Insurance

Optimistic about the motor segment in the future – ICICI Lombard

Update on the Indian Equity Market:

The Indian indices opened the week in the red, reflecting global market weakness. Investors are concerned about the high inflation, which might accelerate the rate hikes. NIFTY ended 1.3% lower at 16,954 dragged by COALINDIA (-6.5%), BPCL (-6.0%), and TATASTEEL (-4.3%). BAJAJ-AUTO (+2.0%), HDFCBANK (+1.1%), and ICICIBANK (+1.0%) were some of the gainers.

Among the sectoral indices, BANK (+0.1%), and PRIVATE BANK (+0.1%) were the only gainers. REALTY (-3.8%), METAL (-2.9%), and OIL & GAS (-2.4%) led the sectoral laggards.

Excerpts of an interview with Mr. Bhargav Dasgupta, MD & CEO, ICICI Lombard (ICICIGI) published in The Economic Times on 22nd April 2022: 

  • ICICIGI announced 4Q and FY22 earnings, which include Bharti Axa business earnings. Considering the standalone numbers coupled with Bharti Axa, the profit growth for FY22 was ~5%.
  • Considering the 4QFY22 quarterly profits, the growth was much better. The Company has outgrown the market.
  • The combined ratio has increased, due to 2-3 factors. Looking at the integrated company suggests Bharti Axa’s combined ratio has always been high. ICICIGI expects to bring it under control in subsequent years. (The combined ratio is indirectly proportional to the profitability of general insurance companies).
  • The profitability of ICICIGI was impacted due to three Covid-19 losses, which were ~ Rs 270mn in 4Q and ~Rs 5,500 mn for FY22. Another impact was due to the accounting methodology for insurance policies. The entire cost has to be accounted for upfront while the revenue (premium earned) is accounted for throughout the policy. In the case of a 12-month policy with a majority of the business undertaken in March, the full cost is accounted for in March while the topline is earned over the next 12 months.
  • The CEO believes a long-term shift is on the way and health consumption behavior is going to change. The change he believes is not just due to the pandemic and digitisation but it has been a global trend for some time now. Health consumption is expected to be very personal, self-driven, and digitised in the long term.
  • Traditionally health insurance in India has focussed on just the hospitalisation costs. But healthcare is about the continuum of preventive care, wellness, fitness, hygiene, and outpatient care. ICICIGI’s approach is providing the entire continuum of care including a pure insurance policy for OPD costs and wellness (preventive, advisory, and fitness).
  • People are willing to consume health in a digital mode. Telehealth, video-based consulting, and increasingly home-based care if the ailment is not severe – there are the components ICICIGI has built on in the last 2 years and is now investing to scale up distribution.
  • With the Bharti Axa acquisition, ICICIGI has inherited some of the crop insurance business. There, most of the commitments are for a longer time so ICICIGI will stay invested in that business for that period.
  • In the previous year, the motor insurance sector has been tepid. The biggest shift that happened in FY22 was health insurance has become number one for the general insurance industry. Traditionally, the motor has been the biggest segment, but in FY22 the new vehicle sales were muted.
  • ICICIGI expects growth momentum once the chip shortage issues are sorted in the next five-six months. It expects a pickup in rural demand for two-wheelers and is optimistic about the motor segment growth in the medium term.
  • Health insurance is expected to continue to grow as it is a very underpenetrated sector.
  • The company has taken small price hikes in motor insurance. On the health side, ICICIGI is not thinking of a price increase for its retail customers as it has profits of ~Rs 40-50 bn despite paying Rs 250bn Covid-19 claims.
  • The Company is not planning an immediate price hike on the retail health portfolio as it believes there are one-off episodes that are unlikely to sustain. Healthcare inflation is a worry and ICICIGI believes there is a need for more discipline in terms of pricing. Should the healthcare providers inflate the cost of healthcare, the Company may have to increase its prices.

Asset Multiplier Comments:

  • We expect a recovery in the motor segment as new car registrations are expected to recover with the improvement in supply chain and semiconductor availability.
  • With an increase in hiring across sectors, the growth in group health premiums is expected to continue. the pandemic has boosted the demand for such policies.
  • Headwinds due to loss of market share in the individual health insurance segment, and aggression by new-age large players are expected to hurt the profitability in the short term.

Consensus Estimate: (Source: Marketscreener website)

  • The closing price of ICICIGI was ₹ 1,315/- as of 25-Apr-2022. It traded at 35x/ 28x the consensus earnings estimate of ₹ 38/47 for FY23E/FY24E respectively.
  • The consensus target price of ₹ 1,556/- implies a P/E Multiple of 33x on the FY24E EPS estimate of ₹ 47/-

Disclaimer: “The views expressed are for information purposes only. The information provided herein should not be considered as investment advice or research recommendation. The users should rely on their own research and analysis and should consult their own investment advisors to determine the merit, risks, and suitability of the information provided.”

Confident of doubling FY19 VNB in FY23 – ICICI Prudential Life Insurance

Update on the Indian Equity Market:

On Tuesday, Indian equity markets ended in the red for the fifth day in a volatile session. The benchmark index NIFTY50 settled at 16,959 (-1.3%), dragged by HDFC (-6.3%), HDFCLIFE (-6.3%), and SBILIFE (-4.5%). APOLLOHOSP (+5.3%), COALINDIA (+3.3%), and RELIANCE (+3.2%) were the top gainers. Among the sectoral indices, OIL & GAS (+0.8%) was the only one to end in green. IT (-3.0%), FMCG (-2.8%), and REALTY (-2.5%) were the top sectoral losers.

Excerpts from an interview of Mr. NS Kannan, MD & CEO of ICICI Prudential Life Insurance Company (IPRULIFE) with CNBC-TV 18 on 19th April 2022:

  • IPRULIFE announced 4QFY22 and FY22 earnings. APE (Annual Premium Equivalent) grew 20% YoY in FY22, driven by multi-product, multi-channel architecture. VNB (Value of New Business) grew 33% YoY in FY22. In addition to topline growth, the VNB margin grew from 25.1% in FY21 to 28% in FY22.
  • The margin growth can be attributed to the increase in the sale of protection products and a diversified product profile.
  • The Company has an objective of doubling the absolute VNB of FY19 by FY23. IPRULIFE requires 22% growth in FY23 to achieve the target. The growth in VNB will be led by topline growth and margin expansion levers.
  • As the company recovers from the pandemic, it hopes for a much clearer route for growth.
  • Fulfillment was impacted due to the pandemic, the company could not get the medical examination of customers done. Given the awareness of insurance, the demand remains high.
  • VNB has grown from Rs 12,860mn in FY18 to Rs 21,630mn in FY22. The driver for this has been the partnerships established. ICICI bank accounts for ~25% of the topline. The Company has tied up with several banks (7 in FY22), which contribute ~15% of the topline. Direct business is ~13% of the topline. Agency channel contributes ~25% of the business. The well-diversified channel mix has resulted in topline growth despite the challenges posed by the pandemic.
  • The growth driver for VNB margin is product mix. ULIP’s contribution has reduced from ~80% to ~48% of total revenue in FY22. The protection business has also scaled up significantly.
  • The savings business is expected to grow at the nominal GDP growth rate in India. The protection business which is an underpenetrated one is a significant opportunity.
  • The life insurance sector has benefitted from liberalization. Insurance penetration can be measured as a percentage of the sum assured. Based on that metric, IPRULIFE has a 13.5% market share.

Asset Multiplier comments:

  • The insurance sector in India is a multi-decadal opportunity aided by rising disposable income, young population, and awareness. The pandemic has increased the awareness of insurance and digitization initiatives by companies have helped meet the demand.
  • IPRULIFE is likely to see a growth in the Banca channel sales, aided by new partnerships forged in the previous years and a turnaround in sales from its parent, ICICI Bank. With a focus on scaling up the agency and direct channels through recruitment and training of new agents, we expect the topline growth will help it achieve its target of 2x VNB of FY19 by FY23E.

Consensus Estimate: (Source: Market screener website)

  • The closing price of ICIC was ₹ 512/- on 19-April-2022. It traded at 55x/ 48x the consensus EPS estimate of ₹ 9.3/ 10.6/- for FY23E/FY24E respectively.
  • The consensus average target price is ₹ 678/- which implies a PE multiple of 64x on FY24E EPS of ₹ 10.6/-.
  • In the case of life insurance companies, the embedded value per share is the correct multiple for valuing the company. The consensus estimate of this metric is not available on any of the websites.

Disclaimer: “The views expressed are for information purposes only. The information provided herein should not be considered as investment advice or research recommendation. The users should rely on their own research and analysis and should consult their own investment advisors to determine the merit, risks, and suitability of the information provided.”

Price hikes make sense when loss ratios are moving up- Bajaj Allianz General Insurance


Update on the Indian Equity Market:

On Thursday, NIFTY closed in the red at 16,498 (-0.6%). Among the sectoral indices, OIL & GAS(+1.5%), IT (+1.2%), and METAL (+1.2%) closed higher while AUTO (-2.3%), CONSUMER DURABLES (-1.3%), OIL & FINANCIAL SERVICES 25/50 (-1.3%) closed lower. Among the stocks, ONGC (+4.6%), UPL (+4.5%), and POWERGRID (+2.8%) were the top gainers while ULTRACEMCO (-6.7%), ASIANPAINT (-5.2%), and HDFCLIFE (-5%) were among the top losers.

Excerpts from an interview of Mr. Tapan Singhel, MD & CEO of Bajaj Allianz General Insurance (BAGIC) in Business Standard dated 3rd March 2022:

  • During the third wave in January 2022, claims moved up 241 percent compared to December 2021 but the severity and hospitalization were low as compared to the second wave. The claim ratio did move up but not as much as it did in the second wave.
  • COVID claims contributed 20% to the overall claim ratio. The company has settled COVID-related claims of over Rs 8,000 mn since April 2020.
  • There was a 20 percent movement in BAGIC’s loss ratios. They were the only ones to make underwriting profits in CY21 but COVID-19 still impacted the profitability of the business. There was some relief in the motor segment as the claim ratios declined during the pandemic.
  • BAGIC would have considered increasing its premiums had COVID-19 been a regular phenomenon.
  • Mr. Singhel worries about the rising medical inflation which has gone up 30-45 percent in the last three years from a typical range of 10-15 percent. He also pointed out the need to have regulators for hospitals to control hospital bill inflation and a reduction in GST of 18% on premiums.
  • The premiums on group health policies have gone up due to price hikes taken to manage increasing loss ratios in that segment. In retail health, companies can take price hikes only after three years. During the pandemic, many consumers purchased covid- related products. Overall, on a base effect, growth in retail seems lower.
  • The insurance industry has a direct correlation with the volumes of vehicles being sold. The semiconductor shortage has caused sales volumes to decline resulting in muted growth in motor insurance premiums.
  • Hikes in motor third-party premiums will be taken when loss ratios start moving up in this segment. The industry seems comfortable with the existing situation.
  • As infrastructure is the main focus of our country, Mr. Singhel believes there should be solutions to provide funding to contractors and free up their capital. He believes surety bonds to be a very good move by the regulator and the government and that BAGIC will be keeping an eye on this business. The idea is to not replace bank guarantees entirely.
  • BAGIC is sure that any acquisition they do would be adding value to the company, in terms of distribution or processes.

Asset Multiplier comments:

  • We expect the health claims ratio to moderate from its peak levels that were observed during the pandemic.
  • With economic activities picking up, we believe BAGIC is well placed to maintain its combined ratio at pre-covid levels over FY23 and 24.
  • Improvements in operating efficiencies and moderation in claims ratio are expected to improve BAGIC’s profitability over the subsequent quarters.

Consensus Estimate: (Source: Market screener website)

  • BAGIC is a subsidiary of Bajaj Finserv Ltd. The closing price of Bajaj FInserv was ₹ 15,704 as of 3-March-2022. It traded at 6.4x/5.5x/4.7x the consensus book value per share estimate of ₹ 2,452/ 2,848/ 3,326/ for FY22E/FY23E/FY24E respectively.
  • The consensus average target price is ₹ 16,341/- which implies a PE per share multiple of 4.9x on FY24E BVPS of ₹ 3,326/-.

Disclaimer: “The views expressed are for information purposes only. The information provided herein should not be considered as investment advice or research recommendation. The users should rely on their own research and analysis and should consult their own investment advisors to determine the merit, risks, and suitability of the information provided.”

Higher Provisions due to increasing Covid-19 Cases to be made – SBI Life

Update on Indian Equity Market:

On Thursday, markets ended lower with Nifty closing 42 points to end at 15,680. DRREDDY (+2.8%), HINDALCO (+2.1%), and BJAT (+1.7%) were the top gainers on the index while BAJAJFINSV (-2.2%), BRITANNIA (-1.4%) and INFY(-1.2%) were the top losers for the day. 

Among the sectoral indices,  PHARMA (+0.9%),  AUTO (+0.8%), and FMCG (+0.4%) were the top gainers, while IT (-0.6%), FINANCIAL SERVICES (-0.4%), and PRIVATE BANK (-0.3%) were the top losers.

 

Excerpts of an interview with Mr. Mahesh Kumar Sharma, MD and CEO of SBI Life on CNBCTV18 dated 30th June 2021:

  • SBI Life Insurance saw a slowdown in their group business in May. The company only registered a growth of 1.35 percent in new business premium, owing to the lockdown.
  • On a YoY basis, the company saw higher claims in H2FY21 over H1FY21. To address the issue of higher claims, the company has taken steps to tackle the negative impact.
  • SBI Life has set aside a higher amount for provisions for any potential spike in Covid-19 claims Rs 1,830 mn vs Rs 400 mn in FY21 and has changed the mortality assumptions for better risk management.
  • If vaccinations continue at this rate, the company expects the full recovery to pre-covid levels by the end of this year. However, the company is confident of a spike in claims during the upcoming quarter.
  • Despite the lockdowns in May, the company expects positive performance due to lifting restrictions and a digital outreach system developed by the company to contact its customers.
  • Individual Non-single premiums are the biggest contributors to the company’s new business premiums due to raising awareness about health insurance and other products due to the pandemic. The company expects to maintain its growth trajectory in the new business premium in the mid-teens over the next few years. 
  • The company hasn’t changed its underwriting policy. The company is confident of the vaccination drive boosting the number of vaccinated insurable population and has no plans to reduce the scope of insurance to the only vaccinated population. 

Asset Multiplier Comments:

  • The insurance sector has been one of the worst-hit sectors due to Covid-19. With the effects of the pandemic tapering and an informed target customer base, there are better days ahead.
  • India’s insurance penetration is very low compared to developed countries. This industry has reached an inflection point from where SBI Life and its peers can achieve steady growth.

 

Consensus Estimates (Source: market screener website): 

  • The closing price of SBI Life was ₹1,007/- as of 1-July-2021.  It traded at 53x/ 46x the EPS estimate of ₹ 19/ ₹ 22  for FY22E/23E respectively.
  • The consensus price target is ₹ 1190/- which trades at 54x the EPS estimate for FY23E of ₹ 22/-
  • In the case of insurance companies, the embedded value per share is the correct multiple for valuing the company. The consensus estimate of this metric is not available on any of the websites.

Disclaimer: “The views expressed are for information purposes only. The information provided herein should not be considered as investment advice or research recommendation. The users should rely on their own research and analysis and should consult their own investment advisors to determine the merit, risks, and suitability of the information provided.”

Any new Government scheme is welcomed as it expands the market– SBI Life Insurance

Update on the Indian Equity Market:

On Friday, Nifty closed 0.1% lower at 12,969. Within NIFTY50, TATAMOTORS (+2.8%), ASIANPAINT (+2.0%), and HEROMOTOCO (+2.0%) were the top gainers, while NESTLEIND (-4.3%), POWERGRID (-3.2%), and JSWSTEEL (-2.6%) were the top losing stocks. Among the sectoral indices, REALTY (+2.7%), MEDIA (+1.5%), and AUTO (+1.4%) were the top gainers while IT (-0.4%) was the only losing sector.

Any new Government scheme is welcomed as it expands the market– SBI Life Insurance

Excerpts of an interview with Mr. Mahesh Kumar Sharma, MD & CEO, SBI Life, aired on CNBC-TV19 on 27th November 2020
● The growth trend for SBI Life remains healthy. Management is seeing numbers similar to last year and things are panning out as per internal targets.
● SBI Life did well in October even though the growth was lower than peers. Some areas like ULIPs are seeing improvement and Protection segment growth has been very strong.
● 1QFY21 was weak due to strict lockdowns. SBI Life like its peers had to jump from physical one-to-one selling to digital selling in the least possible time. Management is seeing a month-on-month improvement since June. They expect growth to continue in 2HFY21. Generally, for life insurance companies, 1HFY has lower seasonality and 2HFY is seasonally stronger.
● SBI Life has seen some increase in Covid-19 claims but the quantum is not worrying.
● Demand for risk products is higher from September. Credit life has grown in low double digits since September. Management expects this growth to continue on the back of strong growth in credit offtake.
● SBI Life is seeing YoY growth in ULIPs on the back of picking up of the market, improvement in sentiments easing of lockdowns.
● SBI Life has already repriced products that have an interest rate guarantee to adjust for a drop in interest rates. They continue to reprice products where needed.
● SBI Life has a lot of customers on the Pradhan Mantri Jeevan Jyoti Bima Yojana (PMJJBY). The government has been talking about Saral Bima Yojana. Management thinks that any new scheme is welcomed as it increases the market and penetration. And if everyone takes insurance, it is going to be a very profitable business.

Consensus Estimate (Source: investing.com and market screener websites)
● The closing price of SBILIFE was ₹ 849/- as of 27-November-2020. It traded at 55x/ 47x/ 39x the consensus EPS estimate of ₹ 15.3/18.2/21.8 for FY21E/ FY22E/ FY23E respectively.
● The consensus target price of ₹ 967/- implies a PE multiple of 44x on FY23E EPS of ₹21.8/-.
● In the case of insurance companies, the embedded value per share is the correct multiple for valuing the company. The consensus estimate of this metric is not available on any of the websites.

Disclaimer: “The views expressed are for information purposes only. The information provided herein should not be considered as investment advice or research recommendation. The users should rely on their own research and analysis and should consult their own investment advisors to determine the merit, risks, and suitability of the information provided.”