Cyclical recovery remains delayed; focus on health is a long term positive
Delay in cyclical recovery of non-life insurance is an industry issue, which is also affecting ICICI Lombard's (ICICIGI) earnings in FY22E, exacerbated by the higher health claims due to covid. The components driving this cyclical trough are: 1) weakness in fresh motor demand, 2) absence of motor TP price hike for the second consecutive year, 3) continued competitive pricing in motor OD, and 4) impact of covid. While lower non-covid health claims and lower motor claims gave respite in FY21, both have almost retraced to pre-covid levels now. However, the structural under-penetration remains a long-term investment thesis and ICICIGI remains well placed to benefit from it. Recommend HOLD (earlier: Add) with a revised target price of Rs1,530 (40x FY23E EPS of ~Rs38).
- Rs1.5bn PAT in Q1FY22 was a negative surprise due to >150% loss ratio in health segment. The negative impact of covid-related claims was Rs6bn (split between actual claims of Rs3.84bn and reserve for likely unreported claims of Rs2.18bn). There were positive benefits marginally through lower motor and non-covid claims at Rs600mn. Hence, the net negative impact in Q1FY22 was Rs5.4bn. Investment income rose 28% QoQ to Rs7bn. We estimate Rs17.4bn PAT in FY23E on the back of: 1) the 17.6% / 3.8% NEP growth in FY22E / FY23E, 2) 79.7% / 73.5% loss ratio in FY22/FY23E, 3) 28.8% / 26.7% opex ratio (commission plus expenses) in FY22E / FY23E, and 4) Rs25.2bn / Rs27bn investment income in FY22E / FY23E.
- Strong execution & robust balance sheet remains long-term tailwinds; time to fruition however appears longer. ICICIGI has increased the number of agents from 35,729 in FY19 to 59,545 in FY21 and 61,385 in Q1FY22. This increase is more towards retail health and in tiers-3&4 cities. It has also increased its virtual offices from 135 in FY18 to 840 in Q1FY22. The ILTakeCare app has seen >700k downloads till Q1FY22, of which >200k happened in Q1FY22. Company has also embarked on inorganic growth with the acquisition of Bharti Axa, which had 1.6% GDPI market share in FY21. It acquired AutoNinja (CRM software for auto dealers) in Nov'19, which has helped renewal rate in motor insurance. Balance sheet remains strong with solvency of 2.76x as of Q1FY22 and an AUM (including fair value change amount) of Rs321bn (equity exposure was at ~11.9% in Q1FY22, up from 9.8% in Q1FY21, 10.2% in H1FY21, 10.9% in 9MFY21).
- Clear focus on health as a priority segment can potentially rerate the stock in long run. Higher agent addition (1,000 in Q1FY22) in health, ~9,400-strong hospital network, and the initiative to establish direct connectivity with customers through ILTakeCare app are steps towards strengthening the health franchise. While inorganic acquisition of a health player could be a lost opportunity (already acquired Bharti Axa), organic initiatives are expected to bear fruit given the track record of ICICIGI.
Shares of ICICI Lombard General Insurance Company Ltd was last trading in BSE at Rs. 1491 as compared to the previous close of Rs. 1543.95. The total number of shares traded during the day was 43772 in over 5369 trades.
The stock hit an intraday high of Rs. 1516.15 and intraday low of 1469. The net turnover during the day was Rs. 65220493.