ICICI Lombard rating – Buy: Higher commissions impacted earnings

For Q3FY21, ILOM’s profit of Rs 3.1 bn, up 7% y-o-y, fell short of estimates due to higher commissions. This reflects uptick in premiums & lower re-insurance – while GDPI rose by 9%, NWP rose 21% – benefit of this will play out in the future. IBank has temporarily slowed cross-sell of health-insurance & normalisation will be key. Expansion of agency force & new banca tie-ups can help. We trim estimates a bit, but stay with Buy call with target price of Rs 1,780.

Higher commission costs for premium-growth & lower health business drag profit: During Q3, ICICI Lombard saw some uptick in GDPI growth to 9% and net premium written growth improved to 21% y-o-y. This was driven by growth in retail business, lower reinsurance especially due to lower health-insurance business origination by ICICI Bank. The upfront cost of commission rose by 191% y-o-y–towards new business and lower commission on reinsurance offered on health-business. This was the key reason for miss in earnings. Combined ratio was at 97.9% and investment income (total) was up 33% y-o-y.

Drivers of growth for FY22-23: We believe that ICICI Lombard’s organic growth in FY22 would be led by normalisation of business activity as well as ramp-up of partnerships with banks like Standard Chartered, Yes Bank, Karur Vysya Bank along with a few NBFCs/ SFBs. Still normalisation of bancassurance partnership with ICICI Bank on health-benefit side is key – we expect it to play out by H2FY22. Growth in retail health insurance business will be driven by (i) expansion in agency force – up 17% since Mar-20; and (ii) roll-out of products and tech-platforms towards this segment. Its growth in SME segment also continues to hold-up – up 36% y-o-y in Q3. A key positive development can be hike in motor TP insurance premiums (by IRDAI) after nil hike in FY21.

Trim earnings: Mgmt clarified that the merger with Bharti Axa is moving in line with expectations, and we understand it might be consummated by H12021. We trim standalone EPS forecasts by 2-4% factoring in tad slower premium. This also drives small cut to TP to Rs 1,780 (from Rs 1,850) based on 44x Dec-22 PE.