ICICI Lombard’s improving combined ratio is good news but valuation warrants caution

The combined ratio is the sum of incurred losses and operating expenses measured as a percentage of earned premium. A lower combined ratio means the company is doing better financially

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ICICI Lombard General Insurance shares gained on October 19, a day after the private sector insurer reported moderation in the combined ratio during the September quarter of the current financial year.

The combined ratio stood at 103.9 percent against 105.1 percent in the year-ago period. The combined ratio is the sum of incurred losses and operating expenses measured as a percentage of earned premiums. A lower combined ratio means the company is doing better financially.

At 12.20 pm, ICICI Lombard was quoting at Rs 1,370 on the National Stock Exchange, up more than 0.8 percent from the previous close. The stock touched an intraday high of Rs 1,394 at the open.

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HSBC has issued a “buy” call on ICICI Lombard and raised the target to Rs 1,578 a share. The second quarter results revealed robust premium growth and market share gains, it noted. A positive shift in the combined ratio was also observed.

According to HSBC, further moderation in the combined ratio will drive an increase in the FY23-26 EPS CAGR, surpassing top-line growth, resulting in a 2.1-3.6 percent increase in EPS for FY2024-26.

The insurer’s gross direct premium income came in at Rs 6,086 crore, growing 17.4 percent from the year-ago quarter. “This growth was higher than the industry growth of 12.5 percent,” the company said in a press release.

CLSA, too, has stuck to its “buy” call on the stock, with a target of Rs 1,640. The combined operating ratio outperformed expectations, despite challenges posed by floods and seasonal diseases, thanks to the strong performance of the motor book, the analyst at the brokerage firm said.

It has raised its FY24 growth estimate from 15 percent to 17 percent.

High valuation

Macquarie, however, has an “underperform” rating on ICICI Lombard, with a target of Rs 995 per share. ICICI Lombard’s combined ratio is now structurally higher than pre-COVID levels of 99-100 percent, it said.

Elevated loss rates in the motor segment and increased operational expenses are driving these structural combined operating ration increases, it said.

Macquarie said the valuation at 5.0x FY25 P/BV is expensive given the company’s 20 percent RoE (return on equity) profile.

Nuvama Institutional Equities expected a lowering of competitive intensity for ICICI Lombard but it remains “elusive” for now.

“We maintain hold with a target price of Rs 1,350, given high valuations,” it said.

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