ICICI Lombard - Quality franchise in under penetrated industry

Stock Opportunities
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In this business, market share has limited meaning as most policies are annual and next year, the customer may not renew with you.

  • 25% of Bharti Axa’s business is crop insurance, a segment ICICI Lombard just exited because it was not profitable.
  • Bharti Axa’s bancassurance partners HDFC Bank & Axis Bank will not be willing to sell ICICI Lombard policies with as much enthusiasm as they did for Bharti Axa.
  • ICICI Bank stake will reduce to around 47%. Due to some strange regulatory reason, they have to either raise it back above 50% or bring it down to 30%. Mr. Dasgupta said they will gradually bring it down to 30.
  • Doubts about asset quality issues remain. Bharti Axa’s investments in Zee, DHFL, etc. are known cases but what else remains under the hood is not known (at least to outsiders).
  • Bharti & Axa will hold around 7% post-merger. There is no lock in, and the threat of their selling this stake will remain a hangover on the stock.

ICICI Lombard’s whole argument to make the deal beneficial is based on cutting operational costs, which they say are currently very high for Bharti Axa. But even here, Mr. Dasgupta did not lay out any concrete roadmap in terms of timelines and numbers.

For most of the negatives that the analysts pointed out, Mr.Dasgupta said it has been already factored into the deal.

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I don’t think he said that the bank would reduce stake to 30%. Icici bank will make appeal to the respective regulators to hold the current stake.

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Curious if HDFC Bank has an ergo and still used to sell the AXA policies, why will it not sell Lombard with same enthusiasm? Thanks

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Bharti AXA’s Crop business is a profitable one. Loss ratios are near 40% only; compared to what ICICI Lombard had.

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Thanks Vivek - Fantastic blurb giving a quick overview of the firm. Sorry as this could sound like a naive question - doesn’t the low interest rate environment now post a threat to the bottom line ? Thanks again

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Thanks for feedback. That depends upon portfolio of fixed income they have. If they have long duration bonds as mix, they will party offset loss from coupon for new securities with capital gains of existing bonds. But yes, that’s true and hence non-life insurance premiums are cyclical in nature across the world.

Another interesting point on pricing power is that players like acko waived-off premiums during covid but ICICI lombard did not despite its expenses going down (please correct me if I missed this update and they have also done the same).

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ICICI LOMBARD - notes from AR 2019-20 -

  1. Company is a leading private sector insurer in India. Has been present in India for two decades - therefore knows the customer needs and designs products accordingly.

Branches - 273
Partner Garages - 8800
Partner Hospitals - 6536
Total Headcount - 10,600
No of Call centers - 02
Call center executives - 501
Health claim managers - 290
Motor claim managers - 756
Actuarial team - 22

  1. Combined ratio in the last 3 FYs - 100.2, 98.8,100.4

Investment assets in last 3 FYs ( in Rs Billion ) - 181 , 222 , 263

PAT- last 3 FYs ( in Rs Billion ) - 8.62, 10.49, 11.94

Solvency- last 3 FYs - 2.05, 2.24, 2.17

RoE - last 3 FYs - 20.8, 21.3, 20.8

  1. Breakdown of Insurance segments ( revenue wise ) -

Motor - Own Damage - 28 pc
Motor - Third Party - 23 pc
Health and Personal accident - 25 pc
Marine- 4pc
Fire- 12 pc
Others - 8 pc

  1. Mkt share - 7 pc - overall
    Pvt Sec Mkt share - 14.6 pc
    Debt/Equity - 0.08
    Investment leverage - 4.21 times
  2. Latest trends and challenges in the Industry-
    Artificial intelligence, block chain, machine learning - based risk modelling.

Rise of aggregators giving customer access to lowest cost insurer at the click of a button

6. Non life Insurance industry growth from 2001-20 - 16.7 pc CAGR !!!

Growth largely led by - fire, motor - TP, retail health and group health segments.

Private sector’s Mkt share- 48.2 pc of the total gen insurance industry.

  1. Total policies issued by the company in FY 19-20- 2.6 cr, collecting a GDPI of Rs 13,313 cr - a de-growth of 8.1 pc as the company took a concious call to exit the underpriced crop insurance segemnt. Excluding crop insurance, GDPI grew by 10.5 pc.

Percentage of Crop insurance has dropped from 17 pc to zero in FY 19-20 !!!

Percentage of all other segments like Motor - od / tp, Health , Fire, Marine, Others has increased.

Fastest growing segemts -retail health, SME insurance.

Company is the fifth largest general insurance player in India.

  1. Total investments - Rs 26,327 cr with a leverage of 4.21 times. Since inception, company has had no instances of delayed payments / defaults on its debt portfolio. Listed equity makes up 8 pc of company’s investments by carrying value as on 31 Mar. Listed portfolio of the company has returned 23.2 pc CAGR returns since inception !!!
  2. Total new products launced across all verticals ( incl ind, corp and group ) in last FY - 18

Motor insurance OD mkt share - 13.9 pc vs 12.9 pc last yr

Individual Heath Indemnity business grew - 16.6 pc to reach Rs 564 cr

SME - CAGR of over 27.5 pc in last 3 yrs- crossing the Rs 1000 cr premium collection mark. Most SME products also avlb on digital platforms. Key focus of this vertical- 100 pc profitable customer retention. Providing customised options at the time of renewals

NEW COVID-19 product- under group insurance category. Provides 100 pc of sum assured irrespective of hospitalisation expenses

Lombard - Emergency amublance service - avlb in 39 cities

  1. Corporate Solutions-

Fire insurance - Mkt share up to 9.8 pc vs 9.3 pc last yr

Engineering insurance - mkt share at 11.9 pc vs 11.5 pc last yr

Marine insurance - Mkt share at 14.9 pc vs 13.9 pc last yr. Marine segment includes products like - anti theft, anti hijacking, supply chain solutions, marine loss engineering solutions etc

Laibility insurance - mkt share at 15.5 pc vs 14.7 pc last yr

Disc: innvested. Views may be biased.

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Has anyone done any analysis of recent Bharti AXA GI and ICICI Lombard scheme of arrangement and earnings impact?

This report is giving few pointers but would like to study more if anyone has done any work on it.

https://www.icra.in/Rationale/ShowRationaleReport/?Id=97598

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Below video is from Edelweiss EmergingIdeas2020, VirtualConference. Looks most of slides used are same as H12021 earnings call.

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Not a detailed analysis on the earnings impact but the following points build onto the thesis I already have -

Bharti AXA works at a loss ratio of ~78% (including crop vertical) and a combined ratio of ~120%
The equity dilution will be < 10% for existing shareholders post the share swap
GDPI of combined entity goes up by ~23% due to the merger, ~18% if one totally discounts the crop vertical
Investment Book increases by ~18% post merger

Reading between the lines, ICICI Lombard is likely to optimize the cost structure of the combined entity and unlock serious savings. From the investor presentation of Nov -

“Significant headroom for operating leverage and cost effectiveness over time”
“No capital raise is required for solvency purpose”

Over a period of 18-24 months, I would expect the combined entity to report a combined ratio < 105% on a conservative note. In terms of deal making, ICICI Lombard management has been street smart as usual.

The discretionary nature of the business building expenses is the ace in the pack which many analysts do not appear to understand all that well. You can see this in HDFC Life financials too, due to this discretionary expense the PAT ends up being understated by at least 300 Cr per year in my assessment. Anyone who has spent time in the field as a salesman in the financial services segment in India will know exactly what I am talking about. EPS accretion is not the optimal lens to view this deal or this business for that matter.

Disclosure: Invested for self and customers, I am a SEBI registered IA

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ICICI Lombard gets approval to open international financial services centre unit

https://economictimes.indiatimes.com/industry/banking/finance/icici-lombard-gets-approval-to-open-international-financial-services-centre-unit/articleshow/80708902.cms?

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The recent 0.62% stake sale of HDFC Ergo (from HDFC to ergo) to maintain shareholding at <50% levels according to RBI requirements values HDFC ergo at ~11.7 P/B.

236.48 cr. for 0.62% stake implies valuation of ~38142 cr. Net worth was 3253.55 cr. (March 31, 2021). P/B ~11.7

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The Covid claims of 600 crores this quarter put a dent onto the company’s performance for the quarter.

The company reported a very weak set of results on the back of higher claims, especially on the Health Insurance basket with Loss ratio for the health segment at 153%

There are various headwinds that the company is facing such as :

The second wave of COVID brought in huge number of claims. (Just to give a perspective, the industry received 1 million COVID claims in Q1 FY22 alone against 0.98 million in the whole of FY21. Of the total claims 4% of them were received by ICICI Lombard)
The company faced 604 Crores Health claims during the second-wave of COVID-19 in Q1 FY22, whereas this number stood at 20 Crores in Q1 FY21. The company has created a further reserve termed as IBNR (Incurred but not recognised) Claims to the tune of 220 Crores. These 220 crores IBNR reserve is included in the 604 Claim number.
The company is still awaiting price hike on the Motor TP segment. (29% of Net Earned Premium)
The company expects Health Insurance claims (COVID / NON COVID) to continue to come higher than Pre Covid levels due to increase in treatment charges (Longer stays, Higher consumables costs etc.) and it might be here to stay in the long run.
The Combined Ratio for the Quarter came in at 120%. The concern here remains with regards to the Combined Ratio dilution that was expected to happen with the integration of Bharti AXA (Combined Ratio as of FY21 at 120%). The company expects to continue facing headwinds going forward in the short term which should keep the Combined Ratio elevated

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news share : 'Bumper-to-bumper' insurance should be mandatory, says Madras HC | Business Standard News
disc invested

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Update on Bharati AXA Gen Insurance demerger

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Most I like is the valuation framework around 33 mins. I found it useful to share…

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