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Premium/VNB growth healthy; margins moderate sequentially

Persistency trends improve across cohorts

* ICICI Prudential Life Insurance (IPRU) reported a strong growth in new business APE (+26% YoY; 6% miss) in 4QFY23, led by strong traction in the traditional savings and annuity business even as the ULIP business declined. APE rose 12% YoY to INR86.4b in FY23.

* VNB grew 36% YoY to INR10.6b (14% miss), while VNB margin declined 190bp QoQ to 32.0% in 4QFY23. For FY23, VNB rose 28% YoY to INR27.7b, fueled by VNB margin expansion of 400bp to 32.0%.

* We estimate IPRU to deliver a 17% CAGR in VNB over FY23-25. This will be driven by a combination of premium growth and slight improvement in margins, leading to operating RoEV of ~18% over FY23-25E. Maintain BUY with a TP of INR550 (premised on 1.7x Sep’24E EV).

Non-par business drives total growth; new partnerships to aid incremental growth

* IPRU’s gross premium grew 11% YoY to INR129.9b (6% beat) in 4QFY23, with renewal/single premium up 6%/7% YoY and first-year premium up 33% YoY. PAT grew 27% YoY to INR2.3b in 4QFY23 (15% beat; +7.5% YoY at INR8.1b in FY23).

* APE grew 26.5% YoY to INR33b (6.5% miss), led by strong traction in the traditional savings and annuity business (+102% YoY) even as the ULIP business declined 24% YoY due to volatile capital markets.

* The protection business was flat YoY but grew 34% QoQ, with the mix of protection in the overall mix standing at 13.8% in 4QFY23.

* VNB grew 36% YoY to INR10.6b in 4QFY23 (14% miss), while VNB margin declined 190bp QoQ to 32% (up 230bp YoY). For FY23, VNB rose 28% YoY to INR27.7b, aided by VNB margin expansion of 400bp to 32.0%.

* On the distribution side, the banca channel remained weak due to a decline in the share of ICICI Bank. However, this was offset by new bank partnerships, agency and the addition of non-bank tie-ups, which grew at a healthy pace. ICICI Bank now contributes 14% to overall APE of IPRU.

* Cost-TWRP escalated 290bp YoY to 21.5% in FY23. Savings business costs increased 140bp to 14.2% in FY23.

* On the persistency front, all cohorts witnessed an improvement. The 13th month persistency improved 50bp QoQ to 86.6%, while the 61st-month persistency improved 150bp to 65.7%

Highlights from the management commentary

* IPRU does not expect commissions/expenses to go up in the current regulations as the key intent of the regulator is to bring down the cost.

* The Union Budget move to restrict section 10(D) benefits to INR0.5m should not have a material impact. ULIP taxation too did not hurt the product mix. The company is preparing for a regime where no tax incentives will be given.

* A composite license will be good for customers, and IPRU will look to get into 1) Health insurance, 2) wellness and allied business, and 3) InsurTech and FinTech businesses.

* Overall margins could get a boost from a higher share of protection, and within that a higher share of retail protection v/s group protection.

Valuation and view

IPRU has maintained healthy traction in VNB growth by achieving its stated guidance, led by improving product mix in favor of higher-margin products, which resulted in a robust margin of 32%. The share of banca (excluding ICICI Bank) increased to 16% from 4% in FY19, thus supporting growth and diversification in the distribution mix. The increase in agent recruitments and the strong pace of new partnership additions should boost premium growth. Further, the strategy of approaching customers with a wider product bouquet through all channels will also boost premium growth. Persistency too saw an improvement across cohorts. We estimate IPRU to deliver a 17% CAGR in VNB over FY23-25. This will be fueled by a combination of premium growth and slight improvement in margins, leading to operating RoEV of ~18% over FY23-25E. Retain BUY with a TP of INR550 (based on 1.7x Sep’24E EV).

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