BackICICI Lombard stages a decent March quarter show, but stock is pricey
Net earned-premium grew year-on-year on the back of decent 12.1% growth in motor insurance and 11.3% in health insurance, but fell sequentiallyThese two segments account for about 65% and 24% of the total net earned premium, respectively
PremiumDespite the covid-19-related shutdown, ICICI Lombard General Insurance Co. Ltd’s staged a decent show in the March quarter (Q4). Growth in net earned premium was in line with analysts’ estimates. However, investors were not enthused given expectations of a decline in premium earned from businesses in the coming quarters.
Net earned-premium grew year-on-year on the back of decent 12.1% growth in motor insurance and 11.3% in health insurance, but fell sequentially. These two segments account for about 65% and 24% of the total net earned premium, respectively. Growth came in spite of the outbreak, although the lockdown in the last few days of the quarter, did impact motor vehicle and health policy sales.
Further, with vehicle sales coming to a standstill in April and a slow recovery expected after the lockdown eases, new business in the segment will be constrained. Even so, profitability in this segment could be better, largely because claims losses will be limited. Social distancing and other curbs also mean less vehicular travel. Besides, a shorter window to file claims will improve the segment’s return metrics.
In contrast, the health segment could show decent growth as the penetration of health insurance is likely to get a lift due to tailwinds from the ongoing covid-19 pandemic. Group health insurance plans will also get a fillip. One concern, however, is that claims could rise. Analysts expect an improvement in pricing power that could offset the adverse impact of a rise in claims.
“We expect health premiums to grow with some increase in claims, but over time, we expect higher pricing power in health to protect profitability," said Madhukar Ladha, analyst at HDFC Securities Ltd.
Nevertheless, much of the general insurance segment is quite competitive, which tends to trim its business dynamics. Further, re-insurance costs have gone up, eating into profitability.
However, slower growth of public sector general insurance firms due to capital constraints could aid private companies.
This may help ICICI Lombard capture some market share in general insurance. “Strong brand value and resilient balance sheet should provide ICICI Lombard opportunity to capture market share in the present scenario and disproportionately benefit from any long-term positives emerging for the industry. With solvency of weaker players under pressure, price rationalisation may be seen leading to better underwriting profitability," said PhilipCapital (India) Pvt. Ltd.
Importantly, ICICI Lombard’s solvency ratio of 2.17 times compares favourably with peers. Nevertheless, most of these positives have been priced into the stock, which trades at about 31 times its FY22 earnings per share. This explains why the stock hardly reacted to the decent Q4 numbers. Besides, analysts have been lowering premium growth expectations due to covid-19.
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