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VNB margin evolution evidently admirable

Result Highlights

* VNB margin: Calculated VNB margin increased as much as 127bps QoQ to 31.0% driven by favourable product mix change

* VNB growth: VNB grew/de-grew 31.6%/-39.2% YoY/QoQ, where the YoY growth was aided by strong growth in APE and improvement in VNB margin

* APE growth: New business APE grew 24.7% YoY but de-grew -41.7% QoQ, the sequential decline being largely a function of seasonality

* Expense control: Expense ratio rose 145/205 bps QoQ/YoY as opex ratio rose 191/171 bps QoQ/YoY and comm. ratio decline/rose -45bps/35bps QoQ/YoY

* Persistency: 13th month, 37th month and 61st month persistency ratio improved sequentially by 140bps, 290bps and 290bps respectively

Our view – VNB margin evolution evidently admirable Linked business slows on account of market volatility whereas Protection business is driven by Group businesses: The growth of the linked APE was 15% YoY in 1QFY23 with volatility in capital markets having affected the growth of the linked products business. Protection APE has grown 22% YoY to Rs 3.3bn with growth driven by taking advantage in the Group segment, specifically in Credit life. The ROP variant has contributed 18% to retail protection APE. In general, in retail protection, the company has stayed away from undesired profiles. However, sequentially, retail protection growth numbers have stabilized and in third quarter, management expects that there will be YoY growth in retail protection.

In term of channel mix, IPRU continues to become more broad-based with time: ICICI Bank contributed just 20% to total APE in 1QFY23, whereas other banks contributed 15%. Agency channel contributed 22%, Direct channel 11% and Partnerships a further 11%. The growth in the agency channel was 25% YoY. Overall, the Bancassurance channel grew 12% YoY even as ICICI Bank channel de-grew 11% YoY.

While cost ratio deteriorated, it would have no negative ramification for margin; Persistency ratio improved across time cohorts: The overall cost to TWRP has risen from 18.6% in FY22 to 23.8% in 1QFY23. New business growth is higher than expenses growth and, therefore, management does not expect margin to be adversely impacted by expenses growth. 49th month persistency for 2MFY23 was 65.0% compared with 63.4% in FY22.

We maintain ‘Buy’ rating on IPRU with a revised price target of Rs 766: We value IPRU at 2.6x FY24 P/EV for an FY23E/24E/25E RoEV profile of 17.3/17.7%/17.9%.

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