ICICI Lombard Rating: Buy- Growth levers exist for rise in earnings

The strong growth potential of Indian non-life insurance remains the key investment argument for ICICI Lombard (ICICIGI). The company’s RoE and market share remains stable and there are several available levers which could potentially result in positive earnings cycle over next two years. We upgrade the stock to Buy with a revised target price of Rs 1,675 (earlier: Rs 1,575) based on 40x FY23e EPS of Rs 41.9 (earlier: Rs 39.3) as ICICIGI will be one of the key beneficiaries of the positive cycle in non-life insurance.

The company’s stable business model and exemplary track record remain strong investment theses in our view. ICICIGI’s earnings have clocked a CAGR of 24%/ 22% over the last 5 years/8 years till FY21. The stability of the business is illustrated by the fact that RoE has been below 18% only two times between FY12-21 despite the inherent cyclicality in the underwriting business. Investment profit has lent structural support as it has moved from Rs 4 bn in FY12 to Rs 10 bn in FY16 and Rs 21.5 bn in FY21. Additionally, there are certain advantages of multiline insurers like cross-selling possibilities among different sets of agencies of SME, health and motor. On the P&C side, the company has already been able to establish multiple risk management and product offerings which help in better client traction. The scale also enables better cost management and better rates from reinsurers.

Concerns on competition are overdone: We say this on account of two reasons (i) The opportunity in non-life insurance is huge as seen by the under penetration, which is bound to bring competition and (ii) ICICIGI has been able to maintain market share in key segments. The recalibration of distribution leading to loss in health market share will get addressed over near term.

We see significant growth levers ahead including (i) recovery in motor new car registrations, (ii) increase in motor TP rates (iii) fruition of organic initiatives in health and (iv) achieving synergies from the acquisition of Bharti Axa. Additionally, there is a low base of FY22 for ICICIGI. We factor in 13% GDPI CAGR between FY22-24E. ICICIGI GDPI CAGR has been 12% over both last 5/10 years.

Recovery in motor sales: New car sales numbers as seen in FY22 include impact of many adverse factors which could reverse gradually over next two years. Major OEMs expect resolution of semiconductor shortage issue gradually. Motor TP rate hikes have not happened since June 2019 and can be expected to happen over next two months to counter cost inflation.

Merger benefits yet to accrue: We believe cost synergies with Bharti AXA would likely be achieved over next 12 months, while revenue synergies will take 24 months. As such, a combined ratio of 100 can be expected to be achieved by FY24 if other parameters remain supportive.

Road to recovery in health segment expected over FY23-24E: At a strategic level, the company is doing two things (i) investing in health distribution with hiring of 1,000 agents in H1FY22 and (ii) trying to establish a sticky connect with IL Take Care App. The company expects success with the POD (Prevention, Outpatient, and Digital) strategy for health. In our view, these should start leading to higher growth from Q4FY22.

Expect a 17% earnings CAGR over FY22-24e: This can split into underwriting loss of Rs 8/6/5 bn and investment profit of Rs 37/40/43 bn in FY22E/ 23E/ 24E. We maintain our estimate of investment leverage below 4.3x in FY22/23 despite the fact that it can go up with a positive cycle as seen in past. Additionally, we do not factor in any revenue synergies in our estimates.

Risk: The only risk to earnings is if there is a change in the strategy to accommodate higher growth through lower margins. This strategy is possible but depends on competitive intensity.