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COR remains elevated; growth in health segment continues to build momentum

The combined ratio (COR) for ICICI Lombard (ICICIGI) remained elevated at 104.4% in Q3FY23 and 104.6% in 9MFY23. Recovery in motor loss ratios and traction in health (group as well as retail) have been the investment thesis for quite some time now and is still relevant. We remain constructive on such recovery and the Indian non-life insurance sector's strong growth potential. This remains our key investment argument for ICICIGI. Maintain BUY.

* We cut the valuation multiple from 40x to 35x factoring a structural trend of higher COR. COR of 102% could be the best outcome in near term considering the trend and the expense build up. The negative impact is likely to be offset by higher investment income. Higher absolute GDPI (9MFY23 growth of 21%) will aid the same. We therefore keep our FY23/24 PAT estimates unchanged at Rs17/20bn.

* Motor OD prices remain under pressure, but company maintains optimistic outlook based on early trends (this sense has lingered for some time now). Motor GDPI mix as of 9MFY23 for private vehicle segment stood at 50% while two wheelers/CV accounted for 28%/22% respectively. Motor premium growth for ICICIGI has been 10% YoY in 9MFY23, lower than the industry growth of 16.4% YoY as ICICIGI has been selective in underwriting.

* Growth prospects in health segment showing promise (both retail and group). Retail health agency vertical grew 40% YoY in Q3FY23. Bancassurance and ‘key relationship groups’ grew 39.3% YoY during the quarter. ICICI Bank distribution grew 30.9% YoY and non-ICICI Bank distribution was up 44.2% YoY. For Q3FY23, the loss ratio in group health (employer-employee) has been around 99.1%, while retail indemnity loss ratio has been 68% (higher QoQ). Retail health repricing of the renewal book has been done and this will likely help improve the loss ratios ahead. Bank-driven retail indemnity attachment sales and sales from partnerships post the acquisition of Bharti Axa are building momentum. Total downloads for IL Take Care app are now at >3.7mn. Sales through the app have also witnessed significant jump from Rs100mn in Q1FY23 to Rs275mn in Q2FY23 and Rs350mn in Q3FY23. Overall agency force with point of sale is now >100k.

* Maintain BUY with a revised target price of Rs1,445 (earlier Rs1,650) based on 35x (40x earlier) FY24E EPS of Rs41.3 (unchanged). Key elements of our forecast include: 1) 23%/17% GDPI growth in FY23E/FY24E, 2) gradual improvement in the COR from 108.8% in FY22 to 102.5% in FY24E, 3) investment leverage at 4.2x levels, and 4) investment yields of ~8% in FY23E/ FY24E respectively. This leads to an earnings CAGR of 26% and RoE improvement from 15.4% to 18.4% between FY22-FY24E. ? Risks to earnings include: 1) Prolonged competitive pressures resulting in less attractive balance between growth and COR; and 2) Continued pricing pressure in motor segment; and (3) regulatory disruptions creating near-term headwinds.

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