Buy ICICI Lombard Ltd for the Target Rs.2,400 by Motilal Oswal Financial Services Ltd
Investment income boosts PAT; miss in combined ratio
* ICICI Lombard’s (ICICIGI) gross written premium was up 2% YoY in 1QFY26 at INR81b (in line), impacted by 1/n regulation and its cautious approach to the motor segment. NEP grew 14% YoY to INR51.4b (in line).
* The claims ratio stood at 73% (in line) vs. 74% in 1QFY25. The commission ratio increased to 16.8% (our est. 16%) vs. 15% in 1QFY25 and the opex ratio came in at 13.2% (our est. 12.5%) vs. 13.3% in 1QFY25.
* The increase in expense ratios resulted in a 140bp miss in the combined ratio at 102.9% (vs. 102.5% in 1QFY25). Excluding the 1/n impact, the combined ratio was at 102.2% in 1QFY26.
* PAT grew 29% YoY to INR7.5b (25% beat) due to strong growth in investment income. Excluding the 1/n impact, PAT was at INR7.3b.
* ICICI Lombard is consciously prioritizing profitable growth, which has led to relatively slower expansion in a highly competitive motor segment, which has a high industry-level combined ratio of over 120%. If the pricing improves, the company can consider scaling up its market share in the group health segment.
* We have broadly retained our FY26/FY27 NEP estimates but increased FY26 earnings estimates by 3%, considering robust investment gains in 1QFY26. Reiterate BUY with a TP of INR2,400 (based on 33x Mar’27E EPS).
Claims in line; expense ratios result in combined ratio increase
* GDPI grew 1% YoY to INR77.3b in 1QFY26. Excluding the impact of 1/n, it was up 5% YoY.
* NEP growth of 14% YoY was driven by 14%/17% YoY growth in motor /health (including PA) segments. Marine and fire segments reported YoY growth of 5%/9%.
* Underwriting loss was at INR2.9b (est. INR3.2b loss) compared to a loss of INR3.5b in 1QFY25. Total Investment income on policyholders’ account was 16% higher than our estimates at INR9.5b, and for shareholders’ account, it was 7% higher than our estimates.
* Claims ratio at 73% improved by 100bp YoY, driven by 280bp YoY improvement in health segment loss ratio and 60bp YoY improvement in motor TP loss ratio. The loss ratios for motor OD/fire segments increased 260bp/210bp YoY.
* Investment book grew 9% YoY to INR554.5b, reflecting strong investment leverage of 3.74x. Absolute investment yield for 1QFY26 was at 2.32% compared to 2.21% in 1QFY25.
* Strong profitability due to robust investment gains resulted in RoE of 20.5% in 1QFY26 (19.1% in 1QFY25).
* Solvency ratio was at 2.7x (2.56x in 1QFY25).
Highlights from the management commentary
* Industry players, which pursued aggressive pricing strategies, have seen deterioration in their combined ratios, with 50% of the companies not adhering to EoM limit. In contrast, ICICIGI remains focused on maintaining underwriting discipline.
* The Motor segment continues to face profitability pressures. The industry has recommended a hike in motor TP premium rates, marking the first major proposal in four years, and some optimism is there regarding approval of the same.
* In commercial lines, there is still intense competition, as per management, with the overall pricing environment showing signs of rationalization. This pricing discipline is expected to support improved profitability in the commercial lines portfolio in the coming quarters.
Valuation and view
* The industry is witnessing some recovery in FY26, with a focus on infrastructure investments and recovery trends in motor sales. However, the impact of 1/n and weak credit growth continued to impact GWP growth.
* ICICIGI continues to focus on profitable growth across segments, due to which there has been a growth slowdown in segments like motor and group health. However, growth will pick up gradually when pricing aggression eases in the market. Retail health momentum remains strong and the company is gaining market share, supported by new customer acquisition and strong traction in “Elevate” product. Commercial lines segment continues to witness competitive intensity, but early signs of recovery are visible, setting the stage for a rebound in the coming quarters.
* Overall, we expect a growth recovery in FY26 and stable improvement in profitability, with combined ratio improving to 101.2% by FY27E. PAT is likely to grow ~23%/15% in FY26/FY27. We have broadly retained our FY26/FY27 NEP estimates but increased FY26 earnings estimates by 3%, considering robust investment gains witnessed in 1QFY26. Reiterate BUY with a TP of INR2,400 (based on 33x Mar’27E EPS).
For More Research Reports : Click Here
For More Motilal Oswal Securities Ltd Disclaimer
http://www.motilaloswal.com/MOSLdisclaimer/disclaimer.html
SEBI Registration number is INH000000412
