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Weak underwriting offset by a strong investment performance

? The underwriting loss for ICICIGI stood at INR1.5b in 2Q as against INR1.9b in 1QFY23, as OPEX grew at 9% as compared to a 11% growth in NEP.

? Claims ratio grew to 72.8% in 2Q v/s 72.1% in 1QFY23 as the benefits of a lower loss ratio in Motor TP and Fire were offset by higher claims in Motor OD and the Health segment. Claims ratio grew 300bp YoY.

? Investment income, at INR8.7b, was higher than our expectation of INR7.4b owing to better yields.

? The combined ratio stood at 105.1% v/s 105.3%/104.1% in 2QFY22/ 1QFY23. The solvency ratio stood at 2.5x v/s 2.6x in 1QFY23.

? Adjusted for a tax reversal of INR1.3b, PAT stood at INR4.6b (est. INR3.8b). Reported PAT stood at INR5.9b.

Healthy premium growth of 18%, strong growth in investment income

? Total GWP grew 18% YoY, but fell 4% QoQ to INR53b.

? However, NEP grew 18% YoY and 11% QoQ to INR38.4b, with NEP-to-GWP ratio at 72% v/s 63% in 1QFY23.

? NEP grew 18% YoY and 11% QoQ to INR38.4b, but was 3% lower than our estimate. NEP for the Health/Motor/Crop/Fire business grew 32%/6%/ 4x/8% YoY.

? Total investment income (shareholders + policyholders) grew 27% QoQ and 19% YoY to INR8.7b (est. INR7.4b). The jump was primarily driven by higher interest accrual income on the back of rising interest rates in the economy

Loss ratio rises QoQ, lower OPEX ratio restricts rise in the combined ratio

? ICICIGI reported a loss ratio of 72.8% in 2Q v/s 72.1% in 1QFY23. The benefit of a lower loss ratio in Motor TP/Fire (down 730bp/17.3%) was offset by higher claims in Motor OD/Health (up 70bp/8.1%). Claims ratio increased by 300bp YoY.

? Commission ratios increased by 130bp QoQ to 3.5% owing to a higher share of the Retail business, where commission ratios are higher.

? Expense ratio fell to 28.8% from 29.9% QoQ, led by a flattish employee cost and a 5% QoQ fall in sales promotion expenses.

Highlights from the management commentary

? Loss ratio in the Motor OD is higher than Motor TP due to pricing pressures. However, the management expects pricing to improve over the next few quarters.

? ICICIBC has also restarted to distribute indemnity-based products. The profitability of this product is lesser than the erstwhile credit linked benefit based product.

? Around 70-75% of investment income is accrual and the balance is capital gains. A higher interest environment is favorable. Going forward, carrying yield should increase and capital gains will reduce.

Marginally raise our FY23/FY24 earnings estimate; maintain our Buy rating

We expect strong premium growth for ICICIGI, led by strength in new Auto sales, investments in the Health distribution channel, and expected results from past investments in technology. Earnings growth will accrue from synergies from its merger with BAXA and improvement in the loss ratios for the Health segment. We raise our FY23/FY24 earnings estimate by 11%/4%, led by higher investment income, offset by a higher underwriting loss. During FY22-25, we see the company delivering a premium/PAT CAGR of 18%/26% and a RoE of 19% in FY24. We maintain our Buy rating with a one-year TP of INR1,450 (35x FY24E P/E).

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