Analysts hopeful of ICICI insurance twins despite Q3 disappointment

Fair value targets of brokerages suggest there is some upside in the two stocks

The ICICI group’s insurance ‘twins’, ICICI Lombard and ICICI Prudential Life (ICICI Pru), came out with results that disappointed the market. However, analysts' opinion on the two companies is more nuanced, with most maintaining a fairly positive stance.
 

ICICI Pru has underperformed its life insurance peers for a while, but this is mainly attributed to poor returns from the bank channels, and there are some signs that it is improving. ICICI Lombard, meanwhile, reported lower than expected PAT (profit after tax), mainly due to lower investment income.

 

The nine-month FY23 (2022-23 financial year) performance of ICICI Pru repo­rted a strong Value of New Business (VNB) with a VNB margin of 32 per cent, and management guidance is that VNB will double in FY23. Absolute VNB growth is 23.2 per cent year-on-year (YoY) for the nine-month FY23 period — at Rs 1,710 crore — with VNB margin up 4 per cent YoY and APE (annual premium equivalent) showing moderate growth of 4 per cent YoY.

 

The margin rise can be attributed to the increase of non-par savings, annuity and protection products in the premium mix. Retail protection APE is rising sequentially through the third quarter (Q3) for FY23. On the distribution front, all channels, except ICICI Bank, are clocking satisfactory-to-strong performances. ICICI Bank's share in the APE mix has reduced to 18 per cent in the nine months of FY23.

 

The management is optimistic about FY24 growth prospects, given better agency networks and the building of alternative banca partnerships. Given the underperformance for the last two years, the Price to Embedded Value (P/EV) is at a discount to private peers. One analyst has a 12-month target price of Rs 605, implying a significant upside from the current price of Rs 487. Another offers a target price of Rs 525.
 

 

 

In Q3FY23, ICICI Lombard reported a Gross Written Premium (GWP) of Rs 5,600 crore and a combined ratio of 104.4 per cent, which was in line with Street consensus, while PAT, at Rs 352 crore, was below Street estimates. This was largely on account of lower-than-estimated investment income.

 

ICICI Lom­bard delivered GWP growth of 17 per cent YoY to Rs 5,600 crore. Policyholders Account Invest­ment income was Rs 570 crore lower than estimates and the key driver of the miss in terms of PAT. There was poor performance on the motor insurance front too, with intense competition, and the claims ratio was also low. In the health segment, growth was resilient, driven by strong showing in health indemnity attachment and in employer-employee group health. Retail Agency premium was up 40 per cent YoY. Regarding profitability, the Q3 claims ratio of 70.3 per cent was better than the first half claims ratio of 72.5 per cent. The solvency ratio at 245 per cent was stable quarter-on-quarter (QoQ).

 

The non-ICICI Bank channels are delivering higher growth (+44 per cent YoY) in the health business. Com­petitive intensity is slowing in the motor segment, which should be helpful where margins are concerned. The high combined ratio is a point of concern, and the underwriting loss was at Rs 290 crore in Q3, up from Rs 150 crore in Q2FY23. But the combined ratio has improved from a high of 109 per cent in FY22.

 

On the NSE, the stock fell more than 4 per cent on the results, to Rs 1,197 on Wedn­esday, and by another 2.8 per cent to Rs 1,167 on Thursday. Fair value analysis and target prices range between Rs 1,225 to around Rs 1,475-1,500 (22-25 per cent upside).