to
joining ICICI, he has spent over 7 years with BNP Paribas, Mumbai handling diverse responsibilities in the
corporate banking space. He is a qualified CA and Cost Accountant.
Sanjay Datta Chief Underwriting,
Reinsurance & Claims
He has over 24 years of experience in general insurance and was a part of the start-up team at ICICI Lombard
in 2001.
Gopal Balachandran Chief Financial Officer &
Chief Risk Officer
He has over 15 years of experience in general insurance and joined ICICI Lombard in 2002. He is a qualified
CA, CS and CPA.
Gopalakrishnan S Chief Investment Officer He has over 16 years of experience in general insurance and joined ICICI Lombard in 2001.
JV Prasad Appointed Actuary
He holds a master’s in actuarial science from the University of Waterloo and an MBA from the Faculty of
Management Studies, Delhi University. Prior to joining ICICI Lombard in 2005, he was Manager, Structured
Finance Ratings at CRISIL.
Source: Company, JM Financial
Organisation structure Exhibit 93.
Source: Company, JM Financial
ICICI Lombard 10 September 2018
JM Financial Institutional Securities Limited Page 36
Peer comparison
Market share – within industry Exhibit 94.
FY13 FY14 FY15 FY16 FY17 FY18
ICICI Lombard 8.6% 8.6% 7.7% 8.1% 8.4% 8.2%
BAGIC 5.6% 5.7% 6.0% 5.9% 6.0% 6.3%
HDFC Ergo 3.4% 3.6% 3.7% 3.4% 4.6% 4.8%
Reliance General 2.8% 3.0% 3.1% 2.8% 3.1% 3.4%
SBI General 1.1% 1.5% 1.8% 2.1% 2.0% 2.4%
Other private insurers 17.7% 17.7% 18.0% 17.7% 18.0% 18.4%
Standalone health 2.4% 2.8% 3.4% 4.2% 4.6% 5.5%
Total private insurers 41.7% 42.9% 43.6% 44.1% 46.7% 48.9%
Total public insurers 58.3% 57.1% 56.4% 55.9% 53.3% 45.1%
Source: IRDA, JM Financial
Market share – within private (ex-standalone) Exhibit 95.
Total agents (in 000s) – private vs. public Exhibit 135.
134 1
81 2
37 2
87 320
303 3
60
439
158 2
11
224
241
253 287
240
226
0
100
200
300
400
500
FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17Private Public
Source: Company, JM Financial
Increase in competitive pricing and CAT events has resulted in an elevated combined
ratio: While growth has remained healthy for the industry, intense competition, coupled
with several large catastrophic events such as Cyclone Phailin (2013), Uttarakhand floods
(2013), J&K floods (2014), Cyclone Hudhud (2014) and Chennai floods (2015) in recent
years has adversely impacted the profitability of non-life insurers. The impact has been
more severe for public sector insurers given their high exposure to property/government
insurance. Recent steps taken towards the public listing of these insures are expected to
benefit the industry, bringing about improved underwriting discipline, risk management,
disclosure and corporate governance. In FY17, the pressure on profitability was primarily
driven by reserve strengthening by PSUs and heightened competition in the motor
segment.
The Kerala floods in Aug’18 are expected to result in claims amounting to INR 5bn
(according to media reports) primarily for property, motor and health insurance policies.
ICICI Lombard 10 September 2018
JM Financial Institutional Securities Limited Page 50
APPENDIX I
JM Financial Inst itut ional Securit ies Limited ( fo rmer l y known as JM F inanc i a l Secu r i t i e s L im i ted )
Corporate Identity Number: U67100MH2017PLC296081 Member of BSE Ltd., National Stock Exchange of India Ltd. and Metropolitan Stock Exchange of India Ltd.
SEBI Registration Nos.: –Stock Broker - INZ000163434, Research Analyst – INH000000610 Registered Office: 7th Floor, Cnergy, Appasaheb Marathe Marg, Prabhadevi, Mumbai 400 025, India.
Buy Total expected returns of more than 15%. Total expected return includes dividend yields.
Hold Price expected to move in the range of 10% downside to 15% upside from the current market price.
Sell Price expected to move downwards by more than 10%
Research Analyst(s) Certification
The Research Analyst(s), with respect to each issuer and its securities covered by them in this research report, certify that:
All of the views expressed in this research report accurately reflect his or her or their personal views about all of the issuers and their securities; and
No part of his or her or their compensation was, is, or will be directly or indirectly related to the specific recommendations or views expressed in this research report.
Important Disclosures
This research report has been prepared by JM Financial Institutional Securities Limited (JM Financial Institutional Securities) to provide information about the
company(ies) and sector(s), if any, covered in the report and may be distributed by it and/or its associates solely for the purpose of information of the select
recipient of this report. This report and/or any part thereof, may not be duplicated in any form and/or reproduced or redistributed without the prior written
consent of JM Financial Institutional Securities. This report has been prepared independent of the companies covered herein.
JM Financial Institutional Securities is registered with the Securities and Exchange Board of India (SEBI) as a Research Analyst and a Stock Broker having trading
memberships of the BSE Ltd. (BSE), National Stock Exchange of India Ltd. (NSE) and Metropolitan Stock Exchange of India Ltd. (MSEI). No material disciplinary
action has been taken by SEBI against JM Financial Institutional Securities in the past two financial years which may impact the investment decision making of
the investor.
JM Financial Institutional Securities renders stock broking services primarily to institutional investors and provides the research services to its institutional
clients/investors. JM Financial Institutional Securities and its associates are part of a multi-service, integrated investment banking, investment management,
brokerage and financing group. JM Financial Institutional Securities and/or its associates might have provided or may provide services in respect of managing
offerings of securities, corporate finance, investment banking, mergers & acquisitions, broking, financing or any other advisory services to the company(ies)
covered herein. JM Financial Institutional Securities and/or its associates might have received during the past twelve months or may receive compensation from
the company(ies) mentioned in this report for rendering any of the above services.
JM Financial Institutional Securities and/or its associates, their directors and employees may; (a) from time to time, have a long or short position in, and buy or
sell the securities of the company(ies) mentioned herein or (b) be engaged in any other transaction involving such securities and earn brokerage or other
compensation or act as a market maker in the financial instruments of the company(ies) covered under this report or (c) act as an advisor or lender/borrower to,
or may have any financial interest in, such company(ies) or (d) considering the nature of business/activities that JM Financial Institutional Securities is engaged
in, it may have potential conflict of interest at the time of publication of this report on the subject company(ies).
Neither JM Financial Institutional Securities nor its associates or the Research Analyst(s) named in this report or his/her relatives individually own one per cent or
more securities of the company(ies) covered under this report, at the relevant date as specified in the SEBI (Research Analysts) Regulations, 2014.
The Research Analyst(s) principally responsible for the preparation of this research report and members of their household are prohibited from buying or selling
debt or equity securities, including but not limited to any option, right, warrant, future, long or short position issued by company(ies) covered under this report.
The Research Analyst(s) principally responsible for the preparation of this research report or their relatives (as defined under SEBI (Research Analysts)
Regulations, 2014); (a) do not have any financial interest in the company(ies) covered under this report or (b) did not receive any compensation from the
company(ies) covered under this report, or from any third party, in connection with this report or (c) do not have any other material conflict of interest at the
time of publication of this report. Research Analyst(s) are not serving as an officer, director or employee of the company(ies) covered under this report.
While reasonable care has been taken in the preparation of this report, it does not purport to be a complete description of the securities, markets or
developments referred to herein, and JM Financial Institutional Securities does not warrant its accuracy or completeness. JM Financial Institutional Securities
may not be in any way responsible for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report.
This report is provided for information only and is not an investment advice and must not alone be taken as the basis for an investment decision.
ICICI Lombard 10 September 2018
JM Financial Institutional Securities Limited Page 51
The investment discussed or views expressed or recommendations/opinions given herein may not be suitable for all investors. The user assumes the entire risk
of any use made of this information. The information contained herein may be changed without notice and JM Financial Institutional Securities reserves the
right to make modifications and alterations to this statement as they may deem fit from time to time.
This report is neither an offer nor solicitation of an offer to buy and/or sell any securities mentioned herein and/or not an official confirmation of any
transaction.
This report is not directed or intended for distribution to, or use by any person or entity who is a citizen or resident of or located in any locality, state, country
or other jurisdiction, where such distribution, publication, availability or use would be contrary to law, regulation or which would subject JM Financial
Institutional Securities and/or its affiliated company(ies) to any registration or licensing requirement within such jurisdiction. The securities described herein may
or may not be eligible for sale in all jurisdictions or to a certain category of investors. Persons in whose possession this report may come, are required to inform
themselves of and to observe such restrictions.
Persons who receive this report from JM Financial Singapore Pte Ltd may contact Mr. Ruchir Jhunjhunwala ([email protected]) on +65 6422 1888
in respect of any matters arising from, or in connection with, this report.
Additional disclosure only for U.S. persons: JM Financial Institutional Securities has entered into an agreement with JM Financial Securities, Inc. ("JM Financial
Securities"), a U.S. registered broker-dealer and member of the Financial Industry Regulatory Authority ("FINRA") in order to conduct certain business in the
United States in reliance on the exemption from U.S. broker-dealer registration provided by Rule 15a-6, promulgated under the U.S. Securities Exchange Act of
1934 (the "Exchange Act"), as amended, and as interpreted by the staff of the U.S. Securities and Exchange Commission ("SEC") (together "Rule 15a-6").
This research report is distributed in the United States by JM Financial Securities in compliance with Rule 15a-6, and as a "third party research report" for
purposes of FINRA Rule 2241. In compliance with Rule 15a-6(a)(3) this research report is distributed only to "major U.S. institutional investors" as defined in
Rule 15a-6 and is not intended for use by any person or entity that is not a major U.S. institutional investor. If you have received a copy of this research report
and are not a major U.S. institutional investor, you are instructed not to read, rely on, or reproduce the contents hereof, and to destroy this research or return it
to JM Financial Institutional Securities or to JM Financial Securities.
This research report is a product of JM Financial Institutional Securities, which is the employer of the research analyst(s) solely responsible for its content. The
research analyst(s) preparing this research report is/are resident outside the United States and are not associated persons or employees of any U.S. registered
broker-dealer. Therefore, the analyst(s) are not subject to supervision by a U.S. broker-dealer, or otherwise required to satisfy the regulatory licensing
requirements of FINRA and may not be subject to the Rule 2241 restrictions on communications with a subject company, public appearances and trading
securities held by a research analyst account.
JM Financial Institutional Securities only accepts orders from major U.S. institutional investors. Pursuant to its agreement with JM Financial Institutional
Securities, JM Financial Securities effects the transactions for major U.S. institutional investors. Major U.S. institutional investors may place orders with JM
Financial Institutional Securities directly, or through JM Financial Securities, in the securities discussed in this research report.
Additional disclosure only for U.K. persons: Neither JM Financial Institutional Securities nor any of its affiliates is authorised in the United Kingdom (U.K.) by the
Financial Conduct Authority. As a result, this report is for distribution only to persons who (i) have professional experience in matters relating to investments
falling within Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (as amended, the "Financial Promotion Order"), (ii)
are persons falling within Article 49(2)(a) to (d) ("high net worth companies, unincorporated associations etc.") of the Financial Promotion Order, (iii) are
outside the United Kingdom, or (iv) are persons to whom an invitation or inducement to engage in investment activity (within the meaning of section 21 of the
Financial Services and Markets Act 2000) in connection with the matters to which this report relates may otherwise lawfully be communicated or caused to be
communicated (all such persons together being referred to as "relevant persons"). This report is directed only at relevant persons and must not be acted on or
relied on by persons who are not relevant persons. Any investment or investment activity to which this report relates is available only to relevant persons and
will be engaged in only with relevant persons.
Additional disclosure only for Canadian persons: This report is not, and under no circumstances is to be construed as, an advertisement or a public offering of
the securities described herein in Canada or any province or territory thereof. Under no circumstances is this report to be construed as an offer to sell securities
or as a solicitation of an offer to buy securities in any jurisdiction of Canada. Any offer or sale of the securities described herein in Canada will be made only
under an exemption from the requirements to file a prospectus with the relevant Canadian securities regulators and only by a dealer properly registered under
applicable securities laws or, alternatively, pursuant to an exemption from the registration requirement in the relevant province or territory of Canada in which
such offer or sale is made. This report is not, and under no circumstances is it to be construed as, a prospectus or an offering memorandum. No securities
commission or similar regulatory authority in Canada has reviewed or in any way passed upon these materials, the information contained herein or the merits
of the securities described herein and any representation to the contrary is an offence. If you are located in Canada, this report has been made available to you
based on your representation that you are an “accredited investor” as such term is defined in National Instrument 45-106 Prospectus Exemptions and a
“permitted client” as such term is defined in National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations. Under
no circumstances is the information contained herein to be construed as investment advice in any province or territory of Canada nor should it be construed as
being tailored to the needs of the recipient. Canadian recipients are advised that JM Financial Securities, Inc., JM Financial Institutional Securities Limited, their
affiliates and authorized agents are not responsible for, nor do they accept, any liability whatsoever for any direct or consequential loss arising from any use of
this research report or the information contained herein.