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Persistency ratios steady; on track to double VNB over FY19-23E

* ICICI Prudential Life Insurance (IPRU) posted a flattish new business APE (1% YoY growth) in 2QFY23 as strong growth in group protection and non-linked savings was offset by weak performance in ULIPs and group savings. However, APE grew 10% YoY in 1HFY23 to INR35b.

* VNB grew 21% YoY to INR6.2b (8% beat), primarily driven by a 502bp YoY expansion in VNB margin to 31.1% in 2QFY23. For 1HFY23, VNB rose 25% YoY to INR10.9b; VNB margin also expanded 372bp to 31.0%.

* We marginally cut our APE estimates for FY23/24 but estimate IPRU to deliver 23% CAGR in VNB over FY22-24. This will be driven by a combination of premium growth and slight improvement in margins, thereby enabling operating RoEV at ~17% in FY24E. Maintain BUY with a revised TP of INR600 (premised on 2x FY24E EV).

Balanced distribution mix; broad-based improvement in persistency ratio

* IPRU’s net premium income increased 3% YoY in 2QFY23 propelled by a strong show in non-linked savings and group protection. PAT increased 37% YoY to INR3.5b in 1HFY23.

* The share of protection in overall mix improved 485bp YoY to 19% in 2QFY23. However, this was driven by group protection as sales in retail protection remained weak. Sequentially, though retail protection stabilized.

* Annuity APE saw a solid growth of 69% YoY in 2QFY23. On an NBP basis, it formed 17% of mix. Further, the pension subsidiary is also scaling up well with 36% growth in AUM to INR132b. Due to volatile capital markets, ULIPs declined 19% YoY and impacted overall premium growth adversely.

* VNB grew 21% YoY to INR6.2b in 2QFY23 led by optimal business mix with a greater share of higher margin products.

* On the distribution side, banca channel continued to remain weak led by declining share of ICICI Bank. However, this was offset by new bank partnerships, agency and addition of non-bank tie-ups. ICICI Bank now contributes 17% to overall APE of IPRU.

* Persistency improved across all cohorts with 13th -month improving 90bp QoQ to 85.9% while 61st -month persistency improved 940bp QoQ to 61.2%.

Highlights from the management commentary

* IPRU is on track to achieve its stated guidance of doubling the absolute level of FY19 VNB by FY23, guided by its 4P strategy. This implies a 23% growth in FY23.

* Non-linked savings, protection and annuity segments are contributing to growth.

* The strategy of having a wider product suite makes it easier to add new agents and partners.

Valuation and view

IPRU has maintained a steady traction in VNB growth led by healthy product mix and APE growth. The share of banca (excluding ICICI Bank) has increased to 14% from 4% in FY19, thus supporting the growth and diversification in distribution mix. The increase in agent recruitments and strong pace of adding new partnerships will continue to support premium growth. Further, the strategy of approaching customers with a wider product bouquet through all channels will also boost premium growth. We estimate IPRU to deliver 23% CAGR in VNB over FY22-24, led by a combination of premium growth and slight improvement in margins, thereby enabling operating RoEV at ~17% in FY24E. Maintain BUY with a revised TP of INR600 (premised on 2x FY24E EV).

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