REDUCE on ICICI Lombard - COR continues to improve - HDFC Securities

Mr. Madhukar Ladha, Institutional Research Analyst, HDFC Securities

While FY21E is expected to be a muted year in terms of top-line growth, we believe ICICIGI will deliver lower CORs. We remain cautious on health claims as a second wave of COVID-19 may result in significant increase in claims. Additionally, changing regulations in motor are expected to drive down both claims and tariffs, creating supernormal profitability in the short term. We believe that this period (of supernormal profitability) will be short-lived, as we expect IRDAI to restrict TP pricing growth, thereby restricting profitability. We believe the market is not factoring this risk; accordingly, we rate ICICIGI a REDUCE with a target price of Rs 1,141 (DDM derived Sep-22E P/E of 26.4x and a P/ABV of 5.2x).

2QFY21 highlights: (1) NEP was in-line (+0.5% vs. estimates) at Rs 24.6bn (4.5/6.0% YoY/QoQ) as 2Q saw partial easing of lock-down. Motor/Health GDPI grew 9.4/8.3% YoY. The company has grown motor OD business selectively in categories which it believes it can make profits. Within health, retail indemnity business grew 30.9% YoY in 1HFY21, while group business growth was muted at -7.2% YoY due to lower credit off-take. Loss ratios for motor OD were contained at 58.9 (-1,290/-400bps YoY/QoQ) and motor TP at 61.6% (-2,480/-860bps YoY/QoQ), as management had been conservatively providing in previous periods. Loss ratios for health shot up to 81.9% (1,090/640bps YoY/QoQ) as both COVID claims and elective surgeries witnessed a significant surge. Overall, 2QFY21 CoR (calculated) was at 100.7% (-307/+143bps YoY/QoQ) vs. management reported CoR of 99.7% (-290/+0bps YoY/QoQ). Investment yield (including unrealised MTM) was 12.1% (+573/-122bps YoY/QoQ). Reversal of investment provisioning resulted in the company posting an APAT of Rs 4.39bn +27.0/3.9% YoY/QoQ, +7.4% vs. estimate).

Outlook: We expect FY21E to be a muted year in terms of NEP growth (FY21E: 8.3% YoY); however, given the partial re-opening conditions and lower economic activity loss ratios in most lines (except health) are expected to improve. Overall, CoRs are expected to improve in FY21E to 96.8% (-520bps YoY). Health loss ratios may get impacted adversely if the COVID-19 pandemic is not arrested.

Shares of ICICI Lombard General Insurance Company Ltd was last trading in BSE at Rs.1255 as compared to the previous close of Rs. 1257.5. The total number of shares traded during the day was 9264 in over 1307 trades.

The stock hit an intraday high of Rs. 1293.1 and intraday low of 1237.5. The net turnover during the day was Rs. 11676399.

Source : Equity Bulls

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