Here's Why ICICI Lombard Fell Post Q3 Earnings

Shares of ICICI Lombard General Insurance Co. fell 7.86% in three trading sessions after its third-quarter profit missed analysts' estimates, leading most brokerages to cut their earnings estimates and price targets.

The company reported a miss on its after-tax profit as against the consensus estimates by 21%. The company "delivered a weaker-than-expected performance in Q3FY23 on all counts: a weaker premium, lower investment income, and a higher expense ratio", Motilal Oswal said in a report. 

The management's guidance on operating expenses will continue to be high in the coming quarters, according to Emkay Global's insurance analyst, Avinash Singh. Consequently, the combined ratio, including claims, commissions, and other expenses, will remain high despite the claims ratio improving quarter-on-quarter, which may have prompted the street to cut earnings estimates and price targets.

The management stated in the post-earnings guidance that "in the first couple of years, maybe the combined ratio will be elevated, while our endeavour will always be to reduce it and bring it closer to maybe 102% in a couple of years."

"However, the management has stayed true to its combined ratio guidance of 104–105%, and hence, it does not seem to be much of a concern," Singh told BQ Prime.

On an overall basis, there has been no specific shift in the company's strategy or performance.

The company is making investments in building its retail health distribution franchise, the management said in a post-earnings call. "It's not just a one-off addition to the manpower that we did last year, but a continuing one, even as we speak, in the current period as well."

Some of those investments are reflecting themselves in their growth percentages, the management said. "And hence, given the fact that this is a continuing one, we will obviously get to see the expense ratio stay at the current levels at which we are kind of largely operating."

The company also stated that they were able to successfully complete the technology migration, which was supposed to be completed by the third quarter of this year. We expect to see the benefits of synergies from these technology costs starting in the fourth quarter. 

The competitive intensity continued in the motor-own-damage subset, especially in the private car segment, leading to muted growth in the quarter, according to the management. The commercial vehicle business is benefiting from improved discipline in the segment.

The combined ratio for the industry on the motor side is 124%. "We have been taking calibrated calls in the segment where we think the competitive intensity is far more elevated."

"We probably did not anticipate the pricing situation on the Motor OD side to the extent that we've experienced in the last six months. That has had some impact on us this year... We are seeing some early signs of improvement." The management said that the players in the market are starting to become far more rational when it comes to underwriting this particular segment, and they are continuing their investments in the space.

The impact of the changes to the Motor Vehicle Act on third-party claims in motor vehicles has yet to be seen. HDFC Securities, therefore, cut estimates in anticipation of loss ratios in the motor TP segment inching up during FY24, even as the company remains wary of heightened competitive intensity in the motor OD segment.

The realised investment yield was about 1.88% this quarter. According to the street, this was lower because ICICI Lombard's previous quarterly yields ranged between 1.7% and 2% even during FY20 and FY21, when five-year government-security yields were at their lowest.

According to management, the yield on an annualised basis is roughly 7.52%, which is "pretty good in terms of the realised yield on the portfolio" given the current interest regime. 

The management indicated that the combined ratio is likely to improve beginning in FY24, propelling the return on equity to the high teens in a few years.

Motilal Oswal expects technology-related synergy benefits from the Bharti AXA merger, scale benefits, and an improvement in the mix of health businesses—a higher share of retail health—should aid in improving this combined ratio and RoE over the next couple of years.

ICICI Securities said in its note that recovery in motor loss ratios and traction in the health sector—group as well as retail—have been the investment thesis for quite some time now and are still relevant.

However, it highlighted certain risks to earnings—prolonged competitive pressures resulting in a less attractive balance between growth and the combined operating ratio, continued pricing pressure in the motor segment, and regulatory disruptions creating near-term headwinds.