ICICI Lombard rating: Reduce — Weak sales, better loss ratio marked Q1

The sharp solvency rise was due to muted top-line growth, improved profitability and cut in the unrealised loss on equity portfolio from Rs 4.29 bn in FY20 to Rs 0.36 bn in Q1.

ICICI Lombard reported Q1FY21 PAT of Rs 3.98 bn (+28% y-o-y), in line with Bloomberg consensus and our expectations. The gross direct premium income (GDPI) fell 5% y-o-y to Rs 33.0 bn in Q1FY20 vs industry growth (ex. crop insurance) of -3%. The loss ratio fell 570bp y-o-y to 69.8% (Q4FY20:69.9%) mainly due to an improvement in the motor third-party (TP) and own damage (OD) loss ratio. The combined ratio fell 74bp y-o-y to 99.7% (excluding natural catastrophes 98.4%). Shareholder funds rose 6% over FY20, while the solvency ratio rose to 250% (FY20:217%).

The sharp solvency rise was due to muted top-line growth, improved profitability and cut in the unrealised loss on equity portfolio from Rs 4.29 bn in FY20 to Rs 0.36 bn in Q1. The company reported a 5% y-o-y fall in investment income emanating from a 12% rise in interest and dividend income and a 56% fall in realised gains. Investment assets rose 19% y-o-y, but yield fell from 9.4% to 7.6%.

Health remains growth driver; motor profitability rise could result in rate cuts: Health, especially retail health, continues to be the top-line growth driver (24% growth y-o-y). The company has introduced several policies to take advantage of increased health awareness during COVID-19. Health claims, especially related to COVID-19, will need to be tracked closely going forward. On motor, with an improvement in overall industry profitability due to the lockdown, we could now start seeing competition-induced rate cuts in own damage premium.

Downgrade to Reduce from Hold; lift TP to Rs 1,040 from Rs 1,027: We derive our target price based on a Gordon growth model. We do not make any estimate changes in this note. We calculate a target P/B multiple of 6.7x by assuming an average ROE of 23.7%, cost of equity of 10% and growth of 7% (all unchanged). We then apply our target P/B multiple to our year-end BV estimate of Rs 161.8 (unchanged) and discount it back to the present at the cost of equity to arrive at our target price of Rs 1,040 (previously Rs 1,027) after adding unrealised gains. The change in our TP is on account of the increase in unrealised gains. Our TP implies 19.3% downside. We downgrade the stock to Reduce from Hold. Upside risks (i) better-than-expected loss ratio; (ii) increase in OD prices; and (iii) increase in third-party prices.