Since listing in September 2017, the ICICI Lombard General Insurance stock has run up 17% in sharp contrast to the state-owned New India Assurance stock, which has lost 6% since it got listed last November.

Although some analysts say that ICICI Lombard is priced to perfection, many still have a buy rating on it.

The earnings of the private general insurer for 2017-18 provide some justification to the valuation. ICICI Lombard reported a 22.8% growth in profit after tax but its gross direct premium income grew at a slower 15.2% compared with a stellar 32.6% in FY17. Obviously, the growth is slower due to the base effect. Furthermore, general insurers had a bonanza year in FY17 owing to the government’s push for crop insurance.

For FY18, ICICI Lombard’s profitability yardsticks have improved. Its combined ratio—a gauge of incurred losses and expenses as a percentage of premiums earned—slipped to 100.2% from 103.9% in FY17. Hence, the insurer made an operating profit through its underwriting business during the year. Its operating profit growth for the fourth quarter was 15.5%, a shadow of the 42.8% in the previous quarter.

However, this was expected and the management had warned that such high growth in operating profits is unsustainable especially in the growing stage of the company. Insurance companies have to take the entire cost of underwriting upfront while income and profits would be staggered. Nevertheless, the company’s operating profit growth for FY18 at 31.4% should please investors as it is higher than the previous year.

Its loss ratio, which is the difference between claims paid and premium earned, also improved for the third straight year to 76.9% from 81.5% in FY16. That means that the general insurance business is able to keep its expenses under check despite pushing for growth. This is reflected in its expense ratios as well.

Are there any misgivings that investors should worry about?

The company’s loss ratio for its crop insurance portfolio surged to 135% due to underwriting losses of around Rs700 crore. Given that crop insurance forms 19% of the total, a hit once more could upset the insurer’s profitability. The management expects healthy growth in FY19 although it did not put a number to it.

The stock trades at a rich multiple of 6.8 times its estimated book value for FY19. While profitability metrics should cheer, it needs to maintain the growth rates to justify the valuation.

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