ICICI Lombard: Leadership position supersedes other issues for investors

Higher investment gains continue to compensate for underwriting losses; improving product mix is positive

The stock of ICICI Lombard General Insurance has been a straggler unlike its peers in the insurance sector. While for the early part of 2020-21 (FY21), it was moderation in growth which played spoilsport — unlike life insurers helped by an unprecedented surge in demand for protection plans till August 2020 — recovery for general insurers, including ICICI Lombard, has largely been measured.

For instance, even in the October-December quarter (third quarter, or Q3) when the life insurance space saw 10–14 per cent growth in premiums, growth in the general insurance business was subdued. ICICI Lombard’s net premium grew 6.3 per cent year-on-year (YoY) in Q3. Since it was ahead of industry growth at less than 4 per cent, its stock remains a preferred pick in the segment.

If investors are willing to a pay a premium for ICICI Lombard (40x its 2021-22, or FY22, estimated earnings), it will be on the strength of its leadership position and scale.

“ICICI Lombard’s strong execution capabilities, conservative underwriting, and healthy solvency should help the company emerge a stronger player after its merger with Bharti AXA General Insurance,” say analysts at Sharekhan. Due to its strong business strength, high capitalisation, positive tailwinds of economic recovery, and supportive regulations, they find the risk-reward ratio favourable for the stock.

With 14.6 per cent market share among private general insurers, retaining pole position, despite growing competition, hasn’t been challenging. Even if ICICI Lombard continues to make underwriting losses (a trend across general insurers) and much of the net profit accretion happens from investment gains (up 31 per cent YoY in Q3), the Street is willing to sidestep this aspect.

Moreover, the share of motor insurance (third party and own damage) recovered to 60 per cent in Q3, from the lows of 35 per cent in the April-June quarter. It’s the retail health segment that’s put a dampener. With change in regulations (ban on credit-linked products) and ICICI Bank’s shift in focus (largest bancassurance partner), the insurer saw significant decline in credit-linked retail benefit insurance.

Analysts at PhillipCapital note that the pent‐up demand for health insurance may have tapered off. Overall, retail health premiums fell 28 per cent YoY in Q3. From 20–25 per cent share of health products to total assets under management, it dropped to 17 per cent in Q3. However, on the back of integration with Bharti AXA, analysts feel the net written premium should grow 13–16 per cent YoY in FY22, up from less than 10 per cent in the nine months of FY21.

Against this backdrop, delivering on growth will be critical to sustain the Street’s interest.