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ICICI Lombard Ratings| Buy — In a position to maintain dominance

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We believe ICICI Lombard, the best-in-its-domain private non-life insurer, is well-positioned to deliver RoEs in excess of 20%, which would drive 19% book value growth and 25% earnings growth over FY19-21e. We expect a long growth runway for the sector (build 18% premium growth for ICICIGI over FY19-21) on strong demand for consumer-oriented product offering and low correlation to financial markets. Initiate at Buy; target price at Rs 1,136.

Long-term motor insurance RoE-accretive, benefits over FY19-21e
ICICIGI stands as a disproportionate beneficiary of regulation due to two-wheeler and private car heavy motor insurance (~34% of gross premium). For ICICIGI, overall float (assets to net premium) increases from 2.5x to 2.9x over FY19-21e, and even after passing part benefit as lower prices, we expect 150 bps sustainable RoE expansion. We build in 27/23% EPS growth in FY20/21e.

Conservative reserving
Reserving triangles (gap analysis between estimate & realised claim loss) not only show surplus provision release for six straight years now, but also the magnitude of release increases as we move down experience year. Comparable proxy measures like loss reserve and outstanding claims as a percentage of last three-year net premium, 47% for ICICGI vs 34-43% for major peers, point to its reserving adequacy.

Strong underwriting/nimbleness in product mix
ICICIGI s preference for profitability to growth is reflected in its business selection like lower mix of CVs in motor, focus on retail health insurance and limiting high claim ratio group health business. Overall net loss ratios have been at ~80% over the past few years.

Winners are winning, by far
Weak underwriting profitability for sector is because of SOE players, where high underwriting losses are offset by investment income and lenient solvency standards. Restricted by inadequate capital, SOE players have been losing share to private sector lately. For ICICIGI, underwriting losses are at 3%, similar to global peers. Also, ICICIGI earns an investment yield of 9-10%, higher than global peers. Consequently, RoEs (3-year average 19%) are among the highest globally.

Valuation multiples to sustain
Typical consumer businesses (>40x fwd. PE) get valued at a premium to financials on sustainable growth visibility in between lie financials with core business focused on consumer plays, like ICICIGI, BAF, HDFCB. In this context, we expect ICICIGI s valuations (at 33x FY20e EPS) to sustain with strong EPS growth. Value ICICIGI at 38x FY20e EPS, PT `1,136. Risk: high dependence on investment income, slower motor third party rate hike.

ICICI Lombard: Rare opportunity in financial space
We believe ICICI Lombard (ICICIGI) stands out as the most dominant private non-life insurer, commanding an overall market share of ~9% as of end-FY18. It is well-positioned to deliver a strong earnings growth of 25% over FY19-21e, without the need for fresh capital. Amid heightened price competitiveness in the sector, ICICIGI has continued to focus on prioritising profitability over growth, reflected in the stable loss ratio of ~80%, better than most peers. We believe that a well-diversified business mix, strong underwriting standards, extensive multi-channel distribution and regulatory tailwinds make ICICIGI well positioned to maintain its dominance.