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Higher margins lift FY23 RoEV; diversified mix to drive sustainable growth

ICICI Prudential Life Insurance (IPRU) reported Rs27.7bn VNB in FY23, achieving the target set by the company in FY19. While this has been achieved largely through improvement in margins (90% driven by change in margin and 10% on account of growth in APE), it was also post covid challenges and decrease in parent bank channel mix from 51% in FY19 to 14% in FY23. Key growth levers ahead include: (1) Possible improvement in retail protection (20/28% QoQ growth in Q3/Q4FY23) and (2) better traction in partnerships (IPRU added 13 new banks and 113 new partnerships in FY23). Two key business determinants: (1) Impact of limited tax benefits on insurance income FY24 onwards, which as per the company is not a major issue, as per their observations and (2) onboarding of Mr Anup Bagchi (currently Executive Director of ICICI Bank) as MD and CEO of IPRU Life wef 19th Jun’23. Maintain BUY. Key risks: Lower demand in non-par segment on a high base, and weakness in retail protection.

* Maintain BUY with the revised target price of Rs653 (Rs643 earlier), or 2x FY25E EV (2.4x FY24E EV). We factor in VNB margin of 30% each with APE growth of 12%/15% for FY24E/FY25E, respectively. This may result in an embedded value (EV) of Rs470bn by FY25E.

* IPRU witnessed accelerated growth across channels (ex-parent bank): Nonparent banca (43/24% YoY) agency (57/25% YoY), direct (19/7%) and partnership distribution (67/78%) displayed strong performance in Q4FY23/FY23. IPRU’s parent channel mix has come down significantly from ~51% in FY19 to 25% in FY22 and 14% in FY23 (9% in Q4FY23). Parent banca channel is doing roughly Rs1bn premium per month and the degree of dependence of IPRU Life on the same is small. While there was no discussion on whether this channel can show more growth ahead, we observed that there was an appreciable air of confidence in being able to perform irrespective of any particular channel. Premium growth is strategically being driven by (1) focus on agency and direct-to-consumer channels, (2) continued expansion of bank partnerships (recently tied up with Ujjivan Small Finance Bank), (3) sustained growth in annuity line of business. FY23 retail distribution mix is well diversified with a) 39 bank partnerships with access to more than 17,500 branches, b) recruitment of 33.8k agents during FY23, and c) addition of 113 new partnerships in FY23 taking the total to 908 partnerships.

* Are we overestimating the concerns on insurance income taxation? Management does not seem to attach any weightage to the possible demand impact on insurance post the gradual removal of tax exemption on income and/or premium. Management highlighted its product proposition continues to remain strong which may help in sustainable growth going forward, and hence, the impact due to change in tax regime is likely to remain limited. However, the real trend will be visible in H1FY24.

* 28% QoQ growth in retail protection: Retail protection APE grew 28% QoQ to Rs1.1bn. The strategy remains to (1) continue leveraging the opportunity in group protection, (2) focus on retail protection growth, (3) increase risk retention for greater flexibility in a calibrated manner. In terms of total APE, share of linked APE has declined from 48% in FY22 to 36% in FY23 while non-linked (including annuity) has increased from 31% to 43% during the same period. Group savings / protection APE mix has largely remained stable at 3.6%/17% in FY23. IPRU also launched two par products, ICICI Pru Sukh Samruddhi and ICICI Pru Gold plan in FY23.

* Persistency improvement is notable: 11MFY23 13M/61M persistency ratios improved 90/1130bps YoY to 86.6/65.7%.

* VNB margin continues to improve: FY23 VNB margin improved by 400bps YoY to 32%. Of the 400bps improvement in margin, 350bps was driven by change in business mix. Linked savings margin dipped from 9% to 6% purely on account of shift in yield curve and higher expense allocation. Management highlighted current ULIP margins are same as two years back while protection margin improved despite increased mix of group protection. Non-linked savings margin improved from 33% to 37%.

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