Protection holds promise to bear Covid impact
While H1FY21 is going to be challenging, ICICI Prudential Life Insurance (IPRU) can still reach Rs290-300bn embedded value (EV) by FY22 riding on strong performance in protection, cost savings and increased demand for protection from heightened awareness post Covid-19. The strong solvency position, technological capabilities and brand strength are powerful enablers. In near term, the arithmetic lies in growth in protection (expect 45-50% CAGR) versus muted savings growth on an already weak base of FY20 (expect a dip in FY21 and recovery in FY22 to register ~5% decline in FY22 savings APE over FY20). Protection margin (factoring ~ 70% in FY22E) can surprise positively post price hikes and can offset the lower savings margin (can dip to low single digits).
Maintain BUY with a target price of Rs451. We factor in 2%/15% growth in FY21/22E APE with VNB margin remaining at 19%/21% for FY21/22E, respectively. We have also factored a dip in renewal premium to factor in lower persistency in FY21. Factoring unwind at 7% (lower than 8% for FY20), we arrive at EV of Rs259/293bn for FY21/22E. We ascribe 20x multiple to FY22E VNB of Rs17.7bn (VNB can decline in FY21) to arrive at a target price of Rs451 (implied FY22E P/EV of 2.2x).
Strong performance on protection continues; can benefit further from increased awareness post Covid-19; price hikes can help margins, strong balance sheet and brand remain business moats
* IPRU continues to outperform in protection segment leading to an increase in VNB margins of 21.7% for FY20.
Protection APE share increased to 17.8%/15.1% of Q4FY20/FY20 total APE. IPRU has taken price hikes triggered by the increase in reinsurance rates. There has been an impact of ~Rs1bn worth of lost business in March due to Covid-19 and Rs800mn worth of loss due to change in dividend taxation policy. As such, adjusted VNB margin would have been 24%.
* Strong Solvency becomes critical competitive advantage now.
IPRU is comfortable on solvency (194%) even with stress test scenarios (shocks for equity, bond yields & claims). This is a strong competitive advantage. IPRU does not require capital, though they can raise Rs12bn subordinated debt. The company has factored additional reserves for potential Covid-19 claims.
* Protection demand remains strong from anecdotal evidences.
IPRU has been receiving significant enquiries, logins and questions over protection products. IPRU is the market leader in retail protection. The focus will be more on the number of policies (NoP) as large cover underwriting would be difficult in the current situation. The company is seeing an increase in the sum assured. Limited pay protection has been very popular leading to protection ticket size increasing from Rs12,000 in FY19 to Rs23,000 in FY20. The company has taken price hikes in protection. Around 69% of the protection APE is retail.
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