ipo review rating : unrated price band |...

September 13, 2017

IPO Review

ICICI Securities Ltd | Retail Equity Research

ICICI Lombard (Lombard) was founded as a joint venture between ICICI

Bank Ltd and Fairfax Financial Holdings Ltd. Lombard is the largest

private-sector non-life insurer in India based on gross direct premium

income (GDPI) in FY17. Its market share, by GDPI, increased from 7.9% in

FY15 to 8.4% in FY17. Lombard 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.

As of June 30, 2017, ICICI Lombard had 20,775 agents, 51 corporate

agents including bank partners, giving access to 4850 branches. Lombard

had | 150.79 billion in total investment assets, which is the largest among

private-sector non-life insurers in FY17. PAT and RoE were at | 6.42

billion and 17.2%, respectively, in FY17. Capital position remained strong

with solvency ratio of 2.10x compared to IRDAI-prescribed control level of

1.50x and an Indian non-life private-sector average of 1.96x.

Key business aspects

Consistent market leadership; demonstrated growth

ICICI Lombard has maintained a leadership position among private sector

non-life insurers in India across motor (own damage & third party liability),

health, crop/weather, fire, engineering and marine insurance, since FY15.

This leadership has been reinforced by a comprehensive and diverse

portfolio of insurance products, which have continuously evolved to

adapt to customer needs and changing industry dynamics. GDPI has

grown faster than industry at a CAGR of 26.7% in FY15-17 vs. a CAGR of

22.8% for the industry. As a result, its market share, by GDPI, increased

from 7.9% in FY15 to 8.4% in FY17.

Diverse product line with multi-channel distribution network

ICICI Lombard offers a diversified composition of insurance products with

motor, health and personal accident, crop/weather, fire, marine and

engineering insurance contributing 42.3%, 18.9%, 20.1%, 6.9%, 3.2% and

2.1%, respectively, of GDPI in FY17. It has a strong direct sales channel,

which contributed 43.2% of its GDPI in FY17. Further, it has 48 corporate

agents including ICICI Bank, 20383 individual agents and a strong digital

platform through which it issued 1.6 million policies in FY17.

Strong investment returns on diversified portfolio

Investments include debt, equities, mutual funds, real estate and other

alternative investments. As of March 31, 2017, 29.7% of total investment

assets, by carrying value, were held in government securities, 41.8% in

corporate bonds, 17.0% in equities and the remaining in other

investments. Investment assets were at | 150.79 billion, leading Lombard

to report the largest total investment assets in industry in FY17.

Concerns

Termination of, or adverse change of relationship with motor vehicle

manufacturers and ICICI Bank

Significant proportion of government business via crop and health

Geographical concentration

Market risk may impair the value of the investment portfolio

Priced at 46x P/E (post issue FY17 earnings) on higher band

At the IPO price band of | 651-661, the stock is available at a P/E multiple

of 46x FY17 (post issue) at the upper end of the price band. Post issue

market capitalisation is at ~| 30000 crore.

ICICI Lombard General Insurance Co Ltd

Price band | 651-661

Rating matrix

Rating : Unrated

Issue Details*

Issue Opens 15-Sep-17

Issue Closes 19-Sep-17

Issue Size (| Crore) 5615-5701

Price Band (|) 651-661

No of Shares on Offer (crore) 8.6

QIB (%) 50

Non-Institutional (%) 15

Retail (%) 35

Minimum lot size (No. of shares) 22

*Reservation for ICICI Bank shareholders for up to 5%

of the offered shares

Objects of the Issue

To achieve benefits of listing equity shares on Stock Exchanges and

sell up to 86,247,187 equity shares by the selling shareholders.

Listing of the equity shares will also enhance brand name and

provide liquidity to the existing shareholders

1997-98 2001-04 2006

HUL acquires 23% stake. Mitsubishi Corporation and

Shareholding Pattern Pre-Issue Post-Issue

Promoter & promoter group 63.0% 56.0%

Public 37.0% 44.0%

Financial Summary

| Crore FY14 FY15 FY16 FY17

Premiums earned - Net 4352 4234 4826 6158

Income from Investments 122 175 270 297

Claims Incurred (net) 3629 3446 3939 4966

PAT 520 585 505 642

Valuation Summary (at | 661; upper price band)

(x) FY14 FY15 FY16 Pre Post

P/E 53.9 50.7 58.5 46.2 46.2

P/BV 12.2 10.2 9.1 8.0 8.0

FY17

Research Analyst

Kajal Gandhi

[email protected]

Vishal Narnolia

[email protected]

Vasant Lohiya

[email protected]


Company Background

ICICI Lombard 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. ICICI Lombard was founded as a joint venture between ICICI

Bank Ltd and Fairfax Financial Holdings Ltd, a Canada based holding

company which, through its subsidiaries, is engaged in property and

casualty insurance and reinsurance & investment management with

US$43.38 billion of total assets as of December 31, 2016.

Lombard is the largest private-sector non-life insurer in India based on

gross direct premium income (GDPI) in FY17. This position has been

maintained since FY04 after being one of the first few private sector

companies to commence operations in the sector in FY01. Lombard

continued to grow faster than the industry, with GDPI growing at 26.7%

CAGR from FY15 to FY17, as compared to 22.8% CAGR for the Indian

non-life insurance industry in the same period. As a result, its market

share, by GDPI, increased from 7.9% in FY15 to 8.4% in FY17. In FY17,

Lombard issued 17.7 million policies with GDPI at | 107.25 billion, thus

becoming the first private-sector non-life insurer in India to reach the

| 100.00 billion mark in GDPI in FY17.

As of March 31, 2017, Lombard had | 150.79 billion in total investment

assets, which is the largest total investment asset among private sector

non-life insurers in India. PAT and return on equity were at | 6.42 billion

and 17.2%, respectively in FY17. The capital position stayed strong with

solvency ratio of 2.10x as of FY17 compared to IRDAI-prescribed control

level of 1.50x and an Indian non-life private-sector average of 1.96x.

Exhibit 1: Product wise gross direct premium income (ICICI Lombard)

Produt wise GDPI FY15 FY16 FY17

Own Damage 21.3 25.2 27.6

Third-party 12.8 16.3 17.8

Total Motor 34.2 41.5 45.4

Health 13.2 13.8 16.7

Personal Accident 2.3 2.8 3.6

Total Health and Personal Accident 15.5 16.6 20.3

Crop/Weather 2.8 5.9 21.5

Fire 5.5 6.3 7.5

Marine 2.5 3.0 3.4

Engineering 1.7 2.0 2.3

Other 4.7 5.6 7.0

Total 66.8 80.9 107.3

Source: RHP, ICICIdirect.com Research

In terms of products, ICICI Lombard has a diversified composition of

insurance products with motor, health and personal accident,

crop/weather, fire, marine, and engineering insurance contributing 42.3%,

18.9%, 20.1%, 6.9%, 3.2% and 2.1%, respectively, of GDPI in FY17. From

a customer point of view, in FY17, retail (including SME), corporate and

government business groups contributed 60.4%, 17.5% and 22.1% of

gross direct premium income, respectively.


Exhibit 2: Channel wise gross direct premium income (ICICI Lombard)

Distribution Channels FY15 FY16 FY17

Digital 1.6 2.0 2.2

Others 27.6 32.5 44.1

Direct-Total 29.2 34.5 46.3

Broker 19.0 26.1 32.7

Banks partners 5.8 6.0 7.2

Others 1.4 1.5 8.1

Corporate agents-Total 7.2 7.4 15.4

Individual agents 11.4 12.9 12.9

Total 66.8 80.9 107.3


On the geographical front, Lombard has operations across 28 states and

eight union territories in India through 249 offices, which are operated

from leased premises. Key distribution channels include direct sales,

individual agents, bank partners, other corporate agents, brokers and

digital, through which services are provided to customers. As of March

31, 2017, Lombard had 20,383 agents and bank partners, which gave it

access to 5,935 branches.

Exhibit 3: Geographical distribution of gross direct premium income (| billion)

Location FY15 FY16 FY17

Maharashtra 19.5 23.9 28.0

Madhya Pradesh 1.3 1.8 14.1

Delhi 8.3 8.3 8.9

Gujarat 5.8 7.1 8.1

Uttar Pradesh 4.5 6.5 6.4

West Bengal 2.6 2.9 6.0

Tamil Nadu 4.2 4.6 5.9

Karnataka 5.2 5.2 5.8

Telangana 0.6 2.6 5.7

Kerala 1.2 1.3 2.7

Odisha 0.8 1.1 2.5

Haryana 1.7 2.0 2.1

Andhra Pradesh 3.2 1.8 1.9

Bihar 1.0 1.3 1.5

Rajasthan 1.4 5.1 1.4

Punjab 1.1 1.3 1.4

Chandigarh 0.6 0.9 0.7

Chhattisgarh 1.5 0.5 0.6

Others 2.2 3.0 3.5

Total 66.8 80.9 107.3


Product profile

ICICI Lombard offers customers a comprehensive and well-diversified

range of products, including motor, health, crop/weather, fire, personal

accident, marine, engineering and liability insurance catering to individual

as well as corporate customers.

Motor insurance

Motor insurance consists of coverage of private motor cars, two-wheelers

and commercial vehicles. Motor insurance in India can be broadly divided

into two categories: own damage and third-party. Own damage motor

insurance protects a vehicle owner from damage or theft to his/her own

motor vehicle and is optional. On the other hand, third-party motor

insurance, which protects all third parties from damages suffered due to


an accident involving a motor vehicle, must be purchased by every motor

vehicle owner in India pursuant to the Motor Vehicles Act, 1988, as

amended.

ICICI Lombard’s GDPI from motor insurance increased from | 34.16 billion

in FY15 to | 45.42 billion in FY17, representing a CAGR of 15.3%. Motor

insurance accounted for 51.2%, 51.3% and 42.3% of GDPI in FY15, FY16

and FY17, respectively.

Health insurance

The health insurance portfolio consists of corporate health, mass health

and retail health insurance. The corporate health segment consists of

policies purchased by corporates, including SMEs, as employee benefits.

The mass health segment consists of participation in central and state

government health programmes including Rashtriya Swasthya Bima

Yojana (RSBY). The retail health segment consists of sales to individuals

broadly divided into two categories - benefit-based and indemnity-based

policies.

Lombard’s GDPI from health insurance increased from | 13.18 billion in

FY15 to | 16.68 billion in FY17, representing a CAGR of 12.5%. Health

insurance accounted for 19.7%, 17.1% and 15.5% of GDPI in FY15, FY16

and FY17, respectively.

Personal accident insurance

Personal accident insurance provides benefit-based coverage to

policyholders for accidents suffered by them. This insurance is offered to

corporate as well as retail customers. For Lombard, personal accident

insurance GDPI increased from | 2.33 billion in FY15 to | 3.58 billion in

FY17, representing a CAGR of 24.0%. Personal accident insurance

accounted for 3.5%, 3.4% and 3.3% of GDPI in FY15, FY16 and FY17,

respectively.

Crop/weather insurance

Crop/weather insurance is purchased by farmers to protect themselves

against a reduction in their crop yield or loss of their crops due to natural

phenomena like inadequate or excessive rainfall, hailstorm, landslides

and variation in temperature and humidity.

Lombard participates in two major crop-insurance related government

programmes, the Pradhan Mantri Fasal Bima Yojana (PMFBY) and the

Restructured Weather Based Crop Insurance Scheme (RWBCIS).

Crop/weather insurance accounted for 4.1%, 7.3% and 20.1% of GDPI in

FY15, FY16 and FY17, respectively. GDPI from crop/weather insurance

increased from | 2.76 billion in FY15 to | 21.51 billion in FY17,

representing a CAGR of 179.3%. The large growth in FY17 was due to

implementation of PMFBY programme by central and state governments.

Fire insurance

Fire insurance covers damage or loss to property because of fire, riot,

strike, earthquake, storm, flood, and certain other natural catastrophes.

For Lombard, GDPI from fire insurance increased from | 5.45 billion in

FY15 to | 7.45 billion in FY17, representing a CAGR of 16.9%. Fire

insurance accounted for 8.2%, 7.8% and 6.9% of GDPI in FY15, FY16 and

FY17, respectively.

Other insurance products

Apart from the above-mentioned, other insurance products by Lombard

consist of marine insurance (insures goods that are being transported, by

land or by sea, and the insurance of ships, boats and offshore structures),

Engineering insurance (insurance that provides coverage for risks faced

by an ongoing construction project, installation project, and machines

and equipment used in such project), travel insurance, aviation insurance,

etc.


Financial Performance

ICICI Lombard’s GDPI has grown at a healthy pace of 17.7% CAGR in

FY13-17. During FY15-17, Lombard’s GDPI grew at 26.7%, faster than the

industry. As a result, its market share, by GDPI, increased from 7.9% in

FY15 to 8.4% in FY17. AUM growth remained healthy at 19.1% CAGR in

FY13-17 at | 15079 crore. PAT was at | 642 crore in FY17, with return on

net worth exceeding 16% for each year since FY13. The capital position

remains strong with solvency ratio at 210% as on March 31, 2017

compared to the IRDAI prescribed level of 150%.

Exhibit 4: Net earned premium growth remains healthy

5582.3

6475.4

6370.6 8090.7 10725.2

16.0%

-1.6%

27.0%

32.6%

-10%

0%

10%

20%

30%

40%

0

2000

4000

6000

8000

10000

12000

FY13 FY14 FY15 FY16 FY17

| b

illion

Premiums earned - Net YoY growth (RHS)


Exhibit 5: Trend in AUM

930910200

11563

15079

24.1%

9.6% 13.4%

30.4%

0%

10%

20%

30%

40%

0

2000

4000

6000

8000

10000

12000

14000

16000

FY14 FY15 FY16 FY17

(%)

| b

illion

AUM YoY growth (RHS)

Source: RHP, ICICIdirect.com, Research

Exhibit 6: PAT growth trend

353

520

585

505

642

-20%

0%

20%

40%

60%

0

200

400

600

800


| c

rore

PAT YoY growth (RHS)


Exhibit 7: Return on net worth above 16%

19.9

21.720.3

15.617.2

0

10

20

30


(%)


Exhibit 8: Solvency ratio remains prudent (%)

155.0

172.0

195.0182.0

210.0

0

100

200

300


(%)



Indian non-life insurance industry – Quick snapshot

The Indian non-life insurance size was at | 1.28 trillion on a GDPI basis as

of March 31, 2017, making it the 15th largest non-life insurance market in

the world and fourth largest in Asia (Source: Swiss Re and Crisil

Research, Analysis of general insurance industry in India, July 2017). In

FY01-17, Indian non-life insurance GDPI grew at a healthy pace of

~17.4% CAGR. India was also among the fastest growing non-life

insurance markets over 2011-16, growing at 14.5% (Source: Swiss Re).

Despite this, India continues to be an underpenetrated market with a non-

life insurance penetration (Insurance penetration refers to premiums as a

percentage of GDP) of 0.77% in 2016, 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. Similarly, insurance density (per capita

premium or premium per person) also remains very low compared to

other developed and emerging market economies at US$13.2 in 2016.

Exhibit 9: Insurance penetration (as percentage of GDP) - 2016

4.29

2.742.58

2.37

1.81 1.76

1.36

0.77

0.51

0

1

1

2

2

3

3

4

4

5

5

US South

Africa

UK Japan China Brazil Russia India Indonesia

(%)


Exhibit 10: Non-life insurance density (2016)

2449

1031928

147 151 147 10018 13

0

500

1000

1500

2000

2500

3000

US UK Japan S.Africa Brazil China Russia Indonesia India

(U

SD

)


The Indian non-life insurance sector offers different products such as

motor, health, crop, fire, marine, liability, travel, aviation and home

insurance aimed at meeting different protection needs of retail customers,

government as well as corporate customers. The industry operates under

a “cash before cover” model under which insurers are not required to

assume underwriting risk until premiums are received except in the case

of government sponsored schemes like mass health and crop insurance.


The Indian non-life insurance sector holds significant growth potential

because of its under-penetration and low insurance density compared to

other economies. According to Crisil Research, GDPI for non-life insurers

are projected to grow at 15-20% CAGR in FY17-22. India’s large working

population, rising affluence, rapid urbanisation and rising awareness of

risk with higher disposable incomes is expected to continue to propel the

growth of the non-life insurance industry in India. In addition, improving

economic growth, emergence of new risks such as cyber frauds and a

strong regulatory focus on improving insurance coverage are expected to

be the key catalysts among others for this growth.

Recent catastrophic events have also highlighted the importance of

insurance in India. With only around 10% of economic losses being

insured in India, significant market potential exists for insurance as people

seek to obtain protection to reduce the impact of uninsured losses in the

event of a catastrophe.

Exhibit 11: Extent of uninsured losses in recent catastrophe events in India

Date Event Place of event

Economic

Losses

(USD bn)

Insured

Losses

(USD bn)

Un-insured

loss of

total loss

Dec, 2015 Floods Tamil Nadu and Andhra Pradesh 2.2 0.8 66%

Oct, 2014 Cyclone Hudhud Odisha and Andhra Pradesh 7.1 0.6 91%

Sept, 2014 Severe Monsoon Floods Jammu and Kashmir 6.0 0.2 96%

Sept, 2014 Severe Monsoon Floods

Assam, Bihar, Meghalaya, Uttar

Pradesh and West Bengal 6.1 0.2 96%

Oct, 2013 Cyclone Phailin Odisha 4.5 0.1 98%

Jun, 2013 Floods Uttarakhand 1.1 0.5 54%

Sept, 2009 Floods Andhra Pradesh and Karnataka 5.3 0.1 99%


Market structure

The Indian non-life insurance industry comprises 30 companies as of

March 31, 2017. These can be classified as per their domain or product

offering as under;

Multi-product insurers:

Four public sector companies offering multiple products –

National Insurance Company, The New India Assurance, Oriental

Insurance Company and United India Insurance

18 private sector companies – including ICICI Lombard, Bajaj

Allianz, HDFC Ergo, IFFCO Tokio and Tata AIG

Single Product Insurers:

Six standalone private health insurance companies – Apollo

Munich, Cigna TTK, Max Bupa, Religare Health, Star Health and

Aditya Birla

Two public sector specialised single product non-life insurance

companies – Agriculture Insurance Company (AIC), and Export

Credit Guarantee Corporation (ECGC)

Besides these 30 companies, the state owned General Insurance

Corporation of India (GIC) operates as the main Indian reinsurer. The

regulator has recently allowed foreign reinsurers to set up branch offices

in India. This is expected to lead to an increase in reinsurance capacity

thereby increasing the market depth.


Exhibit 12: GDPI by product segment and insurer (FY17)


Structural strength to drive life insurance industry

Demographics strength: India currently has one of the youngest

populations in the world, with a median age of 28 years. It is estimated

that 90% of Indians will still be below the age of 60 by 2020 (according to

Crisil Research). Rapid urbanisation coupled with a high share of working

population with rising affluence and labour mobility is expected to

provide an impetus to growth in the Indian non-life insurance sector.

Exhibit 13: Indian working population

34.727.5 30.8

6.9

30.9

27.6

33.7

7.8

27.5

26

37

9.5

0

20

40

60

80

100

120

0-14 15-29 30-59 60+

(%

)

2000 2010 2020E



Exhibit 14: Urban proportion of total population (2016)

94.1

8681.8

74.1

65.3

56.2 54.5

33.1

0

10

20

30

40

50

60

70

80

90

100

Japan Brazil US Russia S.Africa China Indonesia India

(U

SD

)


Recent product innovations: Non-life insurers have been continuously

innovating with new product offerings and services in response to market

needs. In FY17, 165 products were cumulatively introduced across

insurers, compared with 101 products in FY16. Products launched include

long term health insurance, long term two wheeler insurance, cyber

liability, crop insurance through PMFBY and railway accident insurance.

Add-on products such as engine protect, road assistance, zero

depreciation, return to invoice have also been introduced in recent times

to offer additional services to the customers.

Improved penetration in motor insurance to boost growth: In India, motor

insurance forms the largest pie in the Indian non-life insurance sector

contributing ~40% of industry GDPI in FY17. Among the segment, own

damage motor insurance forms ~19% of industry GDPI, while third party

motor insurance forms ~21% of industry GDPI in FY17. Despite being

more advanced than other forms of non-life insurance, motor insurance in

India continues to be underpenetrated relative to global levels. As per

Crisil Research estimates, only 60% of cars, older than three years, are

insured in India against the global benchmark of 90%. In two wheelers,

only ~25% are insured in India against global benchmark of over 90%.

Exhibit 15: Projected growth rates for individual segments in motor insurance


Increased commission rates for comprehensive auto insurance policies

and third party insurance has been adopted aiming to improve renewal

rates. Improving adoption of telematics is expected to improve own

damage motor insurance performance. Passage of Motor Vehicles

(Amendment) Bill 2016, a legislation that is currently being evaluated by

the Indian parliament is expected to bring in long term changes in the

industry.

Historical evolution of Indian non-life insurance industry

The Indian non-life insurance sector has experienced three phases of

growth since FY02, when the sector was opened to private companies,


and to foreign companies, subject to a shareholding cap of 26%. The tariff

regime applicable to pricing of products offered by non-life insurance

companies primarily determined the historical evolution in the industry.

IRDA has, at periodic interval, modified the tariff structure in the industry

to reach the current regime.

Exhibit 16: Evolution of tariff regime for key product segments


Currently, third party motor insurance remains the only tariffed product

segment. IRDA has de-tariffed the health insurance segment. However,

the premiums filed can ordinarily not be changed for a period of three

years, after a product has been cleared. Thereafter, based on the product

experience and approval of IRDAI, premiums are allowed to be revised.

The Indian non-life insurance industry has undergone various growth

phases as depicted in the exhibit below.

Exhibit 17: Phases of growth in non-life insurance industry


Private insurer gaining market share: In the initial phase (FY02-07), post

opening up the sector for private participation, industry GDPI grew at

17.2% CAGR with private insurers gaining market share at ~33%. Post

de-tariffing of premium (second phase from FY08-11) except for third

party motor insurance, industry GDPI grew at 15.8% CAGR in FY07-11.

Private insurer market share, in terms of GDPI, reached 37% by FY11

increasing ~400 bps over the previous phase. Improvement in growth

enabled by proactive regulatory steps presented new avenues for growth


and eased restrictions on existing product lines. Industry GDPI grew at

18.1% CAGR in FY11-17. Since inception, the private multi-product sector

has grown significantly and currently accounts for ~42% (46.7%

including private standalone health insurers) of GDPI of non-life insurance

industry in FY17. Market share growth was driven by superior customer

service and claims settlement.

Exhibit 18: Market share of private insurer on the rise (GDPI basis)

36.1 36.7 35.6 36.1 37.3 39.3 40.0 40.3 40.0 42.1

58.4 56.9 55.7 54.8 53.9 52.1 51.3 51.7 51.0 46.8

0

20

40

60

80

100

FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17

(%

)

Private Multi-Product Insurers Public Multi-Product Insurers

Private Standalone Health Insurers Specialised Insurers


Channel mix shift towards direct and broker: Indian non-life insurers

employ a multi-channel approach to market and sell their products,

including individual agents, bank partners, other corporate agents,

brokers, direct sales and online channels.

In FY11-16, the proportion of broker and individual agent has been on the

rise increasing from 17% to 26.1% and 30.2% to 34.9%, respectively.

However, a shift in channel mix has been witnessed from earlier agency

only model towards direct business. This shift can be partially attributed

to incremental crop insurance business (that is clubbed under direct

business) and increased usage of online & mobile platform by retail

customers. Consequently, the share of direct business increased ~6.6%

from 25.1% in FY16 to 31.7% in FY17.

With advantages such as ability to cross-sell products and collect more

detailed customer data while encouraging better renewal rates through

ease of access and not involving any commission payments to

intermediaries, the online channel is increasingly emerging as a key

distribution channel. Products commonly sold through this channel are

motor, travel and health insurance.


Exhibit 19: Channel wise GDPI of Indian non-life insurance

17.0 18.522.7 22.9 22.1 26.1 25.8

11.6 7.37.4 7.3 8.3

8.0 6.3

35.2 40.7 33.2 32.0 26.825.1

31.7

30.2 30.532.8 34.0

36.7 34.930.0

0

20

40

60

80

100

FY11 FY12 FY13 FY14 FY15 FY16 FY17

(%

)Brokers Corporate Agents - Banks Corporate Agents - Others Direct Business Individual Agents


Key strengths and strategies:

Consistent market leadership, demonstrated growth

ICICI Lombard has maintained a leadership position among private sector

non-life insurers in India across motor (own damage and third party

liability), health and personal accident, crop/weather, fire, engineering and

marine insurance, since FY15. This leadership has been reinforced by a

comprehensive and diverse portfolio of insurance products, which have

been continuously evolved to adapt to the needs of customers and

changing industry dynamics.

Exhibit 20: Market share comparison (FY17)

18

12.8

9.89.2

7

8.4

6

4.6 4.43.3

0

4

8

12

16

20

ICICI Lombard Bajaj Allianz HDFC Ergo IFFCO Tokio Tata AIG

(%

)

Market share - private Market share - overall


GDPI has grown faster than industry at a CAGR of 26.7% from FY15 to

FY17, compared to a CAGR of 22.8% for the Indian non-life insurance

industry. As a result, its market share, by GDPI, increased from 7.9% in

FY15 to 8.4% in FY17.


Exhibit 21: Market share of non-life insurer as per GDPI (FY17)

New

India,

15%United India, 12%

National , 11%

Oriental, 9%

ICICI-lombard, 8%Bajaj Allianz, 6%

AIC (crop), 6%

IFFCO-Tokio, 4%

HDFC ERGO, 5%

Tata-AIG, 3%

Reliance General, 3%

Others, 18%


Diverse product line with multi-channel distribution network

Lombard continued to reinforce its industry leadership by offering

products and solutions that address the untapped and evolving needs of

customers. The company has established itself as a reliable one-stop

insurer for diverse customer requirements. Lombard offers diversified

composition of insurance products with motor, health and personal

accident, crop/weather, fire, marine, and engineering insurance

contributing 42.3%, 18.9%, 20.1%, 6.9%, 3.2% and 2.1%, respectively, of

GDPI in FY17. The company was among the first Indian insurers to offer

parameterised weather-based crop insurance and long-term two-wheeler

motor vehicle insurance policies.

Exhibit 22: Premium channel mix (9MFY17)

30.5 35.9

1832.4 36.7

75

200.05

6.5

0

40

80

120

ICICI

Lombard

Bajaj Allianz HDFC Ergo IFFCO Tokio Tata AIG

(%

)

Brokers Corporate Agents - Bank

Corporate Agents - Others Individual Agents

Direct Business (incl. Others)


Exhibit 23: GDPI channel mix (ICICI Lombard)

43.828.5

10.8 17.0

42.7

32.2

9.216.0

43.2

30.5

14.3

12.0

0

20

40

60

80

100

120

140

Direct-Total Broker Corporate

agents-Total

Individual

agents

(%

)

FY15 FY16 FY17


It has a strong direct sales channel, which contributed 43.2% of its GDPI

in FY17. Further, it has 48 corporate agents including ICICI Bank, 20383

individual agents and strong digital platform through which it issued 1.6

million policies in FY17.

Strong investment returns on diversified portfolio

The investment management philosophy of the company is to earn

investment returns commensurate with the risks undertaken, following

the principle of capital preservation and a total income approach.

Investments include debt, equities, mutual funds, real estate and other

alternative investments. As of March 31, 2017, 29.7% of total investment

assets, by carrying value, were held in government securities, 41.8% in

corporate bonds, 17.0% in equities and remaining in other investments.


Investment assets increased from | 102.00 billion on March 31, 2015 to |

150.79 billion on March 31, 2017, making ICICI Lombard the private-sector

non-life insurer with largest total investment assets in India. Investment

leverage, net of borrowings, has increased from 3.51x in FY015 to 3.92x

in FY17 while net worth increased 28.2% in the same period.

Exhibit 24: Investment return (ICICI Lombard)

10.4 10.3 10.0

18.0

8.8

13.0

0

20

FY15 FY16 FY17

(%

)

Realised return (annualised) Total portfolio return (including unrealised gains)


ICICI Lombard has achieved an annualised total portfolio return (including

unrealised gains) of 18.0%, 8.8% and 13.0% and an annualised realised

return of 10.4%, 10.3% and 10.0% for FY15, FY16 and FY17, respectively.

Since FY04, the listed equity portfolio has returned an annualised total

return of 30.8%, compared to an annualised return of 17.5% on the

benchmark S&P Nifty index.

Exhibit 25: Solvency ratio (Q3FY17)

210.3

261.2

170.7160

178.6

0

100

200

300

ICICI Lombard Bajaj Allianz HDFC Ergo IFFCO Tokio Tata AIG

(%

)


Exhibit 26: Three year average RoE

19.3

24.8

15

21.3

10.8

0

20

40

ICICI

Lombard

Bajaj Allianz HDFC Ergo IFFCO Tokio Tata AIG

(%

)


Focus on investments in technology and innovation

ICICI Lombard is one of the insurers at the forefront of leveraging

technology in the Indian non-life insurance industry. Its ability to integrate

multiple distribution partners seamlessly into its systems & processes has

helped increase its efficiency in business. Lombard has directly integrated

point of sale systems of certain bus companies, railways and airlines with

its policy booking and issuance systems to provide low-coverage travel

insurance for customers. For example, it is one of the three non-life

insurance partners of Indian Railway Catering and Tourism Corporation

(IRCTC), covering over 300,000 trips per day as of March 31, 2017.

In FY17, 87.5% of total 17.7 million policies were initiated on the digital

platform, either by its distributors or customers. This has led to an

improvement in its employee productivity, measured in terms of GDPI per

employee, from | 11.4 million in FY15 to | 16.6 million in FY17,

representing a CAGR of 20.7%.


Key risks and concerns

Termination of, or any adverse change to relationship with motor vehicle

manufacturers and ICICI Bank

A significant proportion of GDPI is derived from sales to customers of

motor vehicle manufacturers (MVM). Any disruption in relationship with

distributors through whom the company sells policies to customers of

MVMs as a result of termination or otherwise could substantially impact

future growth opportunities. The company also has bank partner

relationship with various banks, including ICICI Bank. ICICI Bank

accounted for 7.2%, 6.5% and 6.0% of GDPI in FY15, FY16 and FY17,

respectively. Currently, ICICI Bank exclusively distributes the company’s

insurance products in India. Thus, any termination of, disruption to, or

any other adverse change in relationship with MVMs and/or banks could

significantly reduce product sales and growth opportunities.

Higher dependence on selected types of insurance

In FY17, motor insurance, crop/weather insurance and health insurance

accounted for 42.3%, 20.1% and 15.5% of GDPI, respectively. Any

constraint in selling these products due to future regulatory changes

restricting or limiting the sale or marketing of these products, changes in

customer preference or any other factor could have a material adverse

effect on the company.

Significant proportion of government business

In FY17, 22.1% of GDPI was derived from central and state government

programmes, in relation to crop/weather, mass health and mass personal

accident insurance. Occurrence of any risk including delay or non-

payment of obligations by the government, changes in government

policies or regulations, investigations by various law enforcement

agencies upon allegations of misconduct or irregularities, etc, could

materially impact business, financial condition, results of operations and

cash flows.

Catastrophic events, including natural disasters, may materially increase

liabilities for claims

Fire, engineering, crop/weather, motor and health insurance businesses

expose the company to risks of liabilities for insurance claim payments

relating to catastrophic events, which are covered by insurance.

Catastrophes can be caused by various natural hazards, including

earthquakes, typhoons, floods, drought, windstorms, hailstorms, severe

weather and forest fires. Catastrophes may also be man-made, such as

terrorist attacks, explosions and industrial or engineering accidents.

Catastrophes could also result in losses in our investment portfolios, due

to, among others, the failure of counterparties to perform their obligations

or significant volatility or disruption in financial markets, and could, in

turn, have a material adverse effect on the company’s business, financial

condition, results of operations and prospects.

Geographical concentration

In FY17, Maharashtra, Madhya Pradesh and the National Capital Territory

of Delhi, together accounted for 47.6% of GDPI. Given geographic

concentration, risk pertaining to any catastrophic event in such locations,

decline in local economic conditions and/or change in local regulations

could have a material adverse effect on the business, financial condition,

results of operations and prospects.

Market risk may impair value of investment portfolio

As of March 31, 2017, 81.8%, 17% of total investment assets, by carrying

value, were invested in fixed income assets and equity markets. Volatility

in prevailing interest rates and equity markets affect investment returns,


in turn, could have a material effect on investment income, financial

condition, results of operations and prospects. As the combined ratio is

over 100%, higher reliance upon investment income for profitability could

materially affect overall performance.

Reliant on ‘ICICI Lombard’ brand

Business is, to a large extent, reliant on the strength of the ‘ICICI Lombard’

brand and its reputation, and that of its promoter, ICICI Bank. It is critical

to the business that consumers continue to recognise and trust the ICICI

Lombard brand. Business may be subject to periodic negative publicity,

which could have a material adverse effect on its business, financial

condition, results of operations and prospects.


Financial Summary

Exhibit 27: Policyholders Account

(| Crore) FY13 FY14 FY15 FY16 FY17

Premiums earned - Net 4,012.3 4,352.3 4,234.1 4,826.3 6157.78

Income from Investments 57.5 121.7 175.4 270.4 297.0

Other income 14.6 21.5 31.5 48.3 26.9

Interest, Dividend & Rent- Gross 403.0 532.9 603.8 659.2 698.9

Total 4,487.4 5,028.4 5,044.8 5,804.3 7180.49

Claims Incurred (net) 3350.2 3628.9 3445.6 3939.1 4965.6

Commission (net) -183.1 -229.1 -346.3 -328.0 -434.1

Operating expenses related to insurance business 1019.4 1215.8 1387.1 1711.2 1982.0

Premium deficiency -1.7 0.0 0.0 0.0 0.0

Transfer to Shareholders' account 302.7 412.8 558.4 482.0 667.01


Exhibit 28: Shareholders Account


Operating profit/(loss)

(a) Fire Insurance 39.5 62.2 44.8 110.4 99.6

(b) Marine Insurance 0.4 -25.0 -29.4 -28.4 -15.0

(c) Miscellaneous Insurance 262.9 375.7 543.0 400.0 582.4

Income from investments 111.2 136.0 182.0 227.8 314.6

Other income 2.4 7.5 2.1 14.4 2.0

Total revenue 416.2 556.3 742.4 724.2 983.65

Provisions 56.1 12.5 21.7 1.0 5.1

Other expenses 8.8 10.4 15.7 18.4 98.4

Profit before tax 351.4 533.4 705.1 704.8 880.1

Tax -28.7 -18.0 119.3 200.7 258.0

PAT 380.1 551.5 585.8 504.1 622.1


Exhibit 29: Balance Sheet


Sources of Funds

Share capital 437 445 447 448 451

Reserves and Surplus 1422 1969 2460 2808 3274

Share application money-pending allotment 100 0 0 0 1

Net worth 1959 2414 2907 3255 3727

Shareholders funds 12 18 69 61 175

Policyholders funds 58 95 287 249 503

Borrowings 0 0 0 0 485

Total Liabilities 2029 2528 3263 3564 4889

Applications of Funds

Investments - Shareholders 1289 1508 2089 2389 3983

Investments - Policyholders 6511 7782 8111 9174 11096

Loans 0 0 0 0 0

Fixed assets 400 389 390 383 383

Deferred tax asset 38 56 118 144 87

Net current assets -6309 -7207 -7445 -8525 -10660

Debit balance in profit and loss account 100 0 0 0 0

Total 2029 2528 3263 3564 4889



Exhibit 30: Key Ratios

(Year-end March) FY13 FY14 FY15 FY16 FY17

Valuation

No. of Equity Shares (Crore) 43.7 44.5 44.7 44.8 45.1

Diluted EPS (|) 8.6 12.3 13.1 11.3 14.3

BVPS (|) 40.2 54.2 65.1 72.7 82.6

P/E 76.9 53.9 50.7 58.5 46.2

P/B 16.4 12.2 10.2 9.1 8.0

Efficiency Ratios (%)Expense of Management to Net Written

Premium Ratio 30.6 33.6 38.1 37.9 36.7

Net Incurred Claims to Net Earned Premium 83.5 83.4 81.4 81.6 80.6

Combined ratio 103.7 105.3 104.9 107.1 104.1

Operating Profit Ratio 7.5 9.4 13.0 9.5 10.8

Return Ratios and capital (%)

Return on Net worth 19.9 21.7 20.3 15.6 17.2

Solvency Ratio 155 172 195 182 210



RATING RATIONALE

ICICIdirect.com endeavours to provide objective opinions and recommendations. ICICIdirect.com assigns ratings to its

stocks according to their notional target price vs. current market price and then categorises them as Strong Buy, Buy, Hold

and Sell. The performance horizon is two years unless specified and the notional target price is defined as the analysts'

valuation for a stock.

Strong Buy: >15%/20% for large caps/midcaps, respectively, with high conviction;

Buy: >10%/15% for large caps/midcaps, respectively;

Hold: Up to +/-10%;

Sell: -10% or more;

Pankaj Pandey Head – Research [email protected]

ICICIdirect.com Research Desk,

ICICI Securities Limited,

1st Floor, Akruti Trade Centre,

Road No 7, MIDC,

Andheri (East)

Mumbai – 400 093

[email protected]


ANALYST CERTIFICATION

We /I, Kajal Gandhi, CA, Vasant Lohiya, CA and Vishal Narnolia, MBA, Research Analysts, authors and the names subscribed to this report, hereby certify that all of the views expressed in this research

report accurately reflect our views about the subject issuer(s) or securities. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s)

or view(s) in this report.

Terms & conditions and other disclosures:

ICICI Securities Limited (ICICI Securities) is a full-service, integrated investment banking and is, inter alia, engaged in the business of stock brokering and distribution of financial products. ICICI Securities

Limited is a Sebi registered Research Analyst with Sebi Registration Number – INH000000990. ICICI Securities is a wholly-owned subsidiary of ICICI Bank which is India’s largest private sector bank and has

its various subsidiaries engaged in businesses of housing finance, asset management, life insurance, general insurance, venture capital fund management, etc. (“associates”), the details in respect of which

are available on www.icicibank.com.

ICICI Securities is one of the leading merchant bankers/ underwriters of securities and participate in virtually all securities trading markets in India. We and our associates might have investment banking

and other business relationship with a significant percentage of companies covered by our Investment Research Department. ICICI Securities generally prohibits its analysts, persons reporting to analysts

and their relatives from maintaining a financial interest in the securities or derivatives of any companies that the analysts cover.

The information and opinions in this report have been prepared by ICICI Securities and are subject to change without any notice. The report and information contained herein is strictly confidential and

meant solely for the selected recipient and may not be altered in any way, transmitted to, copied or distributed, in part or in whole, to any other person or to the media or reproduced in any form, without

prior written consent of ICICI Securities. While we would endeavour to update the information herein on a reasonable basis, ICICI Securities is under no obligation to update or keep the information current.

Also, there may be regulatory, compliance or other reasons that may prevent ICICI Securities from doing so. Non-rated securities indicate that rating on a particular security has been suspended

temporarily and such suspension is in compliance with applicable regulations and/or ICICI Securities policies, in circumstances where ICICI Securities might be acting in an advisory capacity to this

company, or in certain other circumstances.

This report is based on information obtained from public sources and sources believed to be reliable, but no independent verification has been made nor is its accuracy or completeness guaranteed. This

report and information herein is solely for informational purpose and shall not be used or considered as an offer document or solicitation of offer to buy or sell or subscribe for securities or other financial

instruments. Though disseminated to all the customers simultaneously, not all customers may receive this report at the same time. ICICI Securities will not treat recipients as customers by virtue of their

receiving this report. Nothing in this report constitutes investment, legal, accounting and tax advice or a representation that any investment or strategy is suitable or appropriate to your specific

circumstances. The securities discussed and opinions expressed in this report may not be suitable for all investors, who must make their own investment decisions, based on their own investment

objectives, financial positions and needs of specific recipient. This may not be taken in substitution for the exercise of independent judgment by any recipient. The recipient should independently evaluate

the investment risks. The value and return on investment may vary because of changes in interest rates, foreign exchange rates or any other reason. ICICI Securities accepts no liabilities whatsoever for any

loss or damage of any kind arising out of the use of this report. Past performance is not necessarily a guide to future performance. Investors are advised to see Risk Disclosure Document to understand the

risks associated before investing in the securities markets. Actual results may differ materially from those set forth in projections. Forward-looking statements are not predictions and may be subject to

change without notice.

ICICI Securities or its associates might have managed or co-managed public offering of securities for the subject company or might have been mandated by the subject company for any other assignment

in the past twelve months.

ICICI Securities or its associates might have received any compensation from the companies mentioned in the report during the period preceding twelve months from the date of this report for services in

respect of managing or co-managing public offerings, corporate finance, investment banking or merchant banking, brokerage services or other advisory service in a merger or specific transaction.

ICICI Securities or its associates might have received any compensation for products or services other than investment banking or merchant banking or brokerage services from the companies mentioned

in the report in the past twelve months.

ICICI Securities encourages independence in research report preparation and strives to minimize conflict in preparation of research report. ICICI Securities or its associates or its analysts did not receive any

compensation or other benefits from the companies mentioned in the report or third party in connection with preparation of the research report. Accordingly, neither ICICI Securities nor Research Analysts

and their relatives have any material conflict of interest at the time of publication of this report.

It is confirmed that Kajal Gandhi, CA, Vasant Lohiya, CA and Vishal Narnolia, MBA Research Analysts of this report have not received any compensation from the companies mentioned in the report in the

preceding twelve months.

Compensation of our Research Analysts is not based on any specific merchant banking, investment banking or brokerage service transactions.

ICICI Securities or its subsidiaries collectively or Research Analysts or their relatives do not own 1% or more of the equity securities of the Company mentioned in the report as of the last day of the month

preceding the publication of the research report.

Since associates of ICICI Securities are engaged in various financial service businesses, they might have financial interests or beneficial ownership in various companies including the subject

company/companies mentioned in this report.

It is confirmed that Kajal Gandhi, CA, Vasant Lohiya, CA and Vishal Narnolia, MBA, Research Analysts do not serve as an officer, director or employee of the companies mentioned in the report.

ICICI Securities may have issued other reports that are inconsistent with and reach different conclusion from the information presented in this report.

Neither the Research Analysts nor ICICI Securities have been engaged in market making activity for the companies mentioned in the report.

We submit that no material disciplinary action has been taken on ICICI Securities by any Regulatory Authority impacting Equity Research Analysis activities.

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 ICICI Securities and affiliates 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 certain category of investors. Persons in whose possession this document may come are required to inform themselves of and

to observe such restriction.

ICICI Securities Limited has been appointed as one of the Global Coordinators and Book Running Lead Managers to the initial public offer of ICICI Lombard General Insurance Company Limited. This mailer

is prepared on the basis of publicly available information.

ipo review rating : unrated price band |...

Documents