ICICI Lombard Q1 FY25: Strong growth justifies premium valuation
Highlights
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- Premium growth much above the industry growth
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- Growth in motor insurance accelerated, strong growth in group health business
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- Combined ratio declines due to fall in expenses, claims ratio stable
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- Investment income supports earnings
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- Guidance of lower combined ratio for FY25 is encouraging
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- Valuations rich but sustainable given superior franchise
ICICI Lombard General Insurance (CMP: Rs 1,897; Mcap: Rs 93,579 crore; Rating: Overweight) reported strong earnings in the first quarter of FY25 (Q1 FY25) on the back of robust growth and lower operating expenses. The insurer’s reported net profit increased 49 percent year on year (YoY).
The key positives in Q1 FY25 earnings were significantly higher growth than the industry in GDPI (gross direct premium income), a decline in the expense ratio, and a consequent improvement in the combined ratio. While the claims/loss ratio remained stable, we are encouraged by the management’s guidance for a combined ratio of 101.5 percent by FY25 end.
Premium growth higher than industry growth
ICICI Lombard’s GDPI (gross direct premium income) grew 20.4 percent YoY in Q1 FY25, significantly higher than the industry growth of 13.3 percent in the same period, driven by strong growth in motor insurance and health insurance segments.
In the motor insurance segment, ICICI Lombard saw a growth of 26.3 percent YoY in Q1 FY25 compared with the industry growth of 12 percent in the same period. The overall growth in the motor segment was aided by strong growth in the old business. ICICI Lombard has been losing its market share in the motor insurance segment over the past two years. So Q1 FY25 performance is a positive change.
In the health segment, ICICI Lombard grew at 28.5 percent in Q1 FY25 against the industry growth of 16.6 percent YoY. While the growth in the retail health segment at 12.6 percent YoY was much lower than the industry growth of 19 percent, the insurer reported a growth of 31.1 percent YoY in the group health segment in Q1 FY25.
To capture the opportunity in the retail health segment, ICICI Lombard has been increasing its distribution network by adding retail health agency managers.
Combined ratio improves aided by lower expenses
For a general insurer, lower the combined ratio, better the profitability. Since it remained above 100 percent in Q1 FY25, ICICI Lombard reported underwriting loss which was offset by investment income.
ICICI Lombard’s combined ratio improved in Q1 FY25 due to lower expenses even as claims/loss ratios remained stable. The growth in the group business comes at a relatively lower operating expense and that led to an improvement in the expense ratio.
The claims ratio in motor OD (own damage) and motor TP (third party) declined in Q1 FY25. However, the claims ratio in the health segment increased which could be mostly in the group segment.
While the management expects the combined ratio to come down to 101.5 percent in FY25 from 103.5 percent in FY24, it will be contingent on the loss ratio in the motor segment. The management sees the loss ratio of 60-65 percent in motor OD and 65-70 percent in motor TP segments to sustain. However, it is worth noting that the hike in the motor TP rate, which is regulated, has not been announced by the IRDAI for FY25.
That said, the combined ratio is the sum of the loss/claims ratio and the expense ratio. There could be some improvement in the expense ratio in the future as all investments made in enhancing the distribution channel start yielding results.
Valuation premium justified by superior franchise and sector tailwinds
ICICI Lombard has always traded at a premium valuation because of its market leading share (now more than 10 percent) in a secular growth sector, well diversified product mix, multi-channel distribution network, solid technological prowess, a strong solvency profile, and healthy profitably.
Over the past few years, the insurer has strengthened the market position by accelerating growth both organically and inorganically (Bharti AXA acquisition).
Hence, despite rich valuation, the valuation multiple has expanded in the past one year. At the current market price of Rs 1,897, ICICI Lombard is trading at a valuation of 7.6 times book value as at end June’24 which is undoubtedly rich but justified by the franchise strength and positive guidance on future profits.
Investors should not overlook this stock based on its rich valuation. There is scope for further improvement in return ratios and in market share. For instance, ICICI Lombard’s market share in the retail health business is a mere 3-4 percent (compared to over 30 percent for Star Health and over 9 percent for HDFC ERGO), indicating that there is a long runway for growth.
Long-term investors should accumulate the stock on dips.
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