ICICI Lombard IPO offers slice of nascent market at hefty premium

India’s general insurance market has just begun to stir, reason enough for investors to give a resounding welcome to ICICI Lombard General Insurance Co.’s initial public offering (IPO).

But that is just the first- mover advantage. ICICI Lombard holds a little over 8% of the grossly under-penetrated non-life insurance market where only 30 companies do business. Public sector firms—there are four of them—own more than half of the non-life insurance market.

The insurer has priced its share offer at Rs651-661 apiece and hopes to rake in close to Rs5,700 crore through the IPO. At this band, the company is valued at around Rs30,000 crore, a jump of 48% in just six months. In May, the general insurer’s Canadian shareholder Fairfax Financial Holdings Ltd diluted its stake that had valued ICICI Lombard at a little over Rs20,000 crore.

The general insurer’s management believes that the potential growth in business due to the sheer under-penetration in the market and the fact that ICICI Lombard has an enviable diversified distribution channel are also reasons for the appreciation in valuation.

Indeed, the general insurer does not depend on one channel for its product sale and its parent ICICI Bank’s branches contributed 6.1% of its total gross direct premium income (GDPI) in the three months ended June of the current fiscal year. The next big contributor to premium income was distribution through automobile manufacturers. Tie-ups with auto companies is key as motor insurance remains the dominant product segment for the insurer but closest peer Bajaj Allianz trumps in market share in this segment. Motor insurance where the insurer underwrites contributed 25.7% to GDPI in fiscal year 2017 while that through underwriting third-party insurance contributed 16.6% for ICICI Lombard.

Its performance ratios like loss ratio (the difference between claims paid and premium earned) and combined ratio are also impressive. But analysts are wary that the issue demands a steep premium. Fairfax’s stake dilution in May was more than 3.5 times ICICI Lombard’s embedded value, according to analysts. The IPO demands a higher premium.