The New India Assurance Co Ltd

Transcription

1 IPO Review Rating matrix Rating: Subscribe only for long term Issue Details* Issue Opens 1-Nov-17 Issue Closes 3-Nov-16 Issue Size ( Crore) Price Band ( ) 77-8 No of Shares on Offer (crore) 12. QIB (%) 5 Non-Institutional (%) 15 Retail (%) 35 Minimum lot size (No. of shares) 18 *Retail & Employee discount: 3/-per share Objects of the Issue The object of the issue is to utilize the net proceeds from fresh issue of 2.4 crore shares towards meeting future capital requirements. And further, to achieve benefits of listing equity shares on stock exchanges and sell up to 9.6 crore equity shares by the selling shareholders. Shareholding Pattern Pre-Issue Post-Issue Promoter & promoter group 1.% 85.4% Public.% 14.6% Financial Summary Crore FY14 FY15 FY16 FY17 Premiums earned - Net Income from Investments Claims Incurred (net) PAT Valuation Summary (at 8; upper price band) FY17* (x) FY14 FY15 FY16 Pre Post P/E P/BV *Factoring bonus shares issued in August 217 and fresh issue Research Analyst Kajal Gandhi kajal.gandhi@icicisecurities.com Vasant Lohiya vasant.lohiya@icicisecurities.com Vishal Narnolia vishal.narnolia@icicisecurities.com October 31, 217 New India Assurance (NIA) is the largest general insurance company in India in terms of net worth, domestic GDPI, PAT and branch count as on FY17. As of FY17, it had issued 27.1 million policies across all product segments. This is the highest among all general insurance companies in India. NIA offers a comprehensive and well-diversified range of products, including motor, health, crop/weather, fire, personal accident, marine, engineering insurance, through multiple distribution channels. As of June 3, 217, NIA had 68,389 agents, 16 corporate agents, 25 bancassurance partners and 2452 offices in India. It also has a presence across 28 other countries through a number of international branches, agency offices and subsidiaries. Net worth (excluding fair value change account) increased from 965 crore in FY13 to crore in FY17. The company commands robust financial position with solvency ratio as of 2.27x (June 217) compared to IRDAI requirement of 1.5x. Key business aspects Market leadership and established brand NIA has been operating for almost a century since incorporation in 1919 and has been the largest Indian general insurance company in terms of domestic GDPI as of FY17. Despite significant competition, NIA maintained a leadership position with 15% market share of GDPI (FY17). Given established brand, business reputation, large & diversified product portfolio and multi-channel distribution network, NIA is well positioned to capitalise on growth potential in Indian general insurance industry. Longstanding global footprint, successful international operations NIA has a presence in 28 international jurisdictions including the UK, Japan and Australia. In addition, the company s global operations are spread across Asia Pacific, Middle East, Africa and the Caribbean. In FY17, gross written premium (GWP) from international operations was at crore contributing ~14.2% of total GWP. NIA intends to further expand its international presence through new regions based on existing market knowledge, underwriting expertise and risk management. Multi-channel distribution network but combined ratio remains high NIA has expansive multi-channel distribution network including 68,389 individual agents, 16 corporate agents, 25 bancassurance partners and 2452 offices in India. In FY17, agent (individual and corporate agents), brokers, and bancassurance partners contributed 42.1%, 25.75%, and 1.15%, respectively, of GDPI in India. Company reported weak combined ratio of 119.7% in FY17 and has remained consistently above 115%. Concerns The New India Assurance Co Ltd Price band 77-8 Catastrophic events could have material adverse effect on operations Inability to bring down high combined ratios in future Significant business is generated from relatively few regions Regulation of motor insurance; changes in demand for motor vehicles Additional risks associated with international operations Priced at 64x P/E & 4.3x P/B (post issue FY17 PAT, NW) on higher band At the IPO upper price band of 8, the stock is available at a P/B multiple of 4.3x FY17 (post issue) networth excluding fair value change. Post issue market capitalisation is at ~ 64 crore at the upper band. Being slightly expensive with high combined ratios, we believe one should subscribe only from a longer term view and not for the purpose of accruing listing gains.

2 Company Background New India Assurance (NIA) is the largest general insurance company in India in terms of net worth, domestic gross direct premium, PAT and number of branches as on FY17. The company has been in operation for almost a century. The issue involves 12 crore share on offer totalling 96 crore. Around 2.4 crore shares are fresh issue raising 192 crore and balance funds will flow to the government. As of FY17, it had issued 27.1 million policies across all product segments which is the highest among all general insurance companies in India. NIA s insurance products can be broadly categorized into the following product verticals: fire insurance; marine insurance, motor insurance, crop insurance, health insurance and other insurance products. Between FY13 and FY17, despite increasing competition from private players, NIA has maintained market leadership in the general insurance industry in India and were leaders in all segments except crop insurance (source: Crisil report). In FY17, the gross direct premium from fire, engineering, aviation, liability, marine, motor and health insurance represented a market share of 19.1%, 21.9%, 29.6%, 18.2%, 21.%, 15.1% and 18.4%, respectively, of total gross direct premium in these segments in India. Exhibit 1: Product-wise breakup of NIA ( crore) FY15 FY16 FY17 Product Segment GWP % of total GWP % of total GWP % of total Fire Insurance % % % Marine Insurance % % 714 3% Motor Insurance % % % Crop Insurance 66.7 % 52.3 % 125 5% Health Insurance % % % Other Insurance % % % Total % % % Source: RHP, ICICIdirect.com Research The company has developed an expansive multi-channel distribution network that includes individual and corporate agents, brokers, bancassurance partners and other intermediaries, as well as direct sales and sales through online channels. As of Q1FY18, its distribution network in India included 68,389 individual agents and 16 corporate agents, bancassurance arrangements with 25 banks in India, and a large number of OEM and automotive dealer arrangements through its agent and broker network. Further, the company has developed a pan-india branch network. As of Q1FY18, it had 2452 offices in India across 29 states, seven union territories and across 28 other countries globally through a number of international branches, agency offices and subsidiaries. It also partners with the GoI and state governments for implementation of various government schemes including health insurance and policies for underprivileged customer segments. In FY15, FY16 and FY17, NIA s gross written premium was crore, crore and 2323 crore, respectively. Gross written premium has increased at a CAGR of 15.2% from 132 crore in FY13 to 2323 crore in FY17. In FY16 and FY17, the company paid dividends (including dividend distribution tax) of 36 crore and 32 crore, respectively, while for FY17 it has declared dividend payments (including dividend distribution tax) of 373 crore. Page 2

3 The key highlight is that the company has funded its operations for more than 4 years without any external capital infusion. The net worth (excluding fair value change account) increased from 965 crore as of FY13 to crore as of FY17. The total net worth (including fair value change account) increased from 2547 crore as of FY13 to crore as of FY17. The company commands a robust financial position with a solvency ratio as of FY17 of 2.22x, vs. the IRDAI requirement of 1.5x. NIA has been rated A-(Excellent) by AM Best Company since 27 and has been rated AAA/Stable by Crisil since 214. Details of product portfolio Fire insurance: The fire insurance portfolio includes fire and special perils insurance, business interruption insurance, and large risk package insurance policies. Marine Insurance: The marine insurance business includes marine cargo insurance, hull and machinery insurance and offshore oil and energy insurance products. Motor Insurance: The motor insurance portfolio includes liability only (third party) policies and comprehensive motor (third party and own damage) policies. Crop Insurance: The crop insurance products include Pradhan Mantri Fasal Bima Yojana farmers package insurance, weather based crop insurance, unified package insurance schemes and horticulture/ plantation insurance. Health Insurance: Health insurance products include individual health products such as mediclaim, floater and premier mediclaim products; corporate (group) health insurance products; and personal accident products and schemes implemented for the GoI such as the Rashtriya Swasthya Bima Yojana, PMSBY and PMJDY. Other Insurance: The company has a broad range of general insurance products under this category, including the following: liability insurance; engineering insurance; aviation insurance; nuclear insurance; fidelity guarantee and burglary insurance; householder insurance; insurance specific commercial insurance such as banker s indemnity and shopkeepers insurance; money insurance; travel insurance; and social insurance products. Page 3

4 (%) (%) billion crore billion Financial Performance NIA s GWP increased at a healthy pace of 15.18% CAGR from crore in FY13 to crore in FY17. As of March 31, 217, investment portfolio including cash and bank balances grew at 11.32% CAGR in FY13-17 and stood at crore. Net worth (excluding fair value change account) increased at 7.1% CAGR from 965 crore in FY13 to crore in FY17, and stood at crore as of June 3, 217, while net worth (including fair value change account) increased at 9.26% CAGR from crore in FY13 to crore in FY17 ( crore as of June 3, 217). Capital position remains strong with solvency ratio at 227% as on June 3, 217 compared to IRDAI prescribed level of 15%. Exhibit 2: Net earned premium growth remains healthy % 13.9% 14.5% 16.2% FY13 FY14 FY15 FY16 FY17 3% 2% 1% % Premiums earned - Net YoY growth (RHS) Source: RHP, ICICIdirect.com Research Exhibit 3: Trend in AUM Exhibit 4: PAT growth trend % % FY15 FY16 FY17 2% 1% (%) % -1% FY13 FY14 FY15 FY16 FY17 8% 6% 4% 2% % -2% -4% AUM YoY growth (RHS) PAT YoY growth (RHS) Source: RHP, ICICIdirect.com, Research Source: RHP, ICICIdirect.com, Research Exhibit 5: Return on net worth above 1% Exhibit 6: Solvency ratio remains prudent (%) FY13 FY14 FY15 FY16 FY17 FY13 FY14 FY15 FY16 FY17 Source: RHP, ICICIdirect.com, Research Source: RHP, ICICIdirect.com, Research Page 4

5 (USD) Indian non-life insurance industry Quick snapshot The Indian non-life insurance size was at 1.28 trillion on a GDPI basis as of March 31, 217, making it the 15 th largest non-life insurance market in the world and fourth largest in Asia (source: Swiss Re and Crisil Research, Analysis of general insurance industry in India, July 217). In FY1-17, Indian non-life insurance GDPI grew at a healthy pace of ~17.4% CAGR. India was also among the fastest growing non-life insurance markets over , growing at 14.5% (source: Swiss Re). Despite this, India continues to be an underpenetrated market with a non-life insurance penetration (Insurance penetration refers to premiums as a percentage of GDP) of.77% in 216, compared to 1.81% in China, 1.7% in Thailand, 1.67% in Singapore and 1.62% in Malaysia and a global average of 2.81% in 216. Similarly, insurance density (per capita premium or premium per person) also remains very low compared to other developed and emerging market economies at US$13.2 in 216. Exhibit 7: Insurance penetration (as percentage of GDP) (%) US 2.74 South Africa UK Japan China Brazil Russia India Indonesia Exhibit 8: Non-life insurance density (216) US UK Japan S.Africa Brazil China Russia Indonesia India The Indian non-life insurance sector offers different products such as motor, health, crop, fire, marine, liability, travel, aviation and home insurance aimed at meeting different protection needs of retail customers, government as well as corporate customers. The industry operates under a cash before cover model under which insurers are not required to assume underwriting risk until premiums are received except in the case of government sponsored schemes like mass health and crop insurance. Page 5

6 The Indian non-life insurance sector has significant growth potential because of its under-penetration and low insurance density compared to other economies. According to Crisil Research, GDPI for non-life insurers are projected to grow at 15-2% CAGR in FY India s large working population, rising affluence, rapid urbanisation and rising awareness of risk with higher disposable incomes is expected to continue to propel the growth of the non-life insurance industry in India. In addition, improving economic growth, emergence of new risks such as cyber frauds and a strong regulatory focus on improving insurance coverage are expected to be the key catalysts among others for this growth. Recent catastrophic events have also highlighted the importance of insurance in India. With only around 1% of economic losses being insured in India, significant market potential exists for insurance as people seek to obtain protection to reduce the impact of uninsured losses in the event of a catastrophe. Exhibit 9: Extent of uninsured losses in recent catastrophe events in India Economic Losses (USD bn) Insured Losses (USD bn) Un-insured loss of total loss Date Event Place of event Dec, 215 Floods Tamil Nadu and Andhra Pradesh % Oct, 214 Cyclone Hudhud Odisha and Andhra Pradesh % Sept, 214 Severe Monsoon Floods Jammu and Kashmir % Sept, 214 Severe Monsoon Floods Assam, Bihar, Meghalaya, Uttar Pradesh and West Bengal % Oct, 213 Cyclone Phailin Odisha % Jun, 213 Floods Uttarakhand % Sept, 29 Floods Andhra Pradesh and Karnataka % Market structure The Indian non-life insurance industry comprises 3 companies as of March 31, 217. These can be classified as per their domain or product offering as under; Multi-product insurers: Four public sector companies offering multiple products National Insurance Company, The New India Assurance, Oriental Insurance Company and United India Insurance 18 private sector companies including ICICI Lombard, Bajaj Allianz, HDFC Ergo, Iffco Tokio and Tata AIG Single Product Insurers: Six standalone private health insurance companies Apollo Munich, Cigna TTK, Max Bupa, Religare Health, Star Health and Aditya Birla Two public sector specialised single product non-life insurance companies Agriculture Insurance Company (AIC), and Export Credit Guarantee Corporation (ECGC) Besides these 3 companies, the state owned General Insurance Corporation of India (GIC) operates as the main Indian reinsurer. The regulator has recently allowed foreign reinsurers to set up branch offices in India. This is expected to lead to an increase in reinsurance capacity thereby increasing the market depth. Page 6

7 Exhibit 1: GDPI by product segment and insurer (FY17) Structural strength to drive life insurance industry Demographics strength: Currently, India has one of the youngest populations in the world, with a median age of 28 years. It is estimated that 9% of Indians will still be below the age of 6 by 22 (according to Crisil Research). Rapid urbanisation coupled with a high share of working population with rising affluence and labour mobility is expected to provide an impetus to growth in the Indian non-life insurance sector. Exhibit 11: Indian working population 12 1 (%) E Page 7

8 (USD) Exhibit 12: Urban proportion of total population (216) Japan Brazil US Russia S.Africa China Indonesia India Recent product innovations: Non-life insurers have been continuously innovating with new product offerings and services in response to market needs. In FY17, 165 products were cumulatively introduced across insurers, compared with 11 products in FY16. Products launched include long term health insurance, long term two wheeler insurance, cyber liability, crop insurance through PMFBY and railway accident insurance. Add-on products such as engine protect, road assistance, zero depreciation, return to invoice have also been introduced in recent times to offer additional services to the customers. Improved penetration in motor insurance to boost growth: In India, motor insurance forms the largest pie in the Indian non-life insurance sector contributing ~4% of industry GDPI in FY17. Among segments, own damage motor insurance forms ~19% of industry GDPI, while third party motor insurance forms ~21% of industry GDPI in FY17. Despite being more advanced than other forms of non-life insurance, motor insurance in India continues to be underpenetrated relative to global levels. As per Crisil Research estimates, only 6% of cars, older than three years, are insured in India against the global benchmark of 9%. In two wheelers, only ~25% are insured in India against global benchmark of over 9%. Exhibit 13: Projected growth rates for individual segments in motor insurance Increased commission rates for comprehensive auto insurance policies and third party insurance have been adopted aiming to improve renewal rates. Improving adoption of telematics is expected to improve own damage motor insurance performance. Passage of Motor Vehicles (Amendment) Bill 216, a legislation that is currently being evaluated by the Indian Parliament is expected to bring in long term changes in the industry. Historical evolution of Indian non-life insurance industry The Indian non-life insurance sector has experienced three phases of growth since FY2, when the sector was opened to private companies, Page 8

9 and to foreign companies, subject to a shareholding cap of 26%. The tariff regime applicable to pricing of products offered by non-life insurance companies primarily determined the historical evolution in the industry. IRDA has, at periodic interval, modified the tariff structure in the industry to reach the current regime. Exhibit 14: Evolution of tariff regime for key product segments Currently, third party motor insurance remains the only tariffed product segment. IRDA has de-tariffed the health insurance segment. However, the premiums filed can ordinarily not be changed for a period of three years, after a product has been cleared. Thereafter, based on the product experience and approval of IRDAI, premiums are allowed to be revised. The Indian non-life insurance industry has undergone various growth phases as depicted in the exhibit below. Exhibit 15: Phases of growth in non-life insurance industry Private insurer gaining market share: In the initial phase (FY2-7), post opening up the sector for private participation, industry GDPI grew at 17.2% CAGR with private insurers gaining market share at ~33%. Post de-tariffing of premium (second phase from FY8-11) except for third party motor insurance, industry GDPI grew at 15.8% CAGR in FY7-11. Private insurer market share, in terms of GDPI, reached 37% by FY11 increasing ~4 bps over the previous phase. Improvement in growth enabled by proactive regulatory steps presented new avenues for growth Page 9

10 (%) (%) and eased restrictions on existing product lines. Industry GDPI grew at 18.1% CAGR in FY Since inception, the private multi-product sector has grown significantly and currently accounts for ~42% (46.7% including private standalone health insurers) of GDPI of non-life insurance industry in FY17. Market share growth was driven by superior customer service and claims settlement. Exhibit 16: Market share of private insurer on the rise (GDPI basis) FY8 FY9 FY1 FY11 FY12 FY13 FY14 FY15 FY16 FY17 Private Multi-Product Insurers Private Standalone Health Insurers Public Multi-Product Insurers Specialised Insurers Channel mix shift towards direct and broker: Indian non-life insurers employ a multi-channel approach to market and sell their products, including individual agents, bank partners, other corporate agents, brokers, direct sales and online channels. In FY11-16, proportion of broker and individual agent has been on the rise increasing from 17% to 26.1% and 3.2% to 34.9%, respectively. However, a shift in channel mix has been witnessed from earlier agency only model towards direct business. This shift can be partly attributed to incremental crop insurance business (that is clubbed under direct business) and increased usage of online & mobile platform by retail customers. Consequently, the share of direct business increased ~6.6% from 25.1% in FY16 to 31.7% in FY17. With advantages such as ability to cross-sell products and collect more detailed customer data while encouraging better renewal rates through ease of access and not involving any commission payments to intermediaries, the online channel is increasingly emerging as a key distribution channel. Products commonly sold through this channel are motor, travel and health insurance. Exhibit 17: Channel wise GDPI of Indian non-life insurance FY11 FY12 FY13 FY14 FY15 FY16 FY17 Brokers Corporate Agents - Banks Corporate Agents - Others Direct Business Individual Agents Page 1

11 Key strengths and strategies Market leadership and established brand NIA has been in operation for almost a century since incorporation in 1919, and has been the largest general insurance company in India in terms of net worth, domestic gross direct premium, profit after tax and number of branches as of FY17 (Source: Crisil Report). Despite significant competition, the company has maintained a leadership position among Indian general insurance market with 15% market share of gross direct premium (FY17). In FY17, NIA was market leader among Indian non-life insurers in each of the segments including fire, engineering, aviation, liability, marine, motor and health insurance (Source: Crisil Report). In FY13-17, despite increasing competition from private players, the company has maintained market leadership in general insurance industry in India, particularly in fire, marine, motor and health insurance (Source: Crisil Report). Exhibit 18: Market share of non-life insurer as per GDPI (FY17) Reliance General, 3% Others, 18% IFFCO-Tokio, 4% Tata-AIG, 3% HDFC ERGO, 5% New India, 15% United India, 12% National, 11% AIC (crop), 6% Bajaj Allianz, 6% Oriental, 9% ICICI-lombard, 8% Source: RHP, ICICIdirect.com Research Current under-penetration in the Indian general insurance industry at.8% in 216, represents significant untapped potential of the Indian general insurance market and presents significant growth potential. With rising income levels in India and inflation under control, discretionary consumer spending and household savings rate (household savings as a percentage of GDP) is expected to increase gradually. This is expected to result in a positive outlook for the general insurance business, given the linkage of general insurance business with consumption demand. Given established brand and business reputation, large and diversified product portfolio targeted at various customer segments, and expansive multichannel distribution network, NIA is well positioned to capitalise on the significant growth potential in the Indian general insurance industry. Longstanding global footprint and successful international operations NIA commenced international operations in 192 and currently has a presence in the UK (with a desk at Lloyd s, London), Japan and Australia. In addition, the company s global operations are spread across Asia Pacific, Middle East, Africa and the Caribbean. As of June 3, 217, NIA operated in 28 international jurisdictions through a number of international branches, agency offices, subsidiaries and associated companies. Page 11

12 Exhibit 19: Gross written premium from various international jurisdictions (FY17) Country GWP ( crore) % of GWP from international operations United Arab Emirates % Bahrain % Kuwait % Muscat % Saudi Arabia. % Aruba % Curacao % Mauritius % Hong Kong % Philippines % Thailand % Australia % Fiji % Auckland % Japan % United Kingdom % Total % Source: RHP, ICICIdirect.com Research NIA s international operations and global footprint strengthen its business reputation and brand, enable diversification of risk geographically and contributes a significant portion of premium generated. In FY15, FY16 and FY17, gross written premium from international operations were crore, crore and crore, respectively, and contributed 17.7%, 17.54% and 14.2%, respectively, of total gross written premium. Underwriting profits recorded in international operation were at 17.4 crore, crore and 31. crore in FY15, FY16 and FY17, respectively. The company intends to further expand operations in additional international markets through selective targeting of new regions based on existing market knowledge, underwriting expertise and risk management capabilities. Diversified product offering and product innovation capability NIA s strong underwriting capabilities, and relationship with reputed reinsurers, enable it to provide a comprehensive range of insurance products address the untapped and evolving needs of customers both individual and commercial. As of June 3, 217, the company offered more than 23 products across various business segments. NIA offers diversified composition of insurance products with fire, motor, health, marine, crop and other insurance segments contributing 15.34%, 38.81%, 26.19%, 3.7%, 5.38% and 11.2%, respectively, of GDPI in FY17. Exhibit 2: Segment mix for industry players (FY17) FY17 NIA United India National Oriental ICICI Lombard Bajaj Allianz HDFC ERGO IFFCO Tokio TATA AIG Reliance General Fire 1% 9% 7% 9% 7% 7% 9% 5% 13% 8% Health 33% 35% 35% 35% 2% 16% 21% 1% 11% 1% Marine 3% 2% 2% 3% 3% 2% 2% 2% 6% 1% Motor 4% 38% 45% 35% 42% 47% 16% 53% 49% 5% Crop 6% 7% 4% 9% 2% 19% 35% 23% 11% 28% Others 9% 9% 7% 1% 8% 9% 17% 7% 11% 4% Source: RHP, ICICIdirect.com Research NIA has maintained leadership position in the Indian general insurance market despite increasing competition from private sector players. In FY17, in terms of gross direct premium, NIA was market leader in each of product segments including fire, marine, motor and health insurance with market share of 19.1%, 21.%, 15.1% and 18.4%, respectively (source: Crisil report). In the recent past, NIA has introduced new products such as Page 12

13 personal accident cover for 41.2 crore individuals with RuPay cards, nuclear operator liability insurance, cellular network policies to operators, bonded warehouse insurance for warehouse owners and customised insurance solutions for various large risk projects across India. Continued focus on product innovation will enable further to appropriately respond to market demands and maintain market leadership in a rapidly growing and changing general insurance market in India. Multi-channel distribution network NIA has developed a multi-channel distribution network including individual and corporate agents, brokers, bancassurance partners and other intermediaries, as well as direct sales and sales through online channels. As of June 3, 217, the company s distribution network included 68,389 individual agents and 16 corporate agents. NIA has a pan-india office network with 2452 offices in India across 29 states and seven union territories. In FY17, gross direct premium generated from agent network (individual and corporate agents), brokers, and bancassurance partners contributed 42.1%, 25.75%, and 1.15%, respectively, of gross direct premium in India. Direct sales contributed 31.9% of gross direct premium in India in FY17. Exhibit 21: Channel-wise GDPI of domestic business (NIA) es (%) Agents Broker Direct Sales Bancassurance FY15 FY16 FY17 Source: RHP, ICICIdirect.com Research Higher combined ratio remains a cause of concern NIA has higher combined ratios >115% on a consistent basis since last 5 years which has impacted ability of the company to make underwriting profits. The company reported weak combined ratio of 119.7% in FY17 and 11.66% in Q1FY18. Inability to bring down high combined ratios can impact future profitability for the company. Page 13

14 (%) (%) Exhibit 22: Combined ratio (FY17) Exhibit 23: Combined ratio remains on the higher side (NIA) NIA Oriental ICICI Insurance Lombard Bajaj Allianz IFFCO Tokio HDFC Ergo Tata AIG FY13 FY14 FY15 FY16 FY17 Q1FY18 Source: IRDA, ICICIdirect.com, Research Source: RHP, ICICIdirect.com, Research Exhibit 24: Solvency ratio (FY17) Exhibit 25: Return on equity (FY17) (%) % 154.6% 131.4% 111.4% 21.3% 261.2% (%) 8.6% NIA 2.3% 23.1% Oriental ICICI Insurance Lombard Bajaj Allianz 29.% IFFCO Tokio 19.2% HDFC Ergo 1.5% Tata AIG NIA United India National Insurance Oriental Insurance ICICI Lombard Bajaj Allianz % Source: RHP, ICICIdirect.com, Research Source: RHP, ICICIdirect.com, Research Robust IT infrastructure NIA has a centralised web-based solutions and IT infrastructure, which provides comprehensive solutions for core business functions like policy servicing and administration, claims management and other related functions including document management, workflow management, human resource management and customer relationship management. Business processes across the entire branch network have been rationalised creating standardised procedures for accounting, reconciliation, reporting, documentation and user communication. Digital platform and network enables pricing the products competitively as well as faster settlement of claims. In FY17, ~12.73% of total premium was collected through digital platform, which has increased rapidly in recent years. While claim settlement ratio (including suit claims) was at 9.4% in FY17, which is the highest among top 1 multi-product insurers (source: Crisil report). The company continues to focus on developing and strengthening IT capabilities to support growth and improve quality of services. It intends to introduce additional standard term products for direct distribution through online channels. In addition, the company aims to introduce mobile applications for new product launches and enable functional ease for agents and customers. Page 14

15 Key risks and concerns Catastrophic events may have material adverse effect on operations NIA has a wide range of insurance products including products that cover losses from unpredictable events such as hurricanes, storms, monsoons, earthquakes, fires, industrial explosions, floods, riots, terrorism, etc. There can be no assurance that the company has been or will in future be able to effectively cover large losses arising out of these catastrophic events. In case the company incurs one or more large catastrophic losses, its ability to write future business may be adversely impacted if the company is unable to replenish its capital. Dependence on select insurance products for premium & profitability In FY17, the fire, motor and health insurance segments contributed 12.1%, 41.1% and 27.9% respectively, of NIA s gross direct premium. Any constraint in selling these products due to future regulatory changes restricting or limiting the sale or marketing of these products, changes in customer preference could have a material adverse effect on business operations. Inability to bring down high combined ratios in future High combined ratios >115% on a consistent basis since last 5 years impact ability of the company to make underwriting profits. Company reported weak combined ratio of 119.7% even in FY17 and 11.66% in Q1FY18. Inability to bring down high combined ratios can impact future profitability for the company. Significant portion of business is generated from relatively few regions Maharashtra and Tamil Nadu accounted for 44.74% of NIA s domestic gross direct premium in FY17. Thus, it is susceptible to economic and other trends and developments, including adverse weather conditions, in these areas. Given NIA s, geographic concentrations, any catastrophic event in such locations may significantly increase catastrophic reinsurance premiums. Regulation of motor insurance; changes in demand for motor vehicles In FY15, FY16 and FY17, NIA derived 38.59%, 39.8% and 38.81% respectively, of its gross written premium from motor vehicle insurance products. This has largely been driven by the continued growth in demand for motor vehicles. Such growth in demand may not sustain in the future. Further, under the Motors Vehicles Act, 1988, as amended, there is a requirement for every person who uses (except passengers) or causes or allows any other person to use a motor vehicle in public, to purchase motor vehicle third-party liability insurance. If there is any change in this requirement, the demand for third-party motor insurance may decline, which could have an adverse effect on company s business as this product line contributed to 19.6% of its gross premium in FY17. Additional risks associated with international operations In FY15, FY16 and FY17, gross written premium from NIA s international operations was 284 crore, 3222 crore and 3164 crore, respectively, and contributed 17.7%, 17.54% and 14.2%, respectively, of its s gross written premium in such periods. This business is subjects to various risks, including currency risk, risks associated with political instability, catastrophic risk affecting business underwritten abroad, changing market conditions around the globe, economic downturn, which could result in financial market disruption, and risk of compliance with local laws, any of which could cause a material and adverse effect on NIA s business and prospects. Page 15

16 Financial Summary Exhibit 26: Policyholders Account ( Crore) FY13 FY14 FY15 FY16 FY17 Premiums earned - Net Profit on sale of Investments Other income Interest, Dividend & Rent- Gross Total Claims Incurred (net) Commission (net) Operating expenses related to insurance business Premium deficiency Others - Foreign Taxes Amortisation, Write off, Prov. - Investments Total Operating Profit/ (Loss) Source: RHP, ICICIdirect.com Research Exhibit 27: Shareholders Account ( Crore) FY13 FY14 FY15 FY16 FY17 Operating profit/(loss) (a) Fire Insurance (b) Marine Insurance (c) Miscellaneous Insurance Income from investments Other income Total revenue Provisions Other expenses Profit before tax Tax PAT Source: RHP, ICICIdirect.com Research Exhibit 28: Balance Sheet ( Crore) FY13 FY14 FY15 FY16 FY17 Sources of Funds Share capital Reserves and Surplus Net worth Fair Value Change Account Borrowings Minority Interest Total Liabilities Applications of Funds Investments Loans Fixed assets Deferred tax asset Net current assets Misc. Exp. (to the extent not written off or adjusted) Total Source: RHP, ICICIdirect.com Research Page 16

17 Exhibit 29: Key Ratios (Year-end March) FY13 FY14 FY15 FY16 FY17* Valuation No. of Equity Shares (Crore) Diluted EPS ( ) BVPS ( ) P/E P/B Efficiency Ratios (%) Premium Ratio Net Incurred Claims to Net Earned Premium Combined ratio Operating Profit Ratio Return Ratios and capital (%) Return on Net worth Solvency Ratio Source: RHP, ICICIdirect.com Research; * Factoring in Bonus issues in August 217 Page 17

18 RATING RATIONALE ICICIdirect.com endeavours to provide objective opinions and recommendations. ICICIdirect.com assigns ratings to its stocks according to their notional target price vs. current market price and then categorises them as Strong Buy, Buy, Hold and Sell. The performance horizon is two years unless specified and the notional target price is defined as the analysts' valuation for a stock. Subscribe: Apply for the IPO Avoid: Do not apply for the IPO Subscribe only for long term: Apply for the IPO only from a long term investment perspective Pankaj Pandey Head Research pankaj.pandey@icicisecurities.com ICICIdirect.com Research Desk, ICICI Securities Limited, 1st Floor, Akruti Trade Centre, Road No 7, MIDC, Andheri (East) Mumbai 4 93 research@icicidirect.com Page 18

19 ANALYST CERTIFICATION We /I, Kajal Gandhi, CA, Vasant Lohiya, CA and Vishal Narnolia, MBA, Research Analysts, authors and the names subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect our views about the subject issuer(s) or securities. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report. Terms & conditions and other disclosures: ICICI Securities Limited (ICICI Securities) is a full-service, integrated investment banking and is, inter alia, engaged in the business of stock brokering and distribution of financial products. ICICI Securities Limited is a Sebi registered Research Analyst with Sebi Registration Number INH99. ICICI Securities is a wholly-owned subsidiary of ICICI Bank which is India s largest private sector bank and has its various subsidiaries engaged in businesses of housing finance, asset management, life insurance, general insurance, venture capital fund management, etc. ( associates ), the details in respect of which are available on ICICI Securities is one of the leading merchant bankers/ underwriters of securities and participate in virtually all securities trading markets in India. We and our associates might have investment banking and other business relationship with a significant percentage of companies covered by our Investment Research Department. ICICI Securities generally prohibits its analysts, persons reporting to analysts and their relatives from maintaining a financial interest in the securities or derivatives of any companies that the analysts cover. The information and opinions in this report have been prepared by ICICI Securities and are subject to change without any notice. The report and information contained herein is strictly confidential and meant solely for the selected recipient and may not be altered in any way, transmitted to, copied or distributed, in part or in whole, to any other person or to the media or reproduced in any form, without prior written consent of ICICI Securities. While we would endeavour to update the information herein on a reasonable basis, ICICI Securities is under no obligation to update or keep the information current. Also, there may be regulatory, compliance or other reasons that may prevent ICICI Securities from doing so. Non-rated securities indicate that rating on a particular security has been suspended temporarily and such suspension is in compliance with applicable regulations and/or ICICI Securities policies, in circumstances where ICICI Securities might be acting in an advisory capacity to this company, or in certain other circumstances. This report is based on information obtained from public sources and sources believed to be reliable, but no independent verification has been made nor is its accuracy or completeness guaranteed. This report and information herein is solely for informational purpose and shall not be used or considered as an offer document or solicitation of offer to buy or sell or subscribe for securities or other financial instruments. Though disseminated to all the customers simultaneously, not all customers may receive this report at the same time. ICICI Securities will not treat recipients as customers by virtue of their receiving this report. Nothing in this report constitutes investment, legal, accounting and tax advice or a representation that any investment or strategy is suitable or appropriate to your specific circumstances. The securities discussed and opinions expressed in this report may not be suitable for all investors, who must make their own investment decisions, based on their own investment objectives, financial positions and needs of specific recipient. This may not be taken in substitution for the exercise of independent judgment by any recipient. The recipient should independently evaluate the investment risks. The value and return on investment may vary because of changes in interest rates, foreign exchange rates or any other reason. ICICI Securities accepts no liabilities whatsoever for any loss or damage of any kind arising out of the use of this report. Past performance is not necessarily a guide to future performance. Investors are advised to see Risk Disclosure Document to understand the risks associated before investing in the securities markets. Actual results may differ materially from those set forth in projections. Forward-looking statements are not predictions and may be subject to change without notice. ICICI Securities or its associates might have managed or co-managed public offering of securities for the subject company or might have been mandated by the subject company for any other assignment in the past twelve months. ICICI Securities or its associates might have received any compensation from the companies mentioned in the report during the period preceding twelve months from the date of this report for services in respect of managing or co-managing public offerings, corporate finance, investment banking or merchant banking, brokerage services or other advisory service in a merger or specific transaction. ICICI Securities or its associates might have received any compensation for products or services other than investment banking or merchant banking or brokerage services from the companies mentioned in the report in the past twelve months. ICICI Securities encourages independence in research report preparation and strives to minimize conflict in preparation of research report. ICICI Securities or its associates or its analysts did not receive any compensation or other benefits from the companies mentioned in the report or third party in connection with preparation of the research report. Accordingly, neither ICICI Securities nor Research Analysts and their relatives have any material conflict of interest at the time of publication of this report. It is confirmed that Kajal Gandhi, CA, Vasant Lohiya, CA and Vishal Narnolia, MBA Research Analysts of this report have not received any compensation from the companies mentioned in the report in the preceding twelve months. Compensation of our Research Analysts is not based on any specific merchant banking, investment banking or brokerage service transactions. ICICI Securities or its subsidiaries collectively or Research Analysts or their relatives do not own 1% or more of the equity securities of the Company mentioned in the report as of the last day of the month preceding the publication of the research report. Since associates of ICICI Securities are engaged in various financial service businesses, they might have financial interests or beneficial ownership in various companies including the subject company/companies mentioned in this report. It is confirmed that Kajal Gandhi, CA, Vasant Lohiya, CA and Vishal Narnolia, MBA, Research Analysts do not serve as an officer, director or employee of the companies mentioned in the report. ICICI Securities may have issued other reports that are inconsistent with and reach different conclusion from the information presented in this report. Neither the Research Analysts nor ICICI Securities have been engaged in market making activity for the companies mentioned in the report. We submit that no material disciplinary action has been taken on ICICI Securities by any Regulatory Authority impacting Equity Research Analysis activities. This report is not directed or intended for distribution to, or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction, where such distribution, publication, availability or use would be contrary to law, regulation or which would subject ICICI Securities and affiliates to any registration or licensing requirement within such jurisdiction. The securities described herein may or may not be eligible for sale in all jurisdictions or to certain category of investors. Persons in whose possession this document may come are required to inform themselves of and to observe such restriction. Page 19