ICICI Lombard IPO review: On a Strong Turf but fully priced

icici lombard IPO
ICICI Lombard General Insurance Co. Ltd. is coming out with its maiden IPO offering 86247187 equity share of Rs. 10 each in a price band of Rs. 651 to Rs. 661 to mobilize Rs.  Rs. 5700.94 crores. ICICI Lombard, founded in 2001, is the first general insurance company to file for a public offering. ICICI Lombard General Insurance Co. Ltd. is a general insurance arm of ICICI Bank group. The ICICI Lombard IPO, a pure offer for sale, will see ICICI Bank and Fairfax sell around 86.24 million shares. The share sale is a pure secondary offering wherein ICICI Bank is selling 7% stake and Fairfax is selling 12%. The ICICI Lombard IPO issue constitutes 19% of fully diluted post issue paid up equity capital of the company.

Related Posts: ICICI Lombard IPO: Brokerage Views & Run up to IPO
ICICI Lombard IPO: Issue Details
Issue Opens  Wednesday, Friday, September 15, 2017
Issue Closes Friday, Tuesday, September 19, 2017
Price Band Rs.651 – 661
Bid Lot 22 Equity Shares and multiple thereof
Issue  Size (Nos.) Offer for sale of 86,247,187 Equity Shares.
Issue Size ( Rs.)  5,700.94  Crore (at upper end)
Reservation for ICICI Bank Shareholders: 4,312,359 Equity Shares (Rs.285.05 Cr)
Issue Structure :  
QIB 50% of the Net offer -40,967,413 Shares – Rs.2,707.95 Cr
NIB 15% of the Net offer 12,290,225 Shares – Rs.812.38^ Cr
Retail 35% of the Net offer 28,677,190 Shares-  Rs.1,895.56 Cr
GCBRLMs DSP Merrill Lynch, ICICI Securities, IIFL Holdings
BRLMs CLSA India, Edelweiss Financial, JM Financial
Registrar Karvy Computershare Pvt. Ltd.
About ICICI Lombard
  • ICICI Lombard is a joint venture between j ICICI Bank Limited, India’s largest private -sector bank in terms of consolidated total assets  and Fairfax Financial Holdings Limited, a Canadian based holding company  owned by Shri Prem Watsa which through its subsidiaries is engaged in property and casualty insurance and reinsurance.
  • The company is one of the first few private-sector companies to commence operations in the sector in fiscal 2002.
  • ICICI Lombard General Insurance co. Ltd. is  the largest private-sector non-life insurer in India based on Gross direct premium income(GDPI) in fiscal 2017, a position it has maintained since the year 2004. 
  • The company offers its customers a comprehensive and well-diversified range of products.  About ICICI Lombard General Insurance Ltd
  • The share of these products as a % of Gross direct premium income(GDPI) is as follows:
    • Motor Insurance (42.3%)
    • Health & Peronal Acident Insurance (18.9%)
    • Crop/ Weather Insurance (20.1%)
    • Fire Insurance  (6.9%)
    • Marine & Engineering Insurance (3.2%)
    • Mass Health Insurance (2.1%)
  • ICICI Lombard has a pan India presence with well established product distribution network to effectively address different customer segments and reduce concentration risk.  ICICI Lombard distribution of business sourced
 Rs. In Crores
Particulars 3m  30th June As at March 31,
2017 2016 2017 2016 2015
Gross Direct Premium Income 3320.9   10725.2 8090.7 6677.8
% Growth 32.6 21.2
Revenue-Premiums Earned (net) 1,533.70 1,393.10 6,157.70 4,826.30 4,234.00
Revenue-Investment Income 158.8 948.3 296.9 270.3 175.4
Profit Before Tax 300.7 189 880.1 704.8 704.7
Profit After Tax 214.3 129.1 641.8 505.3 585.3
Share Capital 452.9 447.7 451.1 447.5 446.5
Reserves (net) 3,466.50 2,880.60 3,274.10 2,807.80 2,459.80
Net Worth 3,919.40 3,328.30 3,725.00 3,235.40 2,852.20
RoNW (%) 5.90% NA 18.40% 16.50% 22.10%
NAV (Rs. per share) 86.5 74.3 82.5 72.3 64.6
EPS  (Rs. per Share) 4.7 2.8 14.3 11.3 13.1
Dividend per share (Rs.) 3.5 3 2
Face Value (in Rs.) 10    
EPS (FY 17) 14.3  
IPO Price 661    
PE Ratio 46.22  
P/B Ratio 8.01
Market Cap 29936.69 crores
Objects of the ICICI Lombard IPO:

The Offer for Sale (OFS) is of up to 3,17,61,478 Equity Shares by ICICI Bank and up to 5,44,85,709 share by FAL. The entire proceeds from the OFS will be paid to selling shareholders. Fairfax will end up with 9.91% stake in the company post the IPO.

Rationale for Investment
  • ICICI Lombard  has the first-mover advantage among private players. 
  • As per Crisil, ICICI Lombard   is the largest private‐sector non‐life insurer in India by GDPI in the yera 2017. The company has maintained this  a position  since fiscal 2004.
  • ICICI Lombard  is the first private sector non‐life insurer to reach Rs100bn in Gross direct premium income(GDPI) in the year 2017,
  • ICICI Lombard  is growing faster than the industry with its Gross direct premium income(GDPI)  recording a CAGR of 26.7% during FY15‐17, as compared to a average CAGR of 22.8% for the industry in the same period. Further in the above period its market share by GDPI increased from 7.9% in FY15 to 8.4%.
  • During Q1 FY18, company’s market share stood at 10% among all non‐life insurers in India and 20.2% among the private players (as per  IRDAI).
  • ICICI Lombard  has delivered good annual returns to shareholders and its return on equity stood at 16.7%.
  • Further ICICI Lombard has delivered good returns on its assets under management(AUM).  As of Jun’17, 30.6% of its total investment assets were held in G-Secs, 43.5% in Bonds, 15.7% in equities and rest in other investments. Listed equities made up 14.8% of total investment assets,as on 30 June 2017, provided annualised total return of 30.8% since FY2004. This is commendable given that the the  annualised return was 17.5% on the Nifty index for the same period.
  • Its strong financial postion is reflected by the fact that ICICI Lombard   became  was the first non-life insurer in India to issue NCDs to raise Rs 4.85bn in 2017.
  • The company  has a strong capital position with a solvency ratio of 2.10x as of fiscal 2017 compared to the IRDAI prescribed control level of 1.50x.
  • Robust risk selection and management framework as the Company’s share of losses incurred from natural calamities/catastrophic event since FY13 has been in the range of 1.5%-6.2% vs. average market share of 7.8% by Gross direct premium income(GDPI) during the same period.
  • The combined ratio for ICICI Lombard  has been in region of 104%. The combined ratio is a measure of profitability used by an insurance company to indicate how well it is performing in its daily operations. The combined ratio is calculated by taking the sum of incurred losses and expenses and then dividing them by earned premium. Wile this ratio is better than many other insurer’s (Bajaj allianz has the best), it indicated that company is making small losses in its core insurance business.
  • Further in the above period, its  loss ratio improved from 81.4% to 80.6%. The loss ratio is the difference between the ratios of premiums paid to an insurance company and the claims settled by the company. The loss ratio is the total losses paid by an insurance company in the form of claims. The losses are added to adjustment expenses and then divided by total earned premiums.
  • The Company is at the forefront of leveraging technology in Indian non-life insurance sector  with focus on digitisation and transformation of sales, customer on-boarding and internal processes, which it has led to a cultural change within the organisation, more efficiency and better response to customer, .from sales to claims settlement.  In FY17, 87.5% of total ~17.7mn policies were initiated electronically.
  •  Its   GDPI per employee improved to to Rs16.6mn in FY17 from Rs11.4mn in FY15,
  • ICICI Lombard  has been regularly paying good dividends.
  • A significant portion of ICICI Lombard  business comes from working with the government which subjects it to risks which could result in litigation, penalties and sanctions including early termination, suspension and removal from the approved panel of insurers. In fiscal 2017, 22.1% of its GDPI was derived from central and state government contracts/programmes, in relation to crop/weather, mass health and mass personal accident insurance
  • A significant proportion of company’s GDPI(Gross direct premium income) is derived from sales to the customers of agents/intermediaries affiliated with motor vehicle manufacturers (MVMs). Any Disruption of its relations with Vehicle OEMs could affect its business considerably. 
  • The company may have to make a provision if it fails to realize the outstanding premium receivables from central/state Govts. As on 31/03/17, the outstanding amount for a period greater than three years from the central or state governments was ₹ 1.64 billion, out of which ₹ 1.08 billion and ₹ 0.45 billion pertain to the states of Bihar and Uttar Pradesh, respectively.
  • Catastrophic events, including natural disasters, could materially increase ICICI Lombard  liabilities for claims by policyholders, result in losses in our investment portfolios, and have a material adverse effect on its business, financial condition and results of operations.

Assessment: ICICI Lombard IPO
  • Indian non-life insurance sector Gross direct premium income(GDPI) grew at a CAGR of 17.4% between FY2001 and FY2017. As per  CRISIL Research, GDPI for non‐life insurers are projected to grow at 15‐20% CAGR from 2017-2022
  • ICICI Lombard IPO would be the first by a general insurer in the country 
  • With significant young people in nation’s population and investments taking place, the need for asset acquisition and therefore asset protection is expected to increase in coming years. This trend is also aided by higher disposable incomes, fast industrial growth, new risks like cyber attacks/ frauds and a strong Government focus on improving insurance coverage by schemes like crop insurance etc. All this  which bodes well for general insurance  industry’s growth prospects.
  • Further India continues to be an under penetrated market with a non-life insurance penetration of  0.77% versus  global average of 2.81% in 2016. The untapped opportunity in general insurance provides ample scope for the company to grow its business
  • On the flip side, the ICICI Lombard IPO valuation is a significant mark up from the Rs20,300 crore in May, at which Fairfax sold a 12.18% stake to a buyers including PE  firm Warburg Pincus. The sale fetched Fairfax ~Rs2,372.5 crore.
  • From ICICI Lombard’s perspective comfortable solvency at 2.13 against regulatory requirement of  1.5 gives good  enough headroom to grow from an organic perspective.
  • ICICI Lombard has been growing faster than industry average and on all parameters it is in the top end of industry which has about 30 players. 
  • The under-penetrated nature of general insurance in India and the diversified product offering, coupled  with demonstrated  market leadership over the years , good risk management, ability to generate higher returns on AUM and good performance in diverse categories of insurance products make ICICI Lombard  IPO issue attractive . However since the company is charging a steep premium short term listing gains may be limited and  one should keep a medium to long term time horizon in this IPO.
  • The trailing PE multiple of 46 along with substantial premium over the deal price done in sale of ICICI Lombard  Lombard stake sale by Fairfax only few months back,  the issue for the short term may not have left enough or even very little  on the table for IPO investors. Raising of prices in just 4 months is seen as a factor that can drag the stock prices on listing.
  • 18/09/17: I intended to apply for the ICICI Lombard IPO issue both as a retail investor and under quota meant for ICICI Shareholders and have aleady put in some applications. However Iam skeptical about its performance on Listing Day as well as in the short run. I Intend to apply but perhaps 50% only. There is a even chance that IPO on Listing could show some discount as well depending on market conditions  even as it remains reasonably OK from a medium to long term term perspective. 

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