Investors' high expectations raise risk for stocks of general insurers

Benefits of lower claims could get offset by subdued premium collection and fixed costs

General insurance firms have staged a sharp comeback on the bourses in recent weeks. ICICI Lombard General Insurance Company (ICICI Lombard) and New India Assurance Company (New India) have seen a 37-48 per cent surge in their share prices since March 23, outperforming the 17-per-cent rise in the Sensex during the same period.

Expectations of strong demand for health products amid the Covid-19 outbreak, and higher profitability — aided by lower claims — have driven up investor sentiment. 

However, investors may have to tone down profitability expectations, given the concerns over premium collections and costs.

Avinash Singh, analyst at SBICAP Securities, says: “Claims will reduce in the near term, with restricted public mobility and transportation. However, the overall combined ratio (profitability measure for general insurers) in FY21 may not see strong improvement because of fixed costs, while premium growth will also remain weak.”

Besides the lockdown impact (as reflected in a 11 per cent year-on-year fall in gross direct premium in March), subdued demand for automobiles is another concern. 

 

 

The automobile sector accounts for 35-40 per cent of total general insurance premiums.
 

Atul Sahai, chairman and managing director of New India Assurance, says: “The motor segment will see growth pressure in ensuing quarters, in terms of both new business and renewals.”

Vehicle sales yield around 15 per cent of new business to general insurers, say experts. 

After the lockdown is lifted, growth for the motor insurance segment will also get restricted as the Insurance Regulatory and Development Authority of India (Irdai) has deferred price hikes for now.

Although a strong impetus to the health insurance industry has not been written off over the long term, experts and analysts believe that a sharp uptick in premium income is unlikely, atleast for nine months, on account of low demand. 

Further, it is still not clear as to how the liquidity crunch (cash flow pressure) at medium and small businesses impacts demand for other general insurance segments, such as fire.

There is also some scepticism over renewals. 

While the government and Irdai have extended the renewal time (for premiums due till 15 May) amid the lockdown, customers may demand more time, says Sahai.

Therefore, management commentary for the March 2020 quarter earnings on demand, loss ratio, and renewals will be closely watched.