ICICI Lombard faces diverse challenges

As such, the motor own damage (OD) insurance segment has been a pain point for the insurer amid stiff competition, especially in the passenger vehicle segment.

However, there were signs of improvement in Q4. “ICICI Lombard reported a marginal improvement in the claims ratio in the motor OD business to 69.4% from 73-74% in the last three quarters," said analysts at Kotak Institutional Equities.

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In an earnings call, ICICI Lombard’s management said the overall competitive intensity in the industry has eased a bit. But investors need to keep a close tab on how the competition pans out, going ahead. “We understand that select large unlisted players remain more aggressive even as IPO-bound new-age players have been less aggressive; the former may not remain irrational for long, in our view," said Kotak’s analysts. The brokerage expects growth to accelerate to 12% over FY24-25E from 7% in FY23, as competitive pressures ease and wallet share in dealership channels rebound.

On the other hand, health and other insurance segments fared well in Q4. Overall, a key metric for ICICI Lombard, the gross direct premium income (GDPI) increased by nearly 7% in Q4. This, however, lagged industry growth of 17%. GDPI was partly impacted by some sell-down and higher base in March. Adjusted growth was 12-13%, said analysts from Jefferies India.

Further, ICICI Lombard’s elevated level of combined ratio in Q4 remains a concern. This ratio stood at 104.2% in the last quarter compared to 104.4% in Q3. A combined ratio of more than 100% indicates an insurance company is paying more for its claims than its premium. ICICI Lombard sold a portion of its motor insurance underwriting pools to earn commissions, resulting in a one-off transaction in the motor segment in Q4. “Despite this sale, the combined ratio was high, and the company also incurred a higher-than-expected underwriting loss in Q4," said Madhukar Ladha, director, Nuvama Institutional Equities.

Even so, it’s encouraging that ICICI Lombard’s management is confident of bringing its combined ratio to 102% by FY25. However, some believe that this target is ambitious and that there are headwinds to achieve this. “External factors such as competition, primarily in the motor segment and the potential negative impact of regulatory changes including the recent implementation of expenses of management (EoM) framework and other anticipated changes like the composite license structure may hurt the industry’s combined ratio going forward," said Ladha.

Note that the commercial lines segment is likely to face pressure in the coming quarters due to price increases by reinsurers, which could impact profitability in this segment.

ICICI Lombard’s management said reinsurance rates have risen by 45-60%.

Given the subdued results and various challenges on the path ahead, shares of ICICI Lombard fell by nearly 5% on Wednesday, taking the losses in the past one year to almost 20%.

Agreed, valuations are not too high. The stock trades at almost 27 times estimated earnings for FY24, showed Bloomberg data. “Two key issues to be monitored are need for ICICI Bank to dilute stake from 48% now to 30% by Sep-24; and the succession at CEO level because as per the indicative norms CEO may need to retire in May-24 when he completes 15 years," said Jefferies analysts.