ICICI Lombard - Uncertain times ahead - 4QFY20 Result Review - HDFC Securities

ICICIGI reported an in-line ex. crop 4QFY20 NEP growth of 13.8% YoY to Rs 23.6bn. Underwriting profits were at Rs (1.3)bn (vs. exp. of Rs 0.1bn) as calc. COR increased to 104.1% (+439/467bps YoY/QoQ). Lower post prov. investment yield of 6.7%, meant a 12.6% lower than estimated APAT of Rs 2.8bn (+23.8/-4.1% YoY/QoQ).

Motor/Health (corporate) growth of 12.1/11.3% YoY drove NEP growth. Motor/Health now contribute 65.3/23.6% of NEP. Lockdown impacted new motor vehicle sales and new retail health policy sales in Mar-20.

CORs: Led by increased commission/expense ratios at 7.0/27.2% (+444/169 bps YoY), Cal. CORs increased to 104.1% (+439/467 bps YoY/QoQ). Claims ratio declined (174/176bps YoY/QoQ) to 69.9% as YoY experience improved for all major segments- motor TP, health and property.

Investment leverage improved to ~4.29x (vs. 4.25x 3QFY20) while investment yield further declined to 6.7% (-143/-57bps YoY/QoQ) as ICICIGI recorded an impairment of Rs1.2bn on its equity exposure. Duration of the investment book is at 3.7 yrs. We expect yields to remain low during FY21E.

Outlook uncertain due to Covid-19: Management stated that given unprecedented circumstances, it would not be correct for it to give guidance on either growth or profitability of the motor segment (65.3% of NEP). Management believes that the health segment (23.6%) should see increased traction both in retail and group health and that it can increase ICICIGI's market share in group health if pricing improves. Lastly, property segment is expected to do well as a result of the price hikes mandated by GICRE. Given its strong capital position, brand and technological prowess, we believe that ICICIGI should be able to increase market share in these times.

Over FY21E we expect lockdown and partial working conditions to result in lower new motor vehicle policy sales, lower renewals, and also lower motor CORs. We expect health premiums to grow with some increase in claims, but over time we expect higher pricing power in health to protect profitability. Overall projecting FY21E remains a challenge but we believe this period should be better for company profitability. 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 super-normal profitability) will be short lived, as we expect IRDAI to clamp down on TP pricing restricting profitability. We believe market is not factoring this risk, and post recent run-up in share price we downgrade ICICIGI to a SELL with a reduced TP of Rs 1,042 (Mar-22E P/E of 26.2x and a P/ABV of 5.5x).

Shares of ICICI Lombard General Insurance Company Ltd was last trading in BSE at Rs.1212.7 as compared to the previous close of Rs. 1205. The total number of shares traded during the day was 76259 in over 2857 trades.

The stock hit an intraday high of Rs. 1227.6 and intraday low of 1172.1. The net turnover during the day was Rs. 91311691.

Source : Equity Bulls

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