ICICI Lombard General Insurance Company - Strong franchise should benefit from cycle recovery - ICICI Securities

We upgrade ICICI Lombard (ICICIGI) from Add to BUY on expected ~30% earnings CAGR in FY20-22E as multiple elements point towards a positive business cycle for general insurance in the near term. ICICIGI will be a key beneficiary. The combination of low growth in motor premiums, higher Covid-19 claims, no hike in motor TP rates point to a business trough in H1FY21. Going ahead, there should be pickup in motor insurance (economic recovery plus a lower base), better earnings from health segment (growth in health premiums will be structural compared to immediate claims) and inflationary hike in motor TP rates. For reference, Chinese health/overall non-life insurance premiums for insurer Ping An grew 39%/14% YoY from April - Sept'20 (i.e post the Covid-19 peak during March) and China Life's (health segment) grew 15.8% YoY in H1CY20. Our DCF-based target price of Rs1,505 implies 38x FY22E EPS of ~Rs40.

- Earnings get a boost from positive experience in H1FY21; expect Rs15bn PAT in FY21 (+27% YoY). Positive drivers in H1FY21 were lower loss ratios in motor (more for TP than OD), manageable loss ratios in health and market share gain in motor (which had lower loss ratios) partially offset by higher expense ratio. Based on 5% growth in NEP (7% NEP growth in 2HFY21 compared to 4% in 1HFY21), 72% loss ratio (75% loss ratio in 2HFY21 compared to 68% in 1HFY21), 28% opex ratio (commission plus expense) (25% opex ratio in 2HFY21 {average Opex ratio between FY17-20 was 24%} as compared to 31% in 1HFY21), Rs18bn investment income (Rs7.4bn in 2HFY21 compared to Rs10.6bn in 1HFY21), we estimate Rs15bn PAT in FY21.

- H1FY21 performance reiterates business strength, earnings worth Rs20bn achievable by FY23. This should be achievable within the constructs of 15-20% growth and 98-100% combined ratio aided by the fact that CAGR parity in growth is likely to be restored post the dip in FY21. We believe the parameter of growth and combined ratio should have a favorable trajectory in a positive business cycle.

- Strong execution and robust balance sheet will further benefit ICICIGI. ICICIGI has managed strong organic expansion with agents increasing from 35,729 in FY19 to 52,785 in Q2FY21 and virtual offices increasing from 135 in FY18 to 840 in Q2FY21. ICICIGI has also embarked on inorganic growth with the acquisition of Bharti Axa which had 1.7% GDPI market share in FY20, Additionally, it also acquired AutoNinja (CRM software for auto dealers) in Nov'19 which has helped renewal rate in motor insurance. ICICIGI remains committed to prudent reserving which has led to management exuding high confidence in maintaining aggregate loss ratios in FY21 to similar levels of FY20 (we expect lower). ICICIGI has maintained strong execution (39% growth in health indemnity over last, 37% growth in SME in H1FY21) along with underwriting discipline (abstained from crop since Mar'19 which should also lead to negligible impact from Kharif claims in Q3, maintained low and nimble exposure to CV mix). This superior execution track record will be further aided by strong balance sheet with solvency of 2.74x as of H1FY21 and an AUM including fair value change account of Rs281bn (equity exposure remains ~10.2%).

Shares of ICICI Lombard General Insurance Company Ltd was last trading in BSE at Rs.1254.95 as compared to the previous close of Rs. 1256.45. The total number of shares traded during the day was 7380 in over 983 trades.

The stock hit an intraday high of Rs. 1265 and intraday low of 1241.3. The net turnover during the day was Rs. 9240850.

Source : Equity Bulls

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