IGI Logo

Successfully weathering the storm

Investing in growth amid favorable industry dynamics

The general insurance industry is all set to deliver a healthy 12% CAGR in premium over the next decade led by 1) healthy trend in auto sales, 2) sustained strong momentum in health insurance demand and 3) commercial insurance lines growing in line with a robust economic growth. Amidst this, ICICIGI has emerged to be India’s largest private sector general insurance company post its merger with Bharti Axa (BAXA). Stronger correlation with new auto sales, investments into health distribution channel, synergies from BAXA merger and expected results of past investments in technology are the key earnings triggers for ICICIGI. During FY22-24, we see the company delivering a premium/PAT CAGR of 19%/28% and a RoE of 19.1% in FY24. The stock is trading closer to its trough P/E multiples post 31% correction in the past 18 months. We recommend BUY with a 1-year price target of INR1,500.

ICICIGI well-placed to capture the ensuing revival in Auto sales

* Following a muted growth in auto sales over the past couple of years, we expect a revival led by: 1) the easing of supply-side issues as the global economy opens up, 2) relatively stronger economic growth and Infrastructure investments driving demand for CVs, and 3) the opening up of offices and colleges, which will drive 2W demand.

* ICICIGI auto segment has a relatively stronger correlation with new Auto sales when compared to that of the industry (60% v/s 40%). Additionally, the mix is skewed towards passenger cars and 2Ws, where the revival is likely to be stronger. Post the decline of 200bps in market share over the past two years, we expect an improvement going ahead.

* Technology initiatives, leadership in EV segments, commercialization of sandbox products, and incremental OEM partners through its merger with Bharti AXA will be additional tailwinds for ICICIGI.

* In terms of claims, we expect steady trends as the impact of adverse pricing is offset by benefits from the implementation of the Motor Vehicles Act.

* Overall, we expect ICICIGI to report 21% CAGR in the Motor segment, led by a 19%/23% CAGR in Motor OD/TP business.

Investing in the Health business to gain market share

* India is highly underpenetrated in terms of the Health business with only 4% of the population covered under Retail Health Insurance plans. This provides huge growth opportunities for players in the industry.

* To capture a higher share of growth opportunities emerging in the segment, ICICIGI has invested in building its individual agency channel, wherein it is hiring 1,000 agency representatives. The benefits of the same will be reaped in the near future. Its investments in technology (such as the IL TakeCare app) will aid growth going forward.

* In the Group Health segment, the management aims to grow the profitable SME segment as compared to the loss-making Large Corporate segment.

* We expect the claims ratio to normalize to pre-COVID levels in FY23 and improve going forward as aggressive growth will lead to a much younger customer base. However, the expense ratio is likely to remain higher, restricting the improvement in the combined ratio for this segment.

Synergies from Bharti AXA merger will drive improvement in combined ratio

* ICICIGI merged with Bharti AXA in FY22 following the receipt of all requisite approvals. The merged entity is now the largest private General Insurance Company in India.

* Key synergies out of the merger include: 1) consolidation of branches (already implemented), 2) technology integration (in process), 3) optimization of the organizational structure, 4) new OEM partners for the Motor segment and 5) new banca partners in distribution.

* So far, the company has reaped INR0.7b in benefits in FY22 and expects further benefits of INR1.3b in the near term. These should translate into strong improvement in combined ratio for the merged entity from 109% in FY22 to 101.4% by FY24.

Focus on growth v/s profitability – A change in strategy

* Empirically, ICICIGI has been reporting an earnings growth and a RoE of over 20% each. During FY22, the company reported a decline in earnings and 15% RoE.

* Going forward, the management’s focus will be on growth than profitability. We expect the company to deliver a gross premium/PAT CAGR of 19%/28% over FY22-24.

* In terms of expenses, we see the expense ratio falling to 27.9% in FY24 from 29.1% in FY22. However, the fall would have been sharper had it not been for the incremental investments in growth. The combined ratio/RoE is likely to improve to 101.4%/19.1% in FY24E from 108.8%/15.4% in FY22.

Recommend Buy, trading near all-time low one year forward valuation, ICICIBC stake sale a key overhang

* The stock has corrected by 31% over the past 18 months, even as the Nifty remained flat. The steep correction has been on account of: 1) shift in the management’s focus to growth from profitability earlier, and 2) expected reduction in ICICIBC’s stake to sub-30% levels by Sep’23 as per RBI regulations from 48% at present.

* After the correction, the stock is trading near at all-time low one year forward valuation. The stock should re-rate towards its historic valuation as it delivers profitable growth and clarity emerges on the stake sale.

* We initiate coverage on ICICIGI with a Buy rating and a one-year TP of INR1,500 (35x FY24E P/E).

To Read Complete Report & Disclaimer Click Here

For More Motilal Oswal Securities Ltd Disclaimer http://www.motilaloswal.com/MOSLdisclaimer/disclaimer.html SEBI Registration number is INH000000412

Above views are of the author and not of the website kindly read disclaimer