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Business momentum upwards; valuations remain attractive

The big strategic achievement from FY21 for ICICI Prudential Life Insurance (IPRU) is the establishment of an ex-ICICI Bank product as well as distribution capability. Key effects of this strategy include: (1) Growth in non-linked savings portfolio by healthy 56% YoY in FY21, (2) introduction of guaranteed savings as well as deferred annuity products and (3) spurt in new distribution channels with ~600 partnerships including 23 banks and > 185,000 advisors. As such, despite ICICI Bank’s contribution declining to 31% of the overall APE which in turn declined 13% YoY, total FY21 VNB was flat at Rs16bn. Management aims to increase annual VNB by Rs10bn over FY22-23 (implied CAGR of 27%). Considering the turnaround in business momentum and attractive valuations (1.8x based on FY23E EV of Rs366bn), we upgrade the stock from Add to BUY.

* Becoming more diversified than peers? The question is absolutely pertinent for IPRU considering its current mix of distribution and products and VNB contribution. The company appears better prepared for more bottom-up approach to follow a demand-based business strategy as it offers the entire bouquet of retail protection, group term, credit life, annuities, linked as well as traditional segments.

The distribution mix (APE terms) of FY21 stood at banca (ICICI Bank): 31%, banca (others): 11%, agency:24%, direct: 13%, partnership distribution: 9% and group: 12% while product mix of APE stood at linked: 48%; non–linked: 31%, protection: 16%, group: 5%. VNB contribution in FY21 stood at protection: 53.4%, non-linked savings: 24.2% and linked savings at 22.3%.

* Protection pricing to remain unchanged as volume becomes a more important VNB driver in FY22/23. IPRU aims to reach Rs26.5bn VNB in FY23 which would imply an APE of Rs106bn in FY23 at 25% VNB margin. This would necessitate APE CAGR of 31% for IPRU Life between FY21-23E. Maintaining pricing (as indicated by IPRU in protection) can be beneficial to attain volume growth which should also benefit from better traction of new products and distribution channels harnessed in FY21. Total claims on account of Covid for FY21 were Rs4.59bn, while claims net of reinsurance were Rs2.64bn. Additional provision remains at Rs3.32bn towards Covid, not utilised so far but accounted in the EV walk.

* Operating performance has been incrementally positive with (1) positive persistency variation (Rs1.1bn) in FY21 which has also been driven by higher nonpar mix which has 13th month persistency of 94%, (2) lower cost ratios (100/80 bps YoY for total /savings business) in FY21 and (3) recovery in APE growth (27% growth in Q4FY21) with health trends witnessed till date in Q1FY22.

* Trading less than 2x FY23E P/EV irrespective of whether VNB falls short of the FY23E target of Rs26.5bn, upgrade from Add to BUY. Based on, 15% APE growth and flattish VNB margins, EV estimate for FY23 turns out to be Rs365.7bn after factoring a negative economic variance possible with increase in interest rates. Meeting the FY23 VNB target is a positive optionality.

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