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Decent performance in Q3FY21

ICICI Lombard General Insurance is a private general insurance company, listed on 27th Sept 2017. The company offers various insurances covering travel, home, health and motor segments.

* Gross direct premium income (GDPI) rose 9.3% YoY, positively impacted by P&C segment (25.7% YoY) and Motor segment (14.3% YoY).

* PAT grew 6.6% YoY to Rs. 314cr owing to capital gains of Rs. 108cr (vs Rs. 17cr in Q3FY20) and lower claims incurred (-2.3% YoY).

* Though we may see increase its sales and promotional expenses owing to pressure from competition, we expect the margins to improve from current levels. Hence, we upgrade our rating to BUY on the stock with a rolled forward target price of Rs. 1,591 based on 7x FY23E BVPS.

GDPI improves from recovery in motor insurance

During Q3FY21, company reported a gradual increase in GDPI at Rs. 4,034cr (+9.3% YoY), while ex-crop GDPI grew 9.9% YoY to Rs. 4,033cr. Motor segment GDPI increased at 14.3% YoY to Rs. 2,396cr due to the recovery in sales of motor vehicles. Property & Casualty (P&C) segment climbed 25.7% YoY to Rs. 948cr owing to the increase in market share in fire, engineering and marine insurances. The worst hit segment was Health, Travel & PA declining 16.0% YoY to Rs. 689cr. However over the upcoming quarters, we expect vaccine to catalyse the economic activities in travel and hospitality. Net premium earned rose 6.3% YoY to Rs. 2,611cr; 39% of which comes from P&C segment. Management has been cautious with Motor insurances, maintaining loss ratio at 63.6% for 9MFY21. Loss ratio for Health and P&C in 9MFY21 were 77.3% and 66.4%, respectively (vs. 69.6% and 57.8%, respectively, in 9MFY20)

Bottom-line boosted by capital gains

Combined ratio was 99.1% (-140bps YoY) for 9MFY21, while excluding impact of cyclone and flood losses it was 97.7% (-180bps YoY). OpEx+Commission ratio dropped to 32.4% for Q3FY21 (vs 33.9% in Q2FY21). PAT grew 6.6% YoY to Rs. 314cr owing to capital gains of Rs. 108cr (vs Rs. 17cr in Q3FY20) and lower claims incurred (-2.3% YoY). For Q3FY21, the ROAE of 17.6% (vs. 20.3% in Q3FY20) includes the upfront expense of acquisition cost. Solvency ratio rose to 2.8x as on Dec 31, 2020 (vs. 2.2x in Dec 2019), against the regulatory requirement of 1.5x.

Key concall highlights

* Net impact of cyclone and flood losses of Rs. 0.32bn for Q3FY21.

* For the industry, COVID-19 claims till now are Rs. 7.68 lacs of which ~39,000 were reported with ICICI Lombard. The company hopes that the decline in non-COVID claims might keep loss ratio in check.

* The discontinuation of long-term motor package policy by IRDAI effective from 1st Aug 2020, should positively impact the already strained segment.

* Concerning the Bharti AXA deal, the company is awaiting approval from NCLT for the amalgamation.

Outlook & Valuation

The company has managed to hold profitability this quarter mainly from capital gains. Though its sales and promotional expenses are expected to go up, we expect it to have a meaningful and positive impact on its topline as well as on margins. Also the recent hike in FDI limit up to 74%, may help unlock further value in the near-to-medium term in this stock. Hence, with a cautiously optimistic outlook, we upgrade our rating to BUY on the stock with a rolled forward target price of Rs. 1,591 based on 7x FY23E BVPS.

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