New India, ICICI Lombard may take time to win investor faith

As the general insurers are yet to report underwriting surplus, dependence on investment gains will remain high

Despite being 2017’s celebrated Initial Public Offerings, ICICI Lombard and New India Assurance haven’t been able to sustain investor interest. While the former is trading around its listing price of Rs 681, the latter is trading six per cent lower than its issue price. Even assuring September quarter (Q2) results hasn’t helped.

For one, valuations are working against them. Analysts at Kotak Institutional Equities point out that ICICI Lombard is currently priced to perfection and ignores volatility of the insurance business and likely increase in competition. The brokerage has a 12-month target price of Rs 550 for the share, down 23 per cent from the current Rs 678.

As for New India, the stock awaits analysts’ verdict, though at 26 times its FY18 estimated earnings, valuations aren’t much of a concern. Therefore, if it maintains its market leadership in the current financial year, things should turn in its favour.

Another apprehension noted by analysts is underwriting losses. New India and ICICI Lombard reported Rs 627 crore and Rs 85 crore, respectively, on this in Q2.

How much importance should investors attach to this? Underwriting income/loss indicates how well an insurer prices the products, as it is a measure of net premium earned less total expenses (including claims paid out).

While life insurers have better pricing flexibility, general insurers are bound by regulatory restrictions, high event risks and competition. For instance, motor insurance accounts for 47 per cent and 45 per cent of ICICI Lombard and New India’s premiums, respectively, while health accounts for 16 per cent and 30 per cent, respectively.

In health insurance, regulations aren’t stiff but competition acts as a natural cap on pricing. For motor insurance, despite recent regulatory relaxations, an insurer’s liability (claims) can rise every year and remain significantly higher than the annual premiums collected. The good part is that claim and settlement processes have been eased, which favours the insurer to some extent. This should, over the years, lead to an improvement in underwriting income.

More important, unpredictability is the nature of the game for general insurers; This keeps them in the business. Therefore, even global leaders such as Berkshire Hathaway and AIG have had to make do with underwriting losses in the past. Hence, investors should look beyond such losses and not be deterred if general insurers make most of the money from their investment bets.

Still, the road ahead looks bright for the sector, with companies working to improve on product pricing and costs. CRISIL pegs gross direct premium for general insurers might grow at an annually compounded rate of 15-20 per cent over five years, while domestic premium could grow more than 2.5 times to touch Rs 3-lakh-crore by FY22. Therefore, long-term investors could use further correction to accumulate or take fresh exposure to the two stocks.