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Tactically open to higher investment / lower RoE; cyclical recovery remains the investment thesis

ICICIGI hinted at several strategic changes, including (1) investing more for future growth even if this entails lower RoE, (2) increasing CV mix in motor segment and (3) prioritising business selection basis combined ratio over loss ratio which would imply relative open stance for high loss ratio but low acquisition cost businesses. Most of the changes have been necessitated from the need to protect market share in the wake of competition, as we continue to see slow growth in motor. We remain constructive on cyclical recovery and strong growth potential of Indian non-life insurance sector. This remains the key investment argument of ICICI Lombard (ICICIGI). Maintain BUY

Tactical changes in strategy to protect market share could be good. ICICIGI is now open to lower the RoE and hence go down the profitability ladder in order to maintain market share and invest for future growth. Additionally, the company has guided for increasing the CV mix from 15% in the past to 25% in FY23. The sustainable loss ratios could remain elevated at 78%/73% for motor TP/OD in FY23E (same as Q4FY22). These measures will help gain/protect market share as seen in Mar’22 (retail health and overall motor GDPI increased by 25% YoY and 24% YoY, respectively in Mar’22).

* Sequentially, improvement in expense ratio by 380bps and in turn combined ratio by 135bps to 103.2% in Q4FY22 is positive. However, loss ratios increased sequentially for motor and health. The sequential lower expense ratio has been driven by lower employee costs.

* Growth levers ahead include (1) recovery in motor new car registrations, (2) fruition of organic initiatives in health and (3) achieving synergies from the acquisition of Bharti Axa. On the health front, ICICIGI has been investing in health distribution as it added ~750 retail health agency managers in FY22 and additional 250 offers have been made. Among total 88,539 agents as of FY22, only 6,000 are in health segment. The company expects success with POD (prevention, outpatient and digital) strategy for health. On motor front, new car registrations will pick up as major OEMs expect resolution of semiconductor issue gradually while there should also be gradual improvement in rates with overall industry combined ratio at a high of 121%.

* Maintain BUY with target price of Rs1,650 (earlier: Rs1,675) based on 40x FY24E EPS of Rs41.3 (earlier: Rs42 based on FY23/24E EPS). Key tenets of our assumptions are: (1) 13%/13.7% GDPI growth in FY23/24E, (2) gradual improvement in combined ratio from 108.8% in FY22 to 100.8% in FY24E, (3) investment leverage of 4.3x levels and (4) investment yields of 8.6%/8.4% in FY23/24E. This results in 26% earnings CAGR and RoE recovering from 15.4% to 18% between FY22-24E.

* Risks to earnings include (1) Prolonged strategy to accommodate higher growth through lower margins to accommodate competitive pressure and (2) delay in revival of motor premiums that can result in continued pricing pressure for available volumes

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