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Strengthened distribution and product mix drives growth; persistency trends stable

VNB margin moderates due to slower Protection sales

* IPRU posted ~35% YoY growth in new business APE, led by healthy trends in the Annuity segment (~67% YoY), while ULIP growth bounced back strongly (~44% YoY). Protection growth was aided by Credit Life/Group Term, while Retail Protection growth stood weak. On the distribution side, growth was supported across all channels (barring ICICIBC). IPRU continued to improve its distribution mix by adding new partners and agents.

* VNB grew ~28% YoY to INR5.2b (~7% miss). VNB margin moderated by 130bp YoY to 26%, affected by slower growth in Protection sales.

* Shareholders’ PAT grew strongly (~47% YoY), aided by moderation in COVID-19 claims. Persistency improved in the 13th month, but was stable in the 61st month.

* We estimate IPRU to deliver ~32% CAGR in VNB over FY21-24E, led by robust premium growth, buoyed by new partnerships and product segments, enabling operating RoEV ~17%. We maintain our BUY rating.

Robust trends continue in the Non-Linked segment; VNB margin moderates QoQ

* Net premium income was muted ~8% YoY, affected by a decline of ~4% in renewal premium. owever, new business premium growth was robust (~34% YoY), led by Regular/Single premium, with both growing ~33%/34% YoY. Growth in shareholders’ PAT stood strong ~47% YoY.

* Total APE growth was robust ~35% YoY, led by a strong recovery in ULIP at ~44% YoY, Annuity (~67% YoY), and Non-Linked Savings (~31% YoY). Protection growth stood ~21% YoY, led by Credit Life/Group Term, while Retail Protection stood muted. The share of Protection declined to 14.2% (v/s 16.2% in FY21). Among other segments, the share of Annuity/ULIP rose to ~4%/~51% (v/s 3.5%/47.8% in FY21).

* IPRU is seeing continued momentum in business growth, led by Non-Linked, Annuity, and Group Protection over the medium term. Inquiries for Retail Protection are increasing, and IPRU expects growth to improve in the coming months.

* COVID-19 update: Total gross COVID-19 claims stood ~INR18.8b over 1H (~INR11.2b in 1Q) and claims net of reinsurance were INR8.6b (~INR5b in 1QFY22). Total COVID-19 provisions buffer stands ~INR4.1b (~INR5b in 1QFY22) towards future claims, including IBNR (incurred but not reported).

* VNB growth stood ~28% YoY to INR5.2b (~7% miss). VNB margin moderated to 26% (~130bp YoY decline), affected by weak Retail Protection trends. However, it was supported by strong trends in Non-Linked and Annuity segment. For 1HFY22, VNB growth stood at 45% YoY, with VNB margin improving 100bp YoY to 27.3%.

* Persistency trends improved by 300bp YoY in the 13th month to 85.1%, but stood stable in the 61st month at 51.6%. The 25th/37th month persistency improved by 160bp/110bp YoY to 74.6%/66.3%.

* On the distribution side, growth was supported across all channels (barring ICICIBC). The share of banca channel in total APE declined by ~390bp YoY to ~40%, affected by weak Protection trends. The share of ICICIBC declined to ~28% (v/s ~31% in FY21) in total APE, while the mix of non-ICICIBC stood at 11% as of 1HFY22. The share of direct channel was stable ~13%.

* On the cost front, OPEX (including commissions) grew ~21% YoY. The total expense ratio (cost/TWRP) stood at 16.2% (v/s 13.9% in 2QFY22). In 1HFY22, the total expense ratio stood at 17.8% (v/s 14.3% in 1HFY21). Cost/TWRP in the Savings business stood at 11.8% (v/s 8.8% in 1HFY21).

Highlights from management commentary

* Re-insurers have indicated another price increase. IPRU will pass on the entire hike to customers, and does not expect any material impact on margin.

* In the last few quarters, IPRU adopted an aggressive stance in gaining share in the Group business. The focus has been on large corporates as the employee vaccination rate is higher. Also, robust trends continue in the Credit Life segment.

* There is a structural long-term play in the Retail Protection business, which would be unaffected by the price increase.

Valuation and view

IPRU has maintained strong traction in premium growth, led by a recovery in ULIP, while healthy momentum continues in the Non-Linked and Annuity segment, backed by a strengthened distribution. The share of banca (excluding ICICIBC) rose to ~11% v/s 5.1% in FY20. The increase in agent recruitment and adding of new ecommerce players will continue to support premium growth. VNB growth moderated in 2QFY22 affected by weak Protection trends.

We expect VNB margin to remain stable as growth trends remain steady and Protection growth recovers. We estimate IPRU to deliver ~29%/32% CAGR in new business APE/VNB growth over FY21-24E, led by improving margin (29% by FY24E), thus enabling an improvement in operating RoEV to ~17%. We maintain our Buy rating with an unchanged TP of INR780/share (2.7x 1HFY24E EV).

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