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ROEs impacted by higher claims and investment into distribution

n 4QFY22, ICICI Lombard (ICICIGI) delivered a strong topline recovery with GDPI up 32.9% YoY to INR46.7bn, however concurrent increase in claims and expenses resulted in reported PAT declining 9.6% vs pre-merger 4QFY21 to INR3.13bn. QoQ, PAT was down 1.5%. The underwriting loss in 4QFY22 increased 14.8% QoQ to INR3.09bn driven by i) continued tepid new car and 2W sales, ii) reserve strengthening in motor TP line, and iii) higher sourcing costs including investments into tech/digital distribution channels. COR (IRDA) came in at 103.2% in 4QFY22 vs 104.5% last quarter. Product mix for 4QFY22 continued to be dominated by motor (53% GWP mix) with total retail mix improving 100bps YoY to 66%. YoY, GWP mix has moved in favour of health – share up c.300bps to 24% in 4QFY22 and CVs – share up c.300bps to 13%. Investment performance was healthy with income growing 31.5% YoY to INR7.06bn in 4QFY22. ROEs for 4QFY22 declined to 14.0% from an average of around 20% levels pre-merger and pre-pandemic (FY19-20) as the insurer moves to a COR filter to underwrite business with a focus on growth/market share. Going forward, we forecast 15% GWP CAGR over FY22-24E with earnings CAGR expected to be 30% on the back of topline growth, improving underwriting performance and scale up of distribution. Overall, we continue to like ICICIGI’s leadership position and conservative investment/ reserving approach and strong solvency levels of 246%. Maintain BUY with a TP of INR 1,530 (implying 35x FY24E EPS).

GWP growth driven by health and motor TP lines: The gross premium for 4QFY22 increased 32.9% YoY driven by 49.3% YoY growth in health line and 42.3% YoY growth in motor TP lines. Within health, growth was driven by 52.9% YoY increase in group (employer-employee) business on the back of strong renewals and price hikes. Within motor, CV segment witnessed robust growth of 69.6% YoY due to a) greater comfort owing to recent TP hikes and higher use of analytics/ segmentation and b) COR approach to underwriting. In terms of mix, the share of motor+retail health increased 100bps YoY to 66% in 4QFY22. We are building in 15% GDPI CAGR over FY22-24E.

Underwriting performance impacted by claims, sourcing costs and investment into distribution: The underwriting loss increased 14.8% QoQ to INR3.09bn in 4QFY22. This was due to a) higher claims – overall loss ratio is higher 246bps QoQ to 72.0% driven by 8% QoQ higher motor TP loss ratios and 31% higher crop loss ratios, b) higher expenses – 8.5% QoQ increase in business support costs and 11% increase in other costs, and c) higher investment into distribution – during 4QFY22, ICICIGI added 350 retail health agency salesforce taking the FY22 health agents number to 750 with a target to add a total of 1,000. Alongside, the insurer is continuing to invest into digital not just from a customer service angle, but also sourcing/underwriting and has tied up with new age insurtechs. Overall, COR (IRDA) stood at 103.2% in 4QFY22. Going forward, the insurer expects CORs to remain at or above 100% as ICICIGI focuses on growth/market share however, certain offsetting factors include, a) expected industry price correction in motor lines, b) benefit of current investment into distribution and digital and c) synergies from BAXA integration (realised INR0.7bn of projected annualized synergy benefits INR2.0bn in FY22). We expect COR to be around 100-101% levels over FY23-24E.

Healthy investment performance: Reported investment leverage improved to 4.23x in 4QFY22 vs 4.09x last year. The insurer is currently holding advance premium of INR33.7bn from long-term motor policies, down from Dec’21 levels. In terms of investment performance, net investment income was up 31.5% YoY / 1.6% QoQ driven by 2x YoY / 3.8% QoQ increase in capital gains

Maintain BUY with TP of INR 1,530: We like ICICIGI given its conservative reserving (reserving triangles have shown a surplus since AY13), strong BS (zero exposure to debt rated below AA) and negligible asset quality risk given cash-before-cover model. Going ahead, as ICICIGI focusses on growth/market share, ROEs are expected to be in the midhigh teens – we are building in 17% and 19% for FY23E and FY24E respectively. We value the stock at 35x Mar’24E EPS resulting in a TP of INR1530.

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