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Company Overview:

ILOM is one of the leading private sector general insurance companies in India with a Gross Written Premium (GWP) of ₹135.92 billion for the year ended FY21. The company issued over 26.2 million policies and settled over 1.86 million claims in FY21. ILOM has 8.3% market share on overall basis and 13% in private general insurance space. The company operates in various non – life spaces with motor insurance being the largest contributor to its premium at ~44% as on 3QFY22. The digital initiatives keep the company ahead of peers as IL “Take Care” app is user friendly, serving customers with key functionalities such as quick and easy claim process, online policy renewal, access to cashless hospital network and other features for better customer engagement.

Investment Rationale:

Market leader in motor insurance space: ILOM is second largest motor insurer (largest in private space) with ~12% market share as on 3QFY22. The company is also second largest in the motor third – party insurance. At aggregate level, ~44% of the total gross premium of the company to industry average of ~30%. Hence, we expect the business to grow further considering growth in auto sales and recent development regarding 3rd – party insurance premium hike. Furthermore, the company has more focus on products with less loss ratios. Under the motor insurance segment, ~55% contribution comes from private cars and ~28% comes from two – wheelers. The contribution to CV is comparatively lower and CV segment has considerably higher loss ratio. Hence the strategy and product mix makes ILOM profitable. Furthermore, 3rd – party insurance was made mandatory for all new four and two wheelers. This would ensure higher compliances and significant advantage is expected in next two-three years. Hike in premiums for private cars, two-wheelers and CV segment would boost the company’s top-line. The two wheelers segment has witnessed a sharp jump in premiums of ~21% which benefits ILOM.

Digital ecosystem is a key strength: The digital initiatives holds well for the company as the turnaround time, user-friendliness and customer connectivity is productive at the organization level. “Take Care” app helps in quick and easy access for claim process, policy renewal and cashless hospital network. The app has total downloads of 1.4mn and witnessed good adaptability. The management is targeting double the installation in next few quarters.

Renewed focus on health insurance to arrest decline in market share: Factoring a huge competition in this space, the company has been lagging growth in this segment. Health insurance is 2nd largest segment of the company with around 20% contribution as on 3QFY22. Despite a lacklustre growth in previous years, the company is focusing on health insurance business and trying to achieve the previous growth run-rate. We believe, because of pandemic, awareness has increased while the health segment is likely to be ahead the industry growth in coming years. A strong expansion in the agent network should propel growth in retail health insurance segment

Superlative return ratios to come back: ILOM has delivered consistent profitability despite slower premium growth. On business front, we expect the gross premium to ~20% for FY22-24E. Additionally, the company has restrained itself from entering into high loss – making segments. Hence, the loss ratio is lower than the industry level. Claims ratio for ILOM has been relatively lower in health insurance because of exiting high loss making businesses like group corporate health. Moreover, profitability has been a key focus for the company as it has delivered an average ROE of ~20% for FY15-21. The company has delivered superior ROE by virtue of strong business choices and cost control. We expect the future ROE to bounce back from FY23.

Outlook and Valuation:

ILOM scores over its peers on profit market share and ROE profile and has managed its investment book exceedingly well. ILOM has leveraged the diversity in its product mix using technology and distribution to post superior ROE with higher solvency.

ILOM stock has underperformed due to loss of premium market share, higher underwriting losses and higher claims due to the Pandemic thereby impacting ROE for FY’21-22. We expect ROE to bounce back strongly to 18.6% in FY’22-23 aided by its digital strategy and superior cost management and value ILOM at 43xFY23E earnings to arrive at a price target of ₹1,808.

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