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Health segment faces short-term challenges; long-term fundamentals remain intact

Health segment of ICICI Lombard (ICICIGI) will have to reorient its product and channel mix as the principal bancassurance partner (ICICI Bank) is focusing less on sale of credit-linked attachment products. This can pose near-term challenge in growth of health segment (ICICIGI health segment witnessed a decline of 3.9%YoY in 9MFY21 vs industry growth of 13.7% YoY). However, with focus on retail sales, new partnerships, new products and favourable base, we expect ICICIGI to recover health segment growth in FY22E/FY23E. With recovery of premium growth in motor and expected price hikes in motor TP along with the market share gain already achieved in motor/P&C, ICICIGI is expected to be able to maintain business constructs of 15- 18% premium growth with 100% combined ratio. This should lead to Rs20bn PAT in FY23E (19% CAGR between FY20-FY23E) with RoE of ~20%. Post the 23% rally in price in past 3 months, we downgrade the stock from Buy to ADD with a target price of Rs1,584, implying 36x FY22E EPS of ~Rs43.8.

* Expectation remains around ~Rs15bn PAT in FY21E and Rs20bn in FY23E. We estimate Rs14.8bn PAT in FY21E on the back of: 1) the 13% NEP growth in Q4FY21 vs 4% in 9MFY21; 2) 69.7% loss ratio in Q4FY21 (67.5% in 9MFY21); 3) 28.6% opex ratio (commission plus expense) (32% opex ratio in 9MFY21 {average opex ratio in FY17- FY20 was 24%}); and 4) Rs6.1bn investment income in Q4FY21 (Rs16.5bn / Rs5.8bn in 9MFY21 / Q3FY21).

* Market share gain in motor and P&C is a typical countercyclical business strength of ICICIGI. ICICIGI gained 1.1% YoY market share in motor segment. Within P&C segment, ICICIGI gained 1%/1.2%/1% in Fire / Engineering / Marine Cargo respectively.

* Prudent reserving the highlight of 9MFY21. Despite the significant fluctuations in business activity and in turn claims, motor TP loss ratios have remained between 62- 70%, motor OD loss ratios between 59-63% and health between 75-82% over the first three quarters of FY21. This has obviously been driven by prudent reserving (change in ‘claims reserve to total claims’ ratio) decreasing gradually from 33% in Q1FY21 to 27% in Q2FY21 and 8% in Q3FY21.

* Strong execution and robust balance sheet will benefit ICICIGI. ICICIGI has managed strong organic expansion with agents increasing from 35,729 in FY19 to 55,615 in Q3FY21 and virtual offices increasing from 135 in FY18 to 840 in Q3FY21. Company has also embarked on inorganic growth with the acquisition of Bharti Axa, which had 1.7% GDPI market share in FY20. It also acquired AutoNinja (CRM software for auto dealers) in Nov’19, which has helped renewal rate in motor insurance). This superior execution track record will be further aided by strong balance sheet with solvency of 2.76x as of 9MFY21 and an AUM including fair value change amount of Rs299bn (equity exposure remains ~10.9%). 47% of non-life insurers (based on GDPI) had less than 1.8x solvency ratio as of Q4FY20.

* Downgrade from Buy to ADD. The shift in sales strategy of ICICI Bank to reduced sale of credit-linked attachment products is a negative surprise for ICICIGI. ICICIGI is expected to address the same through new tie-ups, new products (better pricing with wider coverage) and increased focus on retail sales. However, this one-time reset in distribution mix will have a near-term impact on growth.

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