Stock valuations factor in negatives for ICICI Lombard, say analysts

Improving topline growth but combined ratio, loss ratio key concerns

The Q2 results of ICICI Lombard General Insurance Company drew mixed reactions from analysts though the market responded with selling down the share. The net profit beat expectations but that was partly due to tax reversal, which meant a credit of Rs 130 crore.
 

Growth momentum in the commercial segment and in group health insurance compensated for weakness in the core motor insurance business and moderate growth in retail health. The combined ratio remains high due to a strategy of disruptive pricing to cope with competition and also investments in growth.
 

The general insurer has lost market share in the motor business (down 79 bps year-on-year or YoY to 10.1 per cent), with a slowdown in the motor own damage segment (down 207 bps YoY to 12.3 per cent). This is due to strong competition.
 

The retail health growth was moderate but satisfactory, at 16 per cent, compared to 47 per cent growth in the group health segment. The combined ratio is worrying — it is well above the long-term average of 100 per cent due to higher claims in the retail divisions of the health and motor segments. The combined ratio stood at 105.1 per cent versus 105.3 per cent (YoY) and 104.1 per cent (quarter-on-quarter or QoQ). The solvency ratio stood at 2.5x — deteriorating from 2.6x (QoQ).
 

Investment yield has moved up a little due to higher rates and large capital gains. But it was the tax reversal that contributed most to high earnings growth. The underwriting loss was Rs 150 crore against Rs 190 crore in Q1for financial year 2022-23 (Q1FY23). Opex grew at 9 per cent compared to 11 per cent growth in net earned premium. The claims ratio rose 70 bps, to 72.8 per cent in Q2, versus 72.1 per cent in 1QFY23. The claims ratio grew 300 basis points YoY. 

 

Total gross written premium grew 18 per cent YoY, but fell 4 per cent QoQ to Rs 5300 crore. Adjusted for the tax reversal, Profit after tax (PAT) stood at Rs 460 crore (reported PAT was Rs 590 crore).
 

The Investment income (shareholders and policyholders) was at Rs 870 crore, which was higher than expectation. It grew 27 per cent QoQ and 19 per cent YoY.  The rise was driven by higher interest accrual due to the trend of rising interest rates. Around 70-75 per cent of investment income is accrual and the balance is capital gains.
 

The management commented that the loss ratio in the motor own damage (OD) segment is higher than motor third party due to pricing pressures. 
 

However, the management expects motor OD pricing to improve over the next few quarters. The company has restarted distribution of indemnity-based products. The profitability of this product is lesser than the erstwhile credit- linked benefit based product. A higher interest environment is favourable, given the investment portfolio and in future, carrying yield should increase while capital gains will reduce.
 

Analysts seem divided on the future prospects. On the one hand, topline growth seems to be improving, except in motor OD. 
 

However combined ratio and loss ratio are in red zones.  Recommendations range from reduce with a target Price of Rs 1,200 versus current price of Rs 1,138 to ‘hold’ or ‘buy’ with price targets of Rs 1,450, 1,470 and Rs 1,500. The stock has lost 25 per cent in the last 12 months so the negatives may be priced in, to a large extent.