ICICI Lombard now holds more value for its parent; stock soars post listing

When ICICI Lombard, the general insurance arm of ICICI Bank, was getting ready for an initial public offering (IPO) one-and-a-half years back, analysts had said the value it would unlock would not be as significant as the bank’s life insurance arm. They seem to have been proven wrong.

On Tuesday, ICICI Lombard’s stock scaled to its all-time high of Rs 1,012 a share, before closing at Rs 971.20. As a result, the valuation gap between the general insurance business and the life insurance arm of ICICI Bank has narrowed considerably.

At the time of its listing in September 2017, ICICI Lombard was valued at Rs 30,000 crore. ICICI Prudential Life Insurance, the life insurance arm of ICICI Bank, was valued at Rs 48,000 crore at the time of its IPO in September 2016. ICICI Lombard then contributed only 5 per cent to ICICI Bank’s total valuation, while ICICI Pru Life contributed 7-8 per cent. Now, the market capitalisation of ICICI Pru Life is Rs 49,118 crore, a small increase over its valuation at the time of its IPO. ICICI Lombard’s valuation has shot up to Rs 43,951 crore. Investors have been handsomely rewarded — 41 per cent since its listing.

In 2017, ICICI Pru Life traded at nearly 30 per cent premium over ICICI Lombard. Now, that has shrunk to only 10 per cent. This has, in turn, increased the relevance of ICICI Lombard to its parent’s sum of the parts (SOTP) or overall valuations. 

ICICI Pru Life’s contribution to its parent company’s valuation has remained at 7-8 per cent, while ICICI Lombard’s valuation has risen to 8 per cent. Strong fundamentals have supported its performance.

There are many reasons for it.

One, the equity market is an important investment source for the general insurer, but its product offerings are delinked from equities. With over 80 per cent dependence on equities and the debt-market through its unit-linked insurance plan (ULIP) products, ICICI Pru Life business is vulnerable to market movements. 

In the September and December quarters of this financial year, this adversely affected ICICI Pru Life’s financials. ICICI Lombard’s financials posted stable growth.

The new third-party motor vehicle insurance norms, which went live in September last year, also helped ICICI Lombard’s revenue growth. 

“Being the biggest beneficiary of long-term motor third party-insurance, ICICI Lombard will have the highest headroom for further investments among peers,” said analysts at Investec Securities. The 2019-20 outlook for the general insurer is also more promising compared to that of the life insurer (see table). 

Analysts at JM Financial expect the insurer’s net profit to compound annually by over 25 per cent in FY18-21 period. “The insurer is well-capitalised for growth with a solvency ratio of 212 per cent,” they add. I-Pru Life has recently undertaken a change in business strategy, which could potentially weigh on its financials for the next 2-4 quarters. Scarcity premium is another factor favouring the ICICI Lombard stock. 

General insurers such as Bajaj Allianz, Max Bupa and HDFC Ergo are not directly listed in the exchanges and may be bought only through the shares of their parent companies. Hence, being the only listed pure-play private general insurance company is also helping ICICI Lombard. 

ICICI Pru Life, on the other hand, faces competition from HDFC Life, SBI Life, and Max Financial Services. This is why even though valuations for ICICI Lombard are quite high, it remains a preferred stock among non-lending finance stocks.