ICICI Lombard's Profit Takes a Hit as Claims Surge and Accounting Shifts Weigh Heavily

ICICI Lombard General Insurance Company, India’s largest non-life insurer by premium, reported a narrower-than-expected net profit for the third quarter of fiscal year 2024-25, as a spike in claims and an accounting policy change dented profitability. While the insurer’s net profit rose 68% year-on-year to ₹724 crore due to cost efficiencies and investment gains, its core underwriting performance faltered, with the combined ratio—insurance’s key profitability metric—edging up to 102.7%. The figure, which remains above the breakeven threshold of 100%, reflects both rising claims and the impact of a new regulatory accounting standard effective October 2024.

The Claims Surge: A Headwind for Underwriting

The insurer’s underwriting performance deteriorated as general insurance claims surged, driven by higher motor insurance payouts and weather-related incidents. ICICI Lombard’s gross written premium grew 12% year-on-year to ₹5,893 crore, but claims expenses jumped 16%, outpacing premium growth. This trend, combined with inflationary pressures on repair and replacement costs, strained margins.

The motor segment, which contributes over 40% of the company’s premium, saw a 14% rise in claims expenses, while health and general liability segments also reported higher payouts. CFO Gopal Balachandran noted that the claims spike was partly due to “market expansion and increased penetration,” but acknowledged that “sensible” market conditions would need to persist to curb further margin pressure.

Accounting Changes: A Structural Adjustment with Short-Term Pain

The regulatory shift requiring insurers to recognize premiums and amortize acquisition costs over policy durations, rather than upfront, added a 0.4% drag to the combined ratio in Q3. This adjustment, while aligning financial reporting with economic realities, temporarily inflated expenses relative to revenue. Excluding this impact, the combined ratio would have improved to 102.3%, highlighting the regulatory change’s role in the reported figures.

Balachandran framed the policy as a long-term benefit, stating it creates a “favourable and enabling environment” for profitability by smoothing revenue and expense recognition. Over time, this could reduce volatility in quarterly results and better reflect the multi-year nature of insurance contracts. However, the immediate effect has been a near-term headwind, as Q3’s 0.4% drag underscores the transition costs of aligning with the new standards.

Balancing Act: Near-Term Challenges vs. Strategic Gains

Despite the headwinds, ICICI Lombard’s net profit surged due to a 76% jump in investment income to ₹535 crore, driven by higher interest and dividend receipts. The company also reduced operating expenses by 4%, reflecting cost-cutting measures. Balachandran emphasized that the insurer remains on track to achieve its long-term combined ratio target, citing a “clearly declining” trajectory from 103.6% in Q3 FY2024 to 102.7% currently.

Investors, however, are scrutinizing the sustainability of underwriting improvements. While the combined ratio has fallen 0.9 percentage points year-on-year, it remains above breakeven, and the regulatory drag could widen further as the policy fully embeds. Analysts estimate the accounting change may impact the combined ratio by up to 1% in FY2025, complicating near-term profitability.

Market Reaction: Mixed Signals Amid Uncertainty

The stock dipped 0.33% in immediate trading following the results, reflecting concerns over underwriting margins, though it has since rebounded slightly. Analysts at Motilal Oswal downgraded the stock to “neutral,” citing valuation risks, while others remain optimistic about the long-term structural benefits of the accounting change.

The broader insurance sector faces similar pressures, with competitors like HDFC Ergo and Bajaj Allianz also grappling with claims inflation and regulatory shifts. ICICI Lombard’s scale and distribution network, however, provide a competitive edge in absorbing short-term volatility.

Conclusion: Navigating the Crosscurrents

ICICI Lombard’s Q3 results underscore the tension between short-term operational challenges and long-term structural reforms. While rising claims and accounting changes have dented underwriting profitability, the company’s cost discipline and investment gains have softened the blow. The 0.4% regulatory drag on the combined ratio is a manageable price for aligning with global best practices, and the downward trajectory of the metric—from 103.6% to 102.7%—suggests progress toward profitability.

Investors should monitor two key factors: whether the claims surge is a temporary blip or a structural issue, and how quickly the company can leverage its cost efficiencies and distribution strength to drive underwriting profits. With net profit up 68% and a robust investment portfolio, ICICI Lombard remains resilient. However, the path to a combined ratio below 100% hinges on stabilizing claims costs and realizing the deferred benefits of the accounting change—a balancing act that will define its performance in the quarters ahead.

In the near term, investors may face turbulence, but the insurer’s strategic positioning and regulatory tailwinds position it to navigate these challenges. For those with a long-term horizon, the current headwinds could mark a buying opportunity in a sector poised for consolidation and growth.