ICICI Lombard Q4 results: There's no insurance cover against slowdown

Premium income (excluding crop biz) lagged industry growth in Q4

With the banking sector hit by a fresh wave of possible asset quality issues, the Street had viewed insurance stocks favourably. Whether it be for life or general insurance firms, the view was they would possibly beat the slowdown better than other financial services players. However, as insurance companies publish their March quarter (Q4) results, the view appears to be more of a myth than genuine expectation.

Take ICICI Lombard’s Q4 performance. Its gross direct premium income (GDPI) fell 8.7 per cent year-on-year in Q4. Even if one attributes the sharp 119 per cent decline in crop insurance premium to have dented the firm in Q4, aggregate growth (excluding crop insurance) of 2.3 per cent has lagged industry growth of 4.3 per cent — a reasonable margin. Crop insurance accounts for less than two per cent of ICICI Lombard’s GDPI and in Q4, the business witnessed more outflows than inflows in premium, which explains the over 100 per cent fall. 

 

 

Despite a diverse portfolio, ICICI Lombard's mainstay remains motor insurance, at 55 per cent of GDPI. This segment grew by just four per cent in Q4, inadequate to absorb the losses of the crop insurance segment,  dragging overall performance.

“We expect ICICI Lombard to deliver 6 per cent decline in gross premium in FY21 on the back of a sharp slowdown in motor, muted business in most wholesale segments, moderate growth in the fire segment and some tailwinds to health business following the Covid-19-related anxiety to improve coverage,” say analysts at Kotak Institu-tional Equities. They add that lower interest rates may lead to decline in interest income as well, translating into 11 per cent earnings growth helped by a robust investment book.

Kotak has downgraded the insurer’s earnings estimates for FY21 by eight per cent, and adds that medium-term return on equity (RoE) may be just about 20 per cent for FY21. Q4’s RoE (annualised) fell to 18.8 per cent, from 20.3 per cent in Q3, dragging FY20's RoE to 20.8, as against 21.3 per cent a year-ago.

These downgrades seem to iterate that no sector/firm is immune to earnings downgrade in FY21.   

For ICICI Lombard, even after Monday's 6.5 per cent fall, at 41x FY21 earnings, valuations are extremely bloated. The only silver lining, as analysts at Edelweiss mention, is the firm's dominance in the sector and its strong balance sheet. Some believe this may help it consolidate its market share. Whether that will be adequate to sustain interest in the stock still needs to be seen.