New India Assurance vs ICICI Lombard: Investors monitoring earnings quality

The latest market capitalization of New India Assurance and ICICI Lombard stands close to ₹43,500 crore and ₹80,700 crore, respectively. This is even though the former’s market share is at 16% versus about 8% of the latter.

A deep dive into the comparative financials of the two reveals the reasons.

To begin with, New India Assurance’s underwriting losses are far higher than ICICI Lombard. For instance, in the December quarter (Q3FY24), New India’s underwriting loss stood at ₹1,390 crore. Underwriting loss is calculated by deducting the incurred claims and operating expenses from the net premium earned (or simply put: revenue). It indicates the underwriting standards, or in other words, it is the risk assessment skill of an insurer regarding the likelihood of a claim at the time of insuring a person, object, or property. 

Sure, it is possible to argue that ICICI Lombard too reported an underwriting loss of ₹280 crore last quarter, but the loss as a percentage of net premium earned is much lower at 6.5% as against 15.5% for New India Assurance.

 

New India Assurance still managed to report an operating profit of ₹290 crore owing to income from investments worth ₹1,680 crore. Operating profit is the summation of underwriting profit/loss and income from investments. The reason for the underwriting loss was that New India Assurance had to pay almost 93% of the net premium earned towards claims. Even if the claims related to catastrophic losses due to the cyclone and floods in South India, Sikkim, and West Bengal worth ₹350 crore are excluded, the ratio comes to 89%. This is much higher than the 70% reported by ICICI Lombard in Q3FY24.

Further, ICICI Lombard enjoys a higher solvency ratio of 2.57 as against 1.72 of New India Assurance. The higher solvency ratio indicates the ability to underwrite more business or do more business by selling new insurance. ICICI Lombard has maintained a return on equity (RoE) in excess of 15% for the last three years. New India Assurance is far from clocking double-digit RoE in the near future. In the nine-month ended December, its RoE stood at 5.1% and in FY23, it was at 5.5%.

Despite the higher base, New India Assurance did a good job of matching the net premium earned or topline growth rate of ICICI Lombard at 14% in Q3. However, New India Assurance has a long way to go to catch up with its private peer in terms of profitability.

Having said all of this, it is not surprising that ICICI Lombard commands a market capitalization of ₹84000 crore, which is almost 2x that of New India Assurance. While the net worth or book value of New India Assurance is at ₹20000 crore, almost double of ICICI Lombard, it is clear that the market is valuing the stocks based on the quality of earnings and RoE rather than merely the price to book value multiple.

Going forward, growth is unlikely to be a challenge for New India Assurance and the industry in general as the non-life insurance penetration in India is around one-fourth of the global average as per Swiss Re report. However, investors should monitor the progress of New India Assurance’s future strategy to increase RoE by rationalizing offices and related costs along with growth through digital penetration.

To be sure, till about six months ago, New India Assurance was deeply undervalued with its market capitalization well below its net worth. Investors took notice of that when stocks of all the public sector units (PSUs) started rallying after Prime Minister Narendra Modi made a statement in Parliament regarding improving governance in government-owned companies. The upshot is that over the past one-year, New India Assurance shares have risen more than 150% against ICICI Lombard’s about 50% gain during the same period. ICICI Lombard has also fared well after ICICI Bank, its parent, increased its stake following the Reserve Bank of India’s nod to do so by up to 4%.