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Much encouraging trends
* Margins remain flattish but strong gains on EV which grew by 15% YoY on back of better experience in persistency & mortality
* Higher business strain and expenses from higher growth hits profitability
ICICI Pru Life’s business improved in Q4FY19 with APE growing by 11% YoY ending the fiscal 2019 with flattish growth. Growth continued to be led protection segment in the credit life and retail, while savings saw improvement as well on back of immediate annuity segment. Within mix of products ULIP mix continued to consolidate as company is focusing on widening the base. VNB margins remained at flattish levels of 17% but new disclosure on VNB indicated protection contribution incrementally is much higher with overall being at 60% of VNB. As we had expected growth impact from the structural changes to be higher and should take some quarters to stabilize and then followed by improved growth, however margin improvement, in our view, will be slower given the cost strain. We retain BUY with revised TP of Rs511 (from Rs471) post roll over based on 2.6x Mar-21EV
* Business growth improves led by protection:
Overall APE grew by 11% YoY in Q4FY19 leading to flattish growth in FY19. Growth was led by protection which grew by 21% YoY (62% YoY for FY19) and mainly from retail protection (61% in FY19) and credit life business. ULIP growth also saw some pick up in Q4FY19 but overall mix continued to move lower as base gets widened through lower ticket sizes. Also the annuity business continues to grow well (doubled from last FY) which is mainly the immediate annuity business. Company expects growth to improve as channels & products are aligned to customer preferences and as base of customer widens.
* EV grows 15% YoY while VNB margins steady:
IPru Life’s EV grew by 15% YoY (lower than growth of 16% YoY in FY18) which was mainly on better unwind rate (v/s our estimate), small benefit from VNB and higher benefit from operating assumption changes in persistency (lower surrenders) and mortality experience. Although, overall VNB margin was steady at 17% v/s 16.5% in FY18 on back of slower growth, higher cost strain from fast growing protection business and despite lower surrenders. Company targets to double VNB in next 3-4 years which should be led from protection business which incrementally is contributing 85-90% of NB with overall share at 60% in FY19 and hence should see steady margin improvement going ahead.
* Opex leads to strain in profitability:
IPru Life saw higher opex growth especially in end of FY19 as higher business growth led to higher negative strain impacting profitability. Company expects as growth picks up cost efficiency is likely to lower strain of such cost on business. While on persistency, 9MFY19 has seen dip mainly on 13th month which has seen improvement based on FY19. We are higher on APE CAGR assumptions of 14% in next two years with margins improving to 18.6% by FY21.
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