ICICI Lombard Is Set For Testing Times Ahead. Macquarie Tells Why

ICICI Lombard General Insurance Company Ltd. may lose 30 percent of its market value reeling under the pressure of a large gap between premium collected on policies and expenses incurred.

That's according to global brokerage Macquarie, which initiated coverage on the country's only listed property and casualty insurance company with an 'Underperform' rating. It has given a target price of Rs 565, a fall of 31 percent from yesterday's close.

The stock fell as much as 4 percent, the most in three weeks, to Rs 814 in early trade today after the brokerage note. It has risen 24.5 percent over from its IPO price. The analysts consensus price target tracked by Bloomberg is 16.6 percent lower than the current market price. It currently trades at 6.3 times the expected price-to-book value for the financial year 2020.

Here's what Macquarie had to say on the insurer:

• Intense competition in motor and health insurance is a drag on the underwriting profit.
• Huge lag in the expenses incurred and premiums collected are resulting into underwriting losses, but the company's float income is intact. But it also increases the risk of volatility which is not favoured on the international level.
• Factors improving the underwriting profit, like the Motor Vehicle Act, is a drag on the float income.
• Under penetration guarantees a compounded annual growth rate of 21 percent in its premium over four financial years up to March 2020; makes profit improvement challenging.
• Even if the company's profit starts witnessing a better side, the multiples are not expected to come down any time soon.
• The brokerage firm bets on the principle that "as markets mature, multiples will decline."