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ICICI Prudential Life Insurance:

In Q3 APE grew sequentially by 13.8% to Rs.16.66bn, but was down 18.2% Y-o-Y mainly due to supply side constraints in conducting the necessary testing required for new policies to be issued. ULIPs which tend to be cyclical products took a hit in the pandemic scenario, however we can see sequential recovery with 20% Q-o-Q growth in the category which suggests APE growth might return in the next fiscal year. VNB margins jumped significantly to 26% for 9MFY21 due to the higher share of protection plans, while VNB growth was down by 9% for 9MFY21. The company has taken measures to improve cost efficiency with operating expense ratio down by 140Bps Y-o-Y. Solvency ratio improved in Q3 to 226%. Persistency across all time periods improved sequentially, however only 61st month persistency has improved Y-o-Y. AUM for 9MFY21 stood at Rs.2,048bn.

Improving product mix led to margin expansion:

Retail protection business (pure term insurance) is more profitable and better in terms of persistency. Despite being the market leader in retail protection, ICICI prudential historically lagged behind its private peers in regards to its product mix which led to it having lower margins. The company has realigned its focus towards expanding the share of health & protection plans across both retail and group lines of business. While market linked savings plans (ULIPs) continue to dominate the overall share of the company’s APE, the contribution of protection plans has improved from 5.7% in FY18 to 17.8% in 9MFY21. As a result, the company’s VNB margins have improved from 16.5% in FY18 to 26% in 9MFY21.

FDI Cap increased for insurance companies.

In the Union Budget 2021-22, the finance minister proposed to increase FDI investment limits in Indian insurance companies to 74% from 49%. This will allow more avenues for the company to raise capital and is expected to bring in a wave of transformation in the insurance business.

Distribution channels expanding:

The company has partnered with IIB, RBL Bank, AU SFB, IDFC First Bank & NSDL Payments Bank to enhance its bancassurance network and increase its reach beyond ICICI bank client base. Along with expanding its reach the bancassurance channel has increasingly focused more on protection plans over ULIPs, allowing the company to further improve its product mix.

Outlook and Valuation:

APE growth is expected to stay muted in the near term as ULIPs are subdued in current market conditions, however sequential improvements can be witnessed in Q3. VNB margins expanded to 26% in 9MFY21 as a direct result of the company’s focus on protection business above savings. Cost efficiency and persistency both improved in recent quarters leading to improving profitability. We believe ICICI Pru will continue to improve its product portfolio and enhance distribution to achieve their goal of doubling VNB by FY23. AT CMP of Rs.484.75 the stock is trading at TTM P/EV of 2.7x, whereas the industry average is 3.8x. We value the company at P/EV of 2.4x on FY23E basis to arrive at our TP of Rs.573 and assign a “BUY” rating.

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