New India Assurance vs ICICI Lombard: Size fails to beat profitability

ICICI Lombard General Insurance Company and New India Assurance Company (NIA) hit the bourses around the same time in September-November 2017. While the latter is the industry leader, the former rakes the top slot among private general insurers.

With segments such as motor, health, fire and crop insurance being the stronghold of both players, they have nearly the same product profile. Yet, ICICI Lombard is more popular among investors, while fewer people seem optimistic on NIA. The dichotomy in investors’ preference is also visible in the stock price movements (see chart), especially in the past 18 months (since June 2018). 

ICICI Lombard stock price has more than doubled since listing, while NIA’s has eroded by 62 per cent. Not surprisingly, valuations, too, are poles apart, with NIA trading at 13 times, and ICICI Lombard at 33 times their respective FY21 estimated earnings. 

So, what explains this wide gap between the two stocks? Despite being the leader in the general insurance space, with a balance sheet nearly five-times and September quarter (Q2) premium about 2.5 times larger than ICICI Lombard’s, NIA’s ability to grow its profitability has remained a challenge. When compared against the 20.2 per cent operating profit margin that ICICI Lombard earned in Q2, NIA’s 7.4 per cent margin appears insipid. Weak operating performance driven by elevated claims ratio and operating expenses, and higher underwriting losses on the key motor and health insurance segments often lead to high underwriting losses for NIA.

Positively, in Q2, underwriting losses narrowed down a bit for NIA, prompting analysts at JP Morgan to note that there is perhaps supporting evidence that the industry is gradually moving towards an underwriting upcycle. But those at HDFC Securities think otherwise. “We note the company’s competitive positioning is only weakening and thus we remain concerned of its ability to write high quality business in the near future,” they said. This perhaps explains why NIA’s dependence on investment income is also quite pronounced and higher than that of ICICI Lombard.

NIA also suffers from the overhang of a possible merger with other state-owned companies, talks of which have been doing the round of a while. Nonetheless, analysts at JP Morgan (and perhaps the only brokerage, going by Bloomberg polls) remain positive on the NIA stock. “As we do not expect ICICI Lombard’s combined ratio to improve much in the next couple of quarters, NIA’s potential underwriting gap narrowing with private players is likely to be the key investment thesis on the stock,” the analysts note.  

The brokerage has a target price of Rs 240 a share, indicating a near 60 per cent upside from current levels for NIA. However, considering that the general insurer has quite a bit of ground to cover, these targets do appear quite demanding. The threat of NIA likely to acquire another public sector insurer to support the government’s divestment plan may also put off investors from taking fresh exposure to the stock despite its benign valuations.  

On the other hand, ICICI Lombard’s ability to price its products better is among key reasons helping the company clock better margins. Also, the proportion of business earned from government is insignificant as compared with NIA. This is also helping the private insurer to earn better profitability. These reasons could help ICICI Lombard stay ahead in the future, too. Not surprising then, 47 per cent of analysts polled by Bloomberg have a buy on ICICI Lombard (only 15 per cent for NIA).

However, the average one-year target prices of analysts don’t suggest any meaningful gains for both the stocks.