Decoding ICICI Lombard's Q3 FY2025: Why Profits Soared Despite Subdued GDPI

ICICI Lombard General Insurance (ICICIGI) has delivered a robust performance for Q3 FY2025 and the nine-month period ended December 31, 2024. While headline numbers for Gross Direct Premium Income (GDPI) might appear subdued for the quarter due to a significant regulatory accounting change, a deeper dive reveals strong underlying growth and impressive profitability. The company continues to navigate a dynamic market with a focus on profitable segments and operational efficiencies, aiming to solidify its position as a leading private non-life insurer in India.

Decoding the Business Model: India’s General Insurance Vanguard

ICICI Lombard operates as a comprehensive general insurer across India, providing a diversified portfolio of non-life insurance products. Its main segments include:

• Motor Insurance: Covering both Own Damage (OD) and Third-Party (TP) liabilities for private cars, two-wheelers, and commercial vehicles. This is a large and crucial segment.
• Health Insurance: Encompassing retail, group/corporate, and government health schemes, including personal accident and travel insurance. This segment is a significant growth driver.
• Commercial Lines: Such as Fire, Marine, Engineering, and Liability insurance, catering to corporate and business needs.
• Crop Insurance: A smaller, often volatile segment influenced by agricultural policies and weather.

Key factors influencing ICICIGI’s performance include:

• GDP Growth & Economic Activity: Drives demand for motor vehicles, infrastructure projects (impacting commercial lines), and overall insurance penetration. India’s projected ~6.5-7% GDP growth is a strong tailwind.
• Auto Sector Sales: Directly impacts motor insurance premiums, both new and renewal business.
• Healthcare Trends: Rising healthcare costs and awareness fuel health insurance demand.
• Competitive Intensity: Especially in group health and commercial lines, influencing pricing and market share.
• Regulatory Changes: Like the recent 1/n premium recognition and solvency norms, which can impact reported financials and operational strategies.
• Investment Income: Crucial for overall profitability, influenced by market conditions and asset allocation.

The Nuance of Growth: Unpacking GDPI Amidst Accounting Shifts

At first glance, ICICI Lombard’s Q3 FY2025 Gross Direct Premium Income (GDPI) of ₹62.14 billion shows a slight de-growth of 0.3% year-on-year. However, this figure is impacted by a significant regulatory change: the 1/n accounting basis for long-term products, effective October 1, 2024. This change means that premiums for multi-year policies are now recognized proportionally over their duration, rather than upfront.

To get a clearer picture of underlying performance, we must look at the GDPI excluding the 1/n impact:

• Q3 FY2025 (ex-1/n impact): GDPI grew by a healthy 4.8%. This is still below the industry’s 5.7% (excluding crop and mass health), indicating some selectivity in premium writing.
• 9M FY2025 (ex-1/n impact): GDPI surged by an impressive 11.9%, significantly outperforming the industry’s 9.1% (excluding crop and mass health) for the same period.

This distinction is crucial, revealing that despite the reported quarterly dip, the company’s core business is growing robustly on a year-to-date basis. The management’s focus on “preferred lines of business” appears to be paying off, with a strategic shift impacting segment-wise growth.

Let’s look at the segmental breakdown:

Motor Insurance continues to be a strong performer, growing 9.4% in Q3 FY2025, outpacing the industry’s 7.6%. This was driven by festive auto sales and growth in the old (renewal) book, demonstrating the effectiveness of the company’s “One IL One Call Centre” and distribution efforts.

Health Business showed a reported de-growth of 4.6% in Q3 FY2025 due to the 1/n accounting change. However, excluding this impact, Retail Health segment roared ahead with 19.1% growth, significantly outperforming the industry’s 6.6%. The newly launched ‘Elevate’ product seems to be a success. Group Health saw muted growth (1.1%) due to competitive intensity.

Commercial Lines (including Fire, Marine) experienced an 8.6% de-growth, mirroring the industry’s 8.4% decline. This is largely attributed to pricing pressure in segments like Fire, where the company adopted a cautious approach, prioritizing profitability over volume.

Overall, for a Fast Grower like ICICIGI, the strong underlying growth in its preferred segments (Motor, Retail Health) is a positive sign, even as it consciously scales back in highly competitive or low-margin areas like some commercial lines.

Strengthening Foundations: Key Business Metrics

ICICI Lombard’s key performance indicators reflect a well-managed operation, especially when considering the challenging industry environment and regulatory shifts.

• Combined Ratio (CoR): A key measure of an insurer’s underwriting profitability (lower is better).

  • Q3 FY2025: Improved to 102.7% from 103.6% in Q3 FY2024. Excluding CAT losses (which were nil this quarter), it stood at 102.3%.
  • 9M FY2025: Improved to 102.9% from 103.7% in 9M FY2024.
  • This consistent improvement, despite the industry’s worsening CoR (113.3% in H1 FY2025), showcases ICICIGI’s disciplined underwriting and claims management. Management is confident about its guidance of 101.5% for Q4 FY2025, which would further enhance profitability.

• Solvency Ratio: Measures an insurer’s financial strength (higher is better).

  • As of December 31, 2024, the solvency ratio stood at a healthy 2.36x, comfortably above the regulatory minimum of 1.50x.
  • However, it saw a reduction from 2.65x in Q2 FY2025 due to new IRDAI guidelines on inadmissibility of assets, which reduced it by ~30 basis points. This is a regulatory adjustment, not an operational deterioration.

• Expense of Management (EoM) Ratio:

  • Increased to 34.7% in Q3 FY2025 from 29.8% in Q2 FY2025. This rise warrants attention. Management attributes this to investments in future opportunities (technology, product development) and a shift in business mix towards retail (Motor, Health), which typically has higher acquisition costs but also higher retention and better loss ratios.
  • The management reiterated its commitment to operating within EoM guidelines and withdrawing from business that doesn’t make commercial sense. Regulatory action on industry-wide EoM adherence is expected to bring discipline.

• Incurred Claim Ratio (ICR):

  • Improved significantly to 65.8% in Q3 FY2025 from 70.0% in Q3 FY2024. This is a strong indicator of effective claims management and favorable risk selection.
  • Motor TP Loss Ratio: Steady at 51.3% (Q3 FY2025), benefiting from a favorable portfolio mix and rigorous risk selection, despite no tariff hikes for several years. The overall motor loss ratio is within the comfortable 65-70% range.
  • Health Loss Ratios: Corporate Health stood at 97.2% and Retail Indemnity at 65% in Q3 FY2025. While corporate health is on the higher side, management is comfortable with retail indemnity in the 65-70% range and indicated willingness to reprice if needed.

• Net Retention Ratio: Increased to 78.5% in Q3 FY2025 from 69.6% in Q2 FY2025. This uptick is a direct function of the business mix shifting towards retail lines (Motor and Retail Health) where the company retains a larger portion of the premium on its net account, contributing to higher profitability.

The Profit Story: Stellar Earnings Growth

ICICI Lombard’s profitability metrics truly shine, demonstrating why it’s considered a Fast Grower in the sector.

The reported Profit After Tax (PAT) growth of 67.9% for Q3 FY2025 and 42.9% for 9M FY2025 is outstanding. Again, the 1/n accounting change had a positive impact on reported PAT, increasing it by ₹4.58 billion for Q3 FY2025 due to deferred commission costs. Even excluding this impact, Q3 FY2025 PAT growth was 57.3% and 9M FY2025 PAT growth was 39.6%, which are still exceptional figures.

This strong earnings growth is driven by:

1. Improved Underwriting Performance: The decline in the combined ratio, especially the improved incurred claim ratio, directly boosts underwriting profits.
2. Robust Investment Income: Capital gains in 9M FY2025 more than doubled to ₹7.96 billion (vs. ₹3.95 billion in 9M FY2024), significantly contributing to the bottom line. Investment income (net) also saw a healthy increase.

Return on Average Equity (ROAE) has also seen a significant uplift, reaching 21.5% in Q3 FY2025 (vs. 15.3%) and 20.8% for 9M FY2025 (vs. 17.1%). This demonstrates excellent capital efficiency. While management’s medium-term ROE objective is 16-18%, the current performance exceeds this, driven by profitable growth and capital management.

The company’s earnings trajectory positions it firmly as a Fast Grower, consistently delivering strong profit growth and capital efficiency within the insurance sector.

Financial Health Check: Working Capital & Financing

While detailed working capital movements aren’t explicitly highlighted for a typical manufacturing company, in insurance, advance premium is a key indicator. ICICIGI reported advance premium for the Motor segment at ₹36.44 billion as of December 31, 2024, up from ₹35.13 billion at September 30, 2024. This indicates a healthy inflow of premiums for future coverage.

From a financing perspective:

• The company declared an interim dividend of ₹5.50 per share for H1 FY2025, an increase from ₹5.00 in the previous year, signaling confidence in its financial position.
• The company has zero borrowings as of December 31, 2024, highlighting a very strong balance sheet and reliance on internal accruals for growth.
• Equity capital increased slightly due to ESOP exercises, a common practice for employee retention.
• The robust Solvency Ratio further underscores its strong capital position, enabling future growth initiatives.

Strategic Investments & Outlook

ICICI Lombard is making strategic investments in technology (Project Orion, Artemis platform) and digital capabilities, aiming for shorter product development cycles and enhanced customer experience. These upfront costs might slightly elevate the EoM ratio in the short term but are crucial for long-term growth and operational efficiency. The company’s focus on customer-facing digital business and AI/ML solutions for claims processing demonstrates its commitment to innovation.

From a macroeconomic perspective, the Indian economy’s projected GDP growth of ~6.5-7% and easing inflation to ~3% create a favorable environment for domestic-led sectors like insurance. The government’s continued focus on infrastructure and manufacturing, along with robust GST collections, provides a supportive backdrop. While global uncertainties like US tariffs intensifying and FPI outflows are watchpoints, ICICI Lombard’s domestic-focused business model is well-positioned to capitalize on India’s internal growth drivers.

Other Important Updates

The Board approved the appointment of Mr. Girish Sehgal as Chief - Customer Experience, Support and Operations. This emphasizes the company’s focus on enhancing customer experience and operational efficiency, aligning with its digital transformation efforts.

A contingent liability of ₹45.79 billion was noted for a tax demand related to disallowance of certain expenses. However, the company maintains its tax position is “legally tenable” and is in the process of appeal, which suggests management doesn’t anticipate a significant adverse impact.

Key Takeaways for Investors

1. Underlying Growth is Strong: Don’t be swayed by the reported Q3 GDPI de-growth. The 1/n accounting change distorted the headline number. Excluding its impact, underlying GDPI growth remains robust, especially for 9M FY2025.
2. Profitability Soars: PAT growth (even ex-1/n impact) and ROAE are impressive, driven by improved underwriting discipline and strong investment income. This confirms ICICIGI’s status as a Fast Grower prioritizing profitable growth.
3. Efficiency on the Rise: A continuously improving Combined Ratio, coupled with efficient claims management (evidenced by better ICR and PPN utilization), indicates strong operational performance.
4. Strategic Focus on Retail & Digital: The company is intentionally scaling back in price-sensitive commercial lines while aggressively growing Motor and Retail Health, leveraging digital channels and product innovation (‘Elevate’).
5. Healthy Balance Sheet: Zero borrowings and a strong solvency ratio provide financial resilience and capacity for future expansion.
6. Eye on Expenses: While EoM saw an uptick, management’s strategic investments in technology and commitment to regulatory limits should be monitored for future efficiency gains.

ICICI Lombard General Insurance continues to demonstrate resilience and strategic foresight in a competitive and evolving market. Its disciplined approach to underwriting, coupled with a strong focus on profitable growth segments and digital transformation, positions it favorably to capitalize on India’s burgeoning insurance market opportunity.

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