ICICI Lombard’s Q1 Profit Slumps By More Than Half As Claims Spike
ICICI Lombard General Insurance Co. saw its net profit tumble by more than half and operating income nearly wipe out in the quarter ended June as underwriting loss and outstanding claims spiked amid the Covid-19 pandemic. Still, most analysts stayed bullish on the insurer, expecting it to gain in the long run.
The motor, health, crop, fire, personal accident, marine, engineering and liability insurance provider’s net profit slumped 56% sequentially and 62% year-on-year to Rs 151.63 crore in the quarter ended June, according to an exchange filing.
The claims paid by the company stood at Rs 1,320.96 crore in the reported period, lower than Rs 1,665.52 crore paid in the preceding three months. But the company charged Rs 1,147.31 crore towards outstanding claims, including claims incurred but not reported. This makes up for 85.67% of the total outstanding claims charged for in the entire fiscal 2020-21.
The underwriting loss of Rs 508.16 crore incurred was 2.65 times that of the total underwriting loss incurred for the full financial year ended March 2021.
“ICICI Lombard disappointed expectations as claims of health insurance spiked abnormally, resulting in an all-time high loss ratio of 91%,” Krishnan ASV, analyst at Mumbai-based HDFC Securities Ltd., said in a note. The brokerage has a “reduce” rating on the company, and a price target Rs 1,250, citing rich valuations and uncertainties ahead.
The non-life insurer’s revenue rose 3% sequentially to Rs 2,705.77 crore. Year-on-year, it rose 16%.
Its witnessed a 96% sequential slump in its Ebitda to Rs 32.97 crore. Year-on-year, it plunged 93%.
Margins stood at 1.2% versus 29.9% in the quarter ended March and 19.1% a year ago.
During this quarter, the National Company Law Tribunal sanctioned the scheme of amalgamation of the demerged Bharti AXA General Insurance Co. with ICICI Lombard. The deal was proposed in August 2020 with appointed date April 1, 2021. Accordingly, Rs 5.98 crore towards the consideration for this arrangement has been charged in the quarter ended June against Rs 41.47 crore charged in the preceding three months, the company said.
Other Key Highlights
Solvency ratio stood at 2.76 against 2.9 in the previous quarter and 2.50 times a year ago.
The company saw incurred claim ratio of 91.2% against 71.7% in the January-March period and 69.8% a year earlier.
Net retention ratio was 65.1% against 77.7% in quarter ended March and 65.4% a year ago.
Combined ratio, calculated by taking the sum of incurred losses and expenses and then dividing them by the premium earned, stood at 121.3% in Q1 FY22 compared with 99.7% in Q1 FY21, primarily driven by the Covid-19 pandemic. It was at 101.8% as of March 2021.
Return on average equity was 8.1% in Q1 FY22 against 25.1% in Q1 FY21.
The company registered an operating loss of Rs 159.13 crore in the retail health segment and Rs 357.40 crore in the health group and corporate segment, while it posted a profit of Rs 443.92 crore in the motor segment.
What brokerages have to say about ICICI Lombard’s June-quarter FY22 results...
Recommends ‘buy’ rating with a target price of Rs 1,780 apiece.
Expects normalcy for the company in second half of the fiscal as daily Covid cases continue to decline.
Higher claim costs in health and motor third-party segment drives a 23% cut in FY22 earnings estimates, and tail effect impacts FY23 and FY24 earnings by 6%.
Growth in auto insurance business faces challenges from higher competition and lack of price hikes.
Merger with Bharti Axa slightly behind expectations.
Recommends ‘buy’ with a 12-month price target of Rs 1,840 apiece.
Impact on PAT partially set off by rise in investment income.
Views the impact of Covid on profitability as a one-off event.
Fully expect the loss ratio to normalise.
Enthusiasm in the long-term compounding thesis remains intact.
Growth in motor insurance business muted as sales were affected due to local lockdowns.
ICICI Lombard can grow at 20% for the next 20 years.
High float levels, scale-led pricing, technology investments are key moats.
Recommends a ‘hold’ rating with a target price of Rs 1,530 apiece.
Delay in cyclical recovery of non-life insurance industry, exacerbated by the higher health claims due to Covid affected earnings.
The components driving this cyclical trough are — weakness in fresh motor demand, absence of motor third-party price hike for the second consecutive year, continued competitive pricing in motor own damage, and impact of Covid.
Lower non-Covid health claims and lower motor claims encouraging.
Clear focus on health as a priority segment can potentially rerate the stock in long run.
Higher agent addition (1,000 in Q1FY22) in health, 9,400-strong hospital network, and the initiative to establish direct connectivity with customers through ILTakeCare app are steps towards strengthening the health franchise.
While inorganic acquisition of a health player could be a lost opportunity (already acquired Bharti Axa), organic initiatives are expected to bear fruit given the track record of ICICI Lombard.
The structural under-penetration remains a long-term investment thesis and ICICI Lombard remains well placed to benefit from it.
Weakness in fresh motor demand.
Absence of motor TP price hike for the second consecutive year.
Continued competitive pricing in the motor OD (own damage).
Uncertainty over the extent and duration of Covid impact.
Recommends an ‘add’ rating with target price of Rs 1,587 apiece.
Net earned premium at Rs 2,710 crore was higher than estimates of Rs 2,640 crore
Claims at Rs 2,470 crore were higher than estimate of Rs 1,870 crore.
Underwriting loss at Rs 508.2 crore against an estimate of underwriting loss of Rs 102.6 crore on back of higher claims.
PAT stood at Rs 150 crore, which was lower than estimates of Rs 340 crore.
Near-term risks to the health portfolio will weigh on the stock price performance.
However, over the longer term a strong franchise with a potential to deliver a 18‐20% return on equity and a sustained improvement in combined ratios can be added on declines.
Shares of ICICI Lombard fell as much as 4.8% to Rs 1,469 apiece before paring losses.
Out of the 24 analysts tracking the company, 16 have a ‘buy’ rating and four each suggest a ‘hold’ and a ‘sell’, according to Bloomberg data. The overall consensus price target of analysts tracked by Bloomberg implied an upside of 3.9%.