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ICICI Lombard General Insurance Co. Ltd is going through a rough patch. The general insurer continues to battle competition in motor insurance, its flagship product. This is a drag on its overall earnings growth.

In the December quarter (Q3FY23) earnings call, the management said competitive intensity in the motor own damage (OD) segment remains high, especially within the passenger car category. So, it is looking at opportunities in commercial vehicles and two-wheelers to diversify from the passenger car segment, the management added.

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Graphic: Mint

The firm continued to lose share in this segment, with a share of 13.7% in Q3 versus 15.7% in Q3FY22, said Kotak Institutional Equities. Also, with new non-life insurance licences in the pipeline, competition in this segment is expected to remain elevated in the medium term, said Kotak in the report.

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Lower investment income and elevated expense ratio were the other dampeners in Q3. ICICI Lombard’s operating expense ratio last quarter stood at 29.9%, rising sequentially and year-on-year (y-o-y). The management has guided for a higher expense ratio on the back of investments in the retail health segment and digitization.

Further, a key metric, gross direct premium income (GDPI) rose 16.9% y-o-y, driven by its health-insurance and fire verticals. Even so, industry growth was higher at 18.1%.

The outcome: earnings were below expected. Net profit rose 11% y-o-y to 353 crore, down 40% sequentially.

Naturally, investors were upset, taking the stock down by 4% on Wednesday. Some brokerages have trimmed the company’s FY23 and FY24 earnings per share (EPS) estimates. “The company’s initiatives to deliver growth in certain segments by building distribution and digital capabilities have started delivering results on the growth front, but have inflated the expense ratios," said analysts at Emkay Global Financial Services Ltd. To account for lower investment income and a miss on profit after tax, the broking firm has cut its FY23 EPS by around 7% and FY24-25 EPS by 2-3%.

Meanwhile, the management aims to bring the crucial combined ratio to 102%. In Q3FY23, its combined ratio was 104.4%. A combined ratio of above 100% indicates the company is paying more claims than receiving premiums. The combined ratio target indicates a return of equity of around 18%, said analysts at Nuvama Research. They are of the view that the Street would be less enthused by this guidance.

Taking into account Wednesday’s losses, the stock is down by 18% from its 52-week high of 1,465 seen on 18 January 2022. In comparison, the Nifty Financial Services Index rose by 1.5%.

Not without reason.

“Motor OD saw subdued performance due to weak automobile sales and, until this year, there were no price hikes in the motor third party segment since FY20," said Rishi Jhunjhunwala, senior vice-president and lead analyst, technology, institutional equities, at IIFL Securities Ltd.

The retail health insurance segment has done well for the industry, but ICICI Lombard had a relatively lower exposure, he added. While the impact of these headwinds is abating, the potential ICICI Bank Ltd stake sale later this year, remains a key overhang, he cautioned.

Further, as per regulatory norms, ICICI Bank is required to dilute its stake in the company from 48% to 30% by September. This was in the backdrop of the Bharti AXA General Insurance Co. merger with ICICI Lombard. Jhunjhunwala said the ICICI Lombard stock may see a quick revival in price and a re-rating once this event is out of the way.

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