The Covid-led disruption impacted the business of general insurance companies in the first half of the fiscalon the back of subdued growth in new vehicles sales, no hike in motor third-party premium rates, and muted performance of retail health benefit portfolio (owing to sluggish disbursement in banks, NBFCs/HFCs). In recent months, with the lifting of the lockdown motor OD, (own damage) claims are also nearing pre-Covid levels. There has also been an increase in health claims due to a surge in elective surgeries and spike in Covid cases.

Amid all these challenges, private insurer ICICI Lombard continues to hold promise, given its long-term focus on profitable segments, diversified product mix, prudent provisioning (reserving), increasing penetration in Tier 3/Tier 4 cities, healthy solvency ratio, and quick adoption of digital solutions.

In the first half of FY21, gross direct premium income (GDPI) for ICICI Lombard stood at ₹6,491 crore, reporting a growth of 0.8 per cent when compared to the industry growth of 1.4 per cent. Excluding the crop segment, ICICI Lombard’s GDPI grew 1.1 per cent when compared to the industry growth of 2.8 per cent.

The lower-than-industry growth has been mainly due to the company’s continued focus on profitable segments and being selective in businesses it underwrites (exiting crop, for instance, last fiscal due to uncertain underwriting risks). Lower loss ratios (total incurred claims in relation to the total premiums) and combined ratio (incurred losses and expenses to total premiums) vis-à-vis industry indicates healthy business performance and strong fundamentals that will drive earnings in the long run. While the combined ratio for the industry as a whole stood at 104 per cent in the first quarter of FY21, for ICICI Lombard, it was a lower 99.7 per cent.

Going ahead, ICICI Lombard appears well placed to ride the opportunity and weather near-term challenges in the industry.

Premium growth to improve

On the premium front, industry GDPI has been inching closer to pre-Covid levels, with segments such as motor insurance showing signs of recovery. For ICICI Lombard, while motor segment saw negative growth in June quarter (-22 per cent), it registered a growth of 9.4 per cent during the September quarter. While motor portfolio could face near-term pressure owing to uncertainty in new vehicles sales, no hike in third-party premium rates, and discontinuation of long-term insurance, ICICI Lombard’s steady focus on profitable segments and expansion of distribution network in Tier 3 and Tier 4 cities should aid in market share gains.

On the health side, the pandemic-led awareness about protection and regulatory measures have augured well for the industry. For ICICI Lombard, the first half saw muted growth in its benefit portfolio, owing to weak disbursements by NBFCs/HFCs. But retail health indemnity business grew by robust 38.5 per cent in the first half (48 per cent in September quarter). Strong focus on technology (medical tele-underwriting, voice-enabled AI solutions) and network expansion should continue to drive growth in the segment.

After increase in rates across eight sectors from March 2019, reinsurance rates rose in the fire segment with effect from January 2020. This has aided robust growth (47 per cent in the first half of FY21) in the fire segment. However, marine and engineering segments witnessed decline due to reduced economic activity.

Claims rise, but under check

The profitability of a general insurance business depends on the loss/combined ratio as well as investible assets.

On the claims front, at the industry level, motor OD claim reached pre-Covid levels. Similarly, the in case of health, with elective surgeries resuming, claims have gone up, though they continue to remain below pre-Covid levels. The spike in Covid cases has also been a concern. For the overall industry, Covid claims reported as on September 30, were about 3.24 lakh, of which, around 17 thousand were reported with ICICI Lombard. While Covid cases is seeing some moderation, a second wave of infection (particularly during the festive season) could keep loss ratios elevated through the rest of the fiscal.

For ICICI Lombard, loss ratio in the health segment increased significantly in the September quarter to 81.9 per cent (from 69.9 per cent in FY20). While claims could remain elevated, the company’s strong underwriting and focus on retail health segment (cautious on mass health) should help mitigate the risk. On the motor front, the company has seen a drop in claims in the September quarter both in OD and TP. This could be because of the pandemic-led restrictions, and claims could rise in the second half. However, the company’s focus on two-wheeler and private car segment (rather than CV) should help keep loss ratios under check. Better pricing and pick up in premium growth should also help in the second half.

On the float front, ICICI Lombard has one the largest investment book amongst private players (at ₹29,162 crore as of September 2020). In light of interest rates softening, the realised return on investment book has come down notably to about 7.8 per cent annualised levels (3.9 per cent in first half) against 9 per cent levels last year. Going ahead, realised return could moderate further if rates continue to fall. However, ICICI Lombard’s strong solvency ratio of 2.74 times, is a key positive.

At the current price, ICICI Lombard trades at about 38 times FY21 (first half earnings annualised) earnings. While the stock is not cheap, strong business fundamentals can continue to drive valuations.