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Business mix more balanced than ever; volume vs margin pose near-term quandary

ICICI Prudential Life’s (IPRU) business strategy has over the years diversified well enough to remove dependence on ULIPs, any particular bank as well as retail protection. This makes the business more resilient and flexible to adapt to changing consumer demand and was the main reason for our multiple upgrade last quarter. However, we believe IPRU has to continue this momentum and achieve annual APE/VNB levels of Rs100bn/Rs20bn levels for further re-rating (H1FY22 APE / VNB was Rs32bn/8.7bn). Near-term margin is likely to be range-bound with retail protection continuing to be impacted by supply-side constraints and pickup in growth in ULIPs. As such, VNB growth will depend more on volumes. Yet, the company’s strategy to maintain protection margins by passing on any reinsurer price hike may lead to lower volumes. Q2FY22 protection mix declined to ~14% from 22% in Q1FY22 (IPRU remains leader in terms of total sum assured) and ULIP mix improved to 48%. Maintain ADD with a revised target price of Rs730 (earlier: Rs661).

* Regarding covid provisions: Total covid claims accounted in Q1FY22 was Rs5bn while an additional Rs5bn remains in provision. The provision thus stands at Rs8.6bn as accounted in H1FY22 (implying additional provision of Rs3.6bn in Q2FY22) and Rs4.12bn in total provisions (implying Rs900mn drawdown from reserves). Covid claims accounted include claims paid as well as notified whereas the provisions include claims incurred but not reported, and extra reserves. The declining trend in covid cases and increasing vaccinations limit concerns on provision overrun.

* Much balanced product mix with improving persistency. In terms of total APE, savings APE mix has declined from 85% in FY20 to 83% in H1FY22 while that of protection APE has increased from 15% in FY20 to 17% H1FY22. Within savings APE, share of linked APE has declined from 65% in FY20 to 48% in FY21 and H1FY22, while non-linked share increased from 17% to 30% in the same period. Within protection, retail protection mix saw a sharp decline from 8% / 9% in FY20/FY21 to 3% in H1FY22 while group protection mix improved from 7% to 14% in the same timeframe. Persistency improved in all cohorts. 13M persistency improved from 84.8% in 11MFY21 to 85.1% in 5MFY21 while 61M persistency too improved from 49.8% to 51.6% in the same period.

* More even growth across distribution channels: Banca / agency/ direct / partnership / group channels registered growth of 30% / 41% / 49% / 39% / 59% YoY respectively in H1FY22. Share of banca in total APE has declined from 51% to 42% to 39.4% in FY20, FY21 and H1FY22. Share of agency has increased from 21% to 24% and group has increased from 8% to 12.3% to 15.4% in the same timeframe. Among initiatives, IPRU added 12,000 agents in H1FY22. In total, there are 23 banca and 700 partnerships as of now. Company is trying to ring-fence productive agents and increase the contribution from all partnerships. Within annuity, IPRU is targeting 52-58 years as a new customer segment.

* Maintain ADD with a revised target price of Rs730. We factor-in VNB margins of 26% / 27% with APE growth of 42% / 18% in FY22E / FY23E, respectively. At 25x new business value of Rs27bn in FY23E, our target price (TP) works out to Rs730. At our TP, the stock will trade at 2.8x FY23E P/EV (2.55x at CMP).

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