Analyst Corner: Retain ‘sell’ on ICICI Lombard with fair value of Rs 825

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Published: January 21, 2020 3:07:46 AM

Loss ratio in the motor OD segment continues to drag its earnings although the recent q-o-q reduction may be an early sign of improvement.

icici, icici lombardICICI Lombard has reported reduction in loss ratio in most segments due to a combination of industry tailwinds and improvement in business mix

ICICI Lombard’s 3QFY20 performance was mixed with improvement in profitability in the health segment, while the motor OD business continued to be a drag. Moderate growth in net earned premium surprised positively over muted gross premium though reduction in investment yield pulled down earnings. We cut estimates, roll over fair value to `825 (from `800); retain ‘sell’.

ICICI Lombard has reported reduction in loss ratio in most segments due to a combination of industry tailwinds and improvement in business mix; the company increased the share of the profitable private car business (56% from 50% y-o-y) in the motor segment and increased focus on retail health. We highlight a couple of monitorables over the next few quarters that will determine its medium-term profitability trajectory. Loss ratio in the motor OD segment continues to drag its earnings although the recent q-o-q reduction may be an early sign of improvement. ICICI Lombard’s expenses remain high (expense and commission ratio up 300 bps yoy to 27%) — this is dragging its combined ratio even as its loss ratio has been improving.

The company had guided for investment leverage of 4.5X over the next two years (4.2X in 3QFY20 from 4X in 3QFY19); it has now highlighted that leverage may take longer to improve from here due to provisions of the recent Motor Vehicle Act that cap claim period to six months. The company reported a sharp reduction in calculated investment yield to 7.2% from 7.9-9.4% over the preceding four quarters; this is due to shorter duration and liquid investments.

We expect ICICI Lombard to maintain about 100% combined ratio over the medium term; this will translate to 22-23% RoE. While pricing dynamics in the motor business post the new Motor Vehicle Act are yet to evolve, a shorter claim period of six months may partially offset the leverage benefits of the long-tenure motor policies introduced last year. We remain perplexed with ICICI Lombard’s rich valuations, which are likely tracking the positive trends and narratives, ignoring risks from stringent competition and regulatory linkages.

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