Focus on profitable growth
ROE to be at ~20% despite fall in investment yield
Key highlights from the interaction:
ROE of 20% possible despite fall in yield
* In the last decade, investment yield has been between 7–14%, with an average of 9–10%. Although new flows would generate lower investment yield, the management is confident of delivering at 7%+ returns on investment owing to a high-yielding legacy book. Leverage of 4x+ translates into pre-tax return of 28% and post-tax of 20%+ RoE, considering a 100% combined ratio.
* If investment yield comes in below 5% on a structural basis, the management expects the industry to be more disciplined in terms of pricing and target underwriting profits (combined ratio of less than 100%). Companies with large back books may benefit in the short term as legacy investments could help negate the pressure on underwriting profits.
Good traction in retail indemnity; cautious on Group Health segment
* The company recorded robust growth (high conversions of leads generated in April) in retail indemnity during the lockdown (largely sold through agencies). However, retail benefit products are witnessing a slowdown (as these were primarily sold through lending attachments via bank partners). Note that the company has a 50:50 mix of indemnity to benefit health insurance (compared with 75–80% share of indemnity in the industry).
* In the Corporate segment, while the SME segment is faring well, pricing is still reasonable. Group Health pricing is still competitive and not profitable. Within the Corporate segment, there is good traction in Fire Insurance.
* Motor Insurance sales would be impacted due to weak Auto numbers. However, the management believes Personal Mobility would fare better going forward and 2W / small car / lower-end vehicle sales would recoup faster, especially in rural.
Renewal rates improving; near-term growth pressures to continue
* Lagging overall renewal rate numbers are increasing MoM, and the normal run rate should recover in one to two months. In the Auto segment, the company is looking to increase the retention rate.
* Overall YoY premium growth is still negative, dragged down by New Auto Insurance and retail benefit products. Overall, the first half is likely to be negative at the industry level and would see some improvement from 2HFY21.
Seeks opex ratio reduction
* The management is actively considering having a sizeable proportion of the workforce continue into the “WFH regime” for the long term. This would aid the company’s endeavors to cut related costs.
* While the company would continue to invest in the necessary technology and human resource, it has undertaken the following steps to calibrate fixed costs (salaries / admin branch associated expenses, which constitute 9–10% of premiums). A) For FY21, the senior management would not take any increments. B) The company would cut down on new hires. C) It would reshuffle its human resource capabilities from businesses facing slowdown. Furthermore, other operating expenses are likely to be lower.
Key changes post COVID-19
* The management cited increased demand for higher sum insured policies, stating that a large number of insurers were looking to increase the sum insured. The management believes this is likely to continue even after the situation has normalized.
* Demand for phone consultations is also likely to persist; people would prefer to avoid unnecessary hospital/doctor visits. ICICIGI normally targets INR0.5m and above sum-insured policies through the agency channel.
* Claims frequency in certain segments, such as Auto and Health, is lower. With fewer vehicles on the road, claims in Auto have reduced. Hospitalization claims are down, except related to COVID-19, as elective and accident cases are lower.
* In other developments: a) ICICIGI has launched small ticket size COVID-19 insurance, b) 100% of home care expenses are being reimbursed, c) the sum insured is being restored if it was consumed for COVID-19-related expenses, d) COVID-19 claim durations have been reduced, e) drone are being used to settle claims for select insured in distress, and f) usual health claims may decline in the short term. The magnitude of COVID-19 claims is uncertain.
Comments on reserve triangles
* Of the 10 accident years, 8–9 usually see negative percentage balance; this indicates ICICIGI has been conservative at source, and as the portfolio matures, reserve releases would be witnessed.
* Motor OD and Health claims usually get played out within two years or so (short tailed). On the other hand, for Motor TP, although the policy duration is short, the liabilities tail is very long; hence, experience gets paid out over a very long period of time.
* The establishment of indemnity health insurers may not increase health penetration per se, but may result in a change of hands. ICICIGI would compete with LI on the basis of scale and by providing end-to-end cover. Standalone health insurers could face some pressure as they primarily use LI agents for distribution.
* Regarding the recent withdrawal of long-term Motor OD policies for 2Ws and cars, the management stated this would not impact the company in any meaningful way, especially car insurance. Some impact would be seen on 2W/OD renewals.
* Scale and digitalization have helped significantly over the last decade. The company has reported 7–8x the business with a 40% smaller workforce over the last decade.
* In other developments: a) ICICIGI awaits individual OPD cover approval from the regulator, b) the business mix percentage in the Health segment constitutes 10% for Govt., 40% for Retail, and 50% for Group (B2B2C), c) Engineering/Aviation is a bit slow, while Marine is faring fine, d) all claims overdue for large corporates were cleared during the lockdown, e) new vehicles account for 38% share of the Motor business.
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