01-01-1970 12:00 AM | Source: Motilal Oswal Financial Services Ltd
Buy ICICI Prudential Life Insurance Ltd For Target Rs.630 - Motilal Oswal
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Successful transformation to a more balanced player

Protection & non-par savings remain focus segments; reiterates VNB doubling guidance

* ICICI Prudential Life’s (IPRU) Annual Report reaffirms the company’s focus on steadily diversifying its product mix, especially, the non-par savings & protection segment.

* The addition of new-age partners and a wider presence across traditional channels will boost its business growth. The share of banca channel (excluding ICICI Bank) has increased to 14% in FY22 from 5% in FY18. These initiatives will provide the company with diversification benefits and drive an optimal business mix, thereby supporting margins.

* IPRU reiterated its guidance to double FY19 Value of New Business (VNB) by FY23 led by its 4P strategy.

* IPRU has reported 34% YoY growth in individual WRP in FY23 YTD and we estimate ~21% CAGR in new business APE and 23% CAGR in VNB over FY22-24E. We reiterate our Buy rating with a revised PT of INR630 (2.1x FY24E EV)

 

On track to achieve guidance of doubling

FY19 VNB by FY23E IPRU remains on-course to double FY19 VNB by FY23. It continues to execute its 4P strategy of Protection focus, Premium growth, Persistency improvement, and Productivity enhancement. Wider product offerings, newer channels of distribution and superior customer service are key enablers of this strategy. VNB margins have improved sharply over the years and are likely to remain resilient, aided by further improvement in the company’s product mix. We estimate VNB growth to be mainly driven by premium growth rather than margin enhancement, going forward.

 

Premium mix more balanced; ULIP share declines to 48% from 80% in FY19

IPRU has successfully transformed and diversified its product mix over the last few years. Having shed its singular focus on ULIPs, its balanced product mix is now evident from the decline in the share of ULIPs to 48% in FY22 from 80% of APE in FY19. The share of traditional savings and protection has increased from 9% each in FY19 to 27% and 17% in FY22, respectively. With improving life expectancy and increasing awareness about retirement products, the management is trying to explore the highly underpenetrated annuity segment, which is fast gaining traction.

 

Protection and Annuity remain key growth opportunities

Protection and Annuity segments remain the key focus areas and offer a long growth runway. Demand for retail protection is holding well despite reinsurersled price hike. As supply side challenges abate, we expect retail protection growth to improve. During FY22, IPRU opportunistically focussed on group-term segment and overall the segment contributed 43% of VNB in FY22. IPRU is now focussed on expanding the contribution from its annuity business. At present, annuity contributes 4% of APE, while its share in NBP has improved to 19% in FY22 from 7% in FY19.

 

Mix of non-ICICI Bank banca partners has increased to 14% from 4% in FY19

With the intention to reduce focus on ICICI Bank as a distribution partner, IPRU formed a slew of partnerships over the last few years. It is gradually moving toward a digitally-enabled, omni-channel distribution model with presence across all platforms and customer touchpoints. Recent banca partnerships with IDFC First Bank, IndusInd Bank, RBL Bank, and AU Small Finance Bank have started to yield results. The share of non-ICICI Bank has increased from 4% of APE in FY19 to 14% in FY22. During the year, it added ~24K individual agents and formed 112 new partnerships. Overall, it is expanding its distribution network across all channels and strengthening its reach by closely mapping its distribution segments with customer segments and products.

 

Persistency trends steady; cost-ratios rise on increased business investments

IPRU’s persistency ratios improved across most cohorts during FY22. While 13M persistency ratio dipped marginally by 30bps to 84.6%, 25M and 61M persistency ratio improved 440bps and 580bps to 77.3% and 54.7%, respectively. IPRU continues to expand its innovative capabilities by leveraging new age technologies across the customer lifecycle. In FY22, IPRU increased spends on enhancing distribution channels and building a stronger brand. As a result, Cost/TWRP increased to 18.6% in FY22 from 14.8% in FY21.

 

Worst of COVID impact absorbed in FY22

Owing to the impact of COVID-19, the last few years have been extremely challenging for life insurers with increased distributions, resulting from spikes in mortality. A surge in the number of claims during the second wave of the pandemic had a significant impact on the statutory profits in FY22. The frequency of claims has tapered down in Q3 and Q4, consistent with global trends. During FY22, the company received COVID claim intimation of INR10.2b (net of reinsurance) and now it carries INR0.24b as reserves for delayed claims. Heightened mortality charges dragged Operating RoEV to 11% in F22, which otherwise would have been 15% for FY22

 

Valuation and view

IPRU has maintained a steady traction in VNB growth, led by a healthy product mix and APE growth, aided by a more balanced distribution mix. The share of higher margin products such as protection and annuity/non-par savings has increased in recent years, thus reducing dependence on ULIPs. On the distribution side, the share of banks (excluding ICICI Bank) has increased over the years (off a low base), supporting the diversification in its distribution mix. The increase in agent recruitment and the forming of new partnerships will continue to support premium growth. We expect VNB margins to improve slightly and project IPRU to deliver 21% and 23% CAGR in new business APE and VNB over FY22-24E, respectively, thus enabling an operating RoEV of 16.9% in FY24E. We reiterate our Buy rating with a revised TP of INR630 (premised on 2.1x FY24E EV).

 

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