April 19, 2023
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ICICI LOMBARD Stock Research Report by Motilal Oswal
Sector: Multiline Insurance & Brokers
CMP Rs. 1130, Target Rs. 1400 (24% upside potential)
Target Period: 12 Months
ICICI LOMBARD Stock Research Report:
Expense ratio beats estimates, Claim ratio higher than expectations
● In 4QFY23, underwriting loss amounted to INR2.5b compared to a loss of INR2.9b in 3QFY23 v/s. our estimates of INR3.7b. The beat was on account of lower-than-expected total expense ratio (commission + opex).
● The claims ratio in 4QFY23 increased to 74.2% from 70.3% in 3QFY23, due to higher loss ratio in Motor TP and other misc. commercial lines. The claims ratio increased ~223bp, on a YoY basis, which was higher than our expectations.
● Policyholders’ investment income stood at INR6.2b, which is in line with our expectations.
● The Combined ratio for the quarter stood at 104.2% v/s 103.2%/104.4% in 4QFY22/ 3QFY23. The solvency ratio stood was flat at 2.5x.
● PAT for the quarter grew 40% YoY to INR4.4b v/s our estimate of INR3.4b.
● In FY23, NEP grew 14% YoY, while the combined ratio stood at 104.5% v/s. 108.8%. PAT growth over the same period stood at 26% YoY.
● While our estimates for premium remains unchanged for FY24/FY25, our PAT estimates have been marginally lowered by 4% each for FY24/FY25. We retain our BUY rating and our target price of INR1,400 (29x FY25E).
Investment income led to growth in total income
● Total GWP grew 7%YoY to INR53b in 4QFY23, whereas NEP was flat YoY to INR37b, with NEP-to-GWP ratio at 92% v/s 66% in 4QFY22. NEP was broadly in line with our estimates.
● NEP for the Health/Motor/Marine/Crop business grew 24%/9%/14%/41%, whereas for the fire segment it declined 12% YoY.
● Total investment income (shareholders + policyholders) grew 3% QoQ and 13% YoY to INR7.9b (~10% lower than our estimates, on account of lowerthan-expected investment income on policyholders’ fund)
Loss ratio increases QoQ; lower OPEX ratio aids marginal improvement in
combined ratio
● ICICIGI reported a loss ratio of 74.2% in 4QFY23 v/s 70.3% in 3QFY23. The increase in loss ratio is mainly due to a sharp increase in Motor TP (86.5% in 4QFY23 v/s. 61.9% in 3QFY23). The claims ratio increased 223bp YoY.
● Commission ratios declined 190bp sequentially to 2.3% (~57% lower than our estimates).
● The expense ratio declined to 27.7% in the quarter from 29.9% in 3QFY23. This is because of a sequential decline in employee cost, sales promotion activities, and other expenses. Overall operating expenses for the quarter came in 9% lower than our expectations.
Highlights from the management commentary
● Industry’s combined ratio for motor insurance is showing signs of improvement. ICICI Lombard has taken a price hike in Motor OD.
● The company has announced a 19% price hike in retail health only for renewal book. This shall improve loss ratios (restricted by health inflation). Over the longer term, health indemnity loss ratio is likely to be in the range of 65-70%.
● Investment income was driven by a shift toward higher yielding assets in the portfolio. The company’s overall investment duration stands at 4.99 and YTM of the investments stands at 7.2%. The company is optimistic about achieving its target combined ratio of 102% by FY25.
Marginal cut in estimates by 4%, but retain BUY as valuations palatable at
FY25E P/E of 29x
ICICIGI delivered better-than-expected performance in 4QFY23 on underwriting performance. Going ahead, growth in the motor segment is likely to be back ended with the company waiting for the rationalization of pricing in the OD segment. On the health segment, the benefits of price hike and improving efficiency of the agency channel should translate into improved profitability. Synergy benefits from Bharti AXA merger (technology related), scale benefits, and improvement in mix on health business (higher share of retail health) should aid in improving the combined ratio and RoE over the next couple of years. While our estimates for premium remains unchanged for FY24/FY25, our PAT estimates have been marginally lowered by 4% each for FY24/FY25. We retain our BUY rating and our target price of INR1,400 (29x FY25E).
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