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Combined ratio misses estimate on higher opex

* ICICI Lombard’s (ICICIGI) NEP came in line with our estimate at INR43b (up 14% YoY). Investment income from policyholders and shareholders’ accounts came in lower than our estimates, which led to a miss in PAT in 3QFY24.

*  The claims ratio came in at 70.0% vs. 70.7% in 2QFY24. It was broadly in line with our estimate of 70.5%. The combined ratio stood at 103.6% vs. 103.9% in 2QFY24.

* PAT grew 22% YoY but declined 25% QoQ to INR4.3b. PAT came in 27% lower than our estimate.

* For 9MFY24, NEP/PAT grew by 13%/20% to INR125b/INR14b.

* The company has maintained its guidance of a combined ratio of 102% by FY25. We have cut our estimates to factor in lower-than-estimated performance in 3Q, leading to an EPS cut of 4.5%/4.6% for FY24/FY25. Reiterate BUY with a TP of INR1,650 (premised on 30x FY26E).

Low capital gains dent investment income

* Gross domestic premium income grew 15% YoY in 3QFY24 to INR64b. It was 4.5% above our estimate.

* ICICIGI’s NEP was broadly in line with our estimate at INR43b, up 14% YoY. NEP for Health business grew by 38% YoY, led by group health growth of 42% and retail health growth of 21%. Motor segment was flat YoY and Marine segment grew 21% YoY. NEP in Crop was higher by 52% YoY, while it was down 14% YoY in Fire.

* Underwriting loss stood at INR2.8b vs. a loss of INR1.5b in 2QFY24 and higher than our estimate of a loss of INR1.7b.

* Investment income was lower than our expectation (on policyholders account 10% miss and on shareholders account 13% miss), due to low capital gains in 3Q at INR 1.08b vs. INR1.64b in 2QFY24.

Claims ratio broadly in line

* Claims ratio came in at 70.0% vs. 70.7% in 2QFY24. It was broadly in line with our estimate of 70.5%. On YoY basis, the loss ratio for the Motor OD segment declined to 64.9% from 73%, whereas the loss ratio for the Motor TP was flat YoY at 61.6% in 3QFY24.

* Combined ratio came in at 103.6% vs. 103.9% in 2QFY24 and 104.4% in 3QFY23. (vs. our estimate of 102.2%). Excluding the impact of CAT losses of INR 1.37b, the combined ratio was 102.6% in 9MFY24.

* On a sequential basis, the commission ratio increased to 18% in 3QFY24 from 17.4% in 2QFY24 (our expectation of 14.7%).

* Expense ratio declined to 15.5% from 15.8% in 2QFY24 (vs. our expectation of 17.0%).

* Total expense ratio came in at 33.5% vs. 33.2% in 2QFY24 (vs. our expectation of 31.7%). ? Solvency ratio was at 2.57 vs. 2.59 in 2QFY24.

Highlights from the management commentary

* A new philosophy is being implemented ‘One IL one team’, which would benefit revenue and profitability over the medium term.

* If period of limitation on motor TP claim is implemented, the frequency of claims can reduce at the industry level. ICICIGI works with 12-13% claim inflation assumption in reserve creation, which is higher than the industry, and hence the benefit will be higher compared to the industry.

* Some semblance has been seen with respect to competition in the motor segment, which is reflected in loss ratio declining from 93% to 87% on YoY basis. ICICIGI expects motor OD loss ratios to be in 60-65% range, while for Motor TP segment, 65-70% is the comfortable zone.

Valuation and view: Cut in estimates; retain BUY Going ahead, growth in the Motor segment is likely to be back-ended, with the company waiting for the rationalization of pricing in the OD segment. In the Health segment, the benefits of price hikes and improving the efficiency of the agency channel should translate into better profitability. Scale benefits, a favorable product mix (higher share of retail health), and improvements in efficiencies across channels should help ICICIGI improve the combined ratio and RoE over the next couple of years. The management has maintained its guidance of high-teen growth in premium and combined ratio (of 102%) by FY25. We have cut our estimates to factor in lower-than-estimated performance in 3Q, leading to an EPS cut of 4.5%/4.6% for FY24/FY25. Reiterate BUY with a TP of INR1,650 (premised on 30x FY26E).

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