Stake sale, easing competitive pressures key for ICICI Lombard

ICICI Lombard General Insurance has been a laggard in the private general insurance space and results for the fourth quarter of the 2022-23 financial year (Q4FY23) disappointed the market, though industry analysts claimed the print was on expected lines.

ICICI Lombard reported a net profit of Rs 437 crore in Q4FY23, up 40 per cent year-on-year (YoY). Gross premium growth was moderate at 6.8 per cent after adjusting for a one-off sale transaction in February 2023, and 12.5 per cent unadjusted. This amounted to 12 per cent growth in net premium.

The combined ratio at 104.2 per cent was stable quarter-on-quarter (QoQ), despite a rising 74.2 per cent claims ratio (up from 70.3 per cent in Q3FY23). The higher claims were due to an increase in claims in the motor segment, but offset by lower commission and expenses. Investment yield, at 7.5 per cent, was stable QoQ.

A combined ratio (CR) of above 100 per cent indicates the company is paying out more in claims, expenses, etc., than it is earning in premiums. Hence, the profitability depends on the yield from the investment portfolio. In the long run, the CR has to drop below 100 per cent for sustained profitability. The management guidance is that the CR will drop to 102 per cent (currently at 104.2 per cent) by FY25. Net premiums earned reduced by -1.7 per cent QoQ. Overall, the motor segment reduced 1.9 per cent QoQ while health grew 0.9 per cent QoQ. The market share in retail health is lower than average and management is focussed on it. The fire segment reduced 3.3 per cent QoQ while the marine side grew 8.2 per cent QoQ.

The loss ratio (claims paid as a ratio of premium) has deteriorated by 390 basis po­ints (bps) QoQ to 74.2 per cent, mainly due to high motor third party claims. The opex (operating expenses) fell by 10 per cent QoQ and commission paid fell by 47 per cent QoQ. The expense ratio (expenses incurred in underwriting premiums as a ratio of net premium), though, rose by a marginal 20 bps.

The insurer reported improvement in the claims ratio in motor own damage (OD) segment — to 69.4 per cent from 73-74 per cent in the last three quarters. On the other hand, the claims ratio in the motor third party business increased to 86 per cent, from 62-74 per cent, in the last three quarters. ICICI Lombard lost market share in motor OD to 13.1 per cent in January/ February 2023, from 15.1 per cent in Q4FY22.

The company sold off a large pool of motor loans (about Rs 280 crore) in February 2023. Expenses include investments for the future in distribution channels, and the company is displaying prudent underwriting practices, as it tries to rationalise cost, and launch new products. The regu­latory landscape is still fluid, and there’s a hyper-competitive market in motor insurance and reinsurance rates are high. The regulatory requirement for 18 per cent stake sale by the promoter (ICICI Bank) is a cause of concern. Clarity on the sale could be a positive trigger and it would give a clearer picture on the valuation front.

Most analysts have “buy” or “add” recommendations with target prices and valuations over Rs 1,400. However, the stock saw heavy selling after the results, pulling the price down 4.8 per cent to Rs 1,075. There could be a significant upside.