IGI Logo

Strengthened distribution and product mix to drive growth

Higher COVID-19 claims drives shareholders’ losses

* IPRU posted ~48% YoY growth in total APE, led by healthy (66%/~164%) trends in the Non-Linked Savings/Annuity business, while linked APE growth bounced back strongly (49%). Growth in the Protection segment was mainly aided by Credit Life/Group term, while Individual Protection saw a decline. Absolute VNB growth was robust (~78% YoY, 15% beat), with VNB margin improving sharply to 29.4% (500bp YoY) v/s 25.1% in FY21.

* It reported a shareholders’ loss of ~INR1.9b on account of higher COVIDrelated provisions and claims settlement. It settled total gross COVID-19 claims of ~INR11.2b over 1QFY22 (3.2x increase over FY21). It has created provisions of ~INR5b (Mar’21: INR3.3b) towards future COVID-19 claims.

* We estimate IPRU to deliver ~36% CAGR in VNB over FY21-23E, led by robust premium growth, buoyed by new partnerships and product segments, thus enabling operating RoEV of ~17% over FY21-23E. We maintain our BUY rating.

Sharp improvement in VNB margin; robust trends in the Non-Linked segment continues

Net premium income grew by ~19% YoY, led by a 40%/89% growth in the regular/single premium business. Thus, New business premium (NBP) grew ~71% YoY. However, renewal premium trends remain muted (flat YoY). IPRU reported a shareholders’ loss of ~INR1.9b on account of higher COVID-related provisions and claims settlement.

* Total APE grew 48% YoY led by a 66%/~164% growth in the Non-Linked Savings/Annuity business. Growth in the Linked Savings business bounced back strongly (49% YoY). Growth in the Protection segment (26% YoY) was led by Credit Life/Group term, while Retail Protection declined in 1QFY22. The share of Protection/Annuity rose to 22.1%/~5% (v/s 16%/~4% in FY21), while that for ULIP fell further to ~44% (v/s 57% in FY21). The management sees continued momentum in business growth, led by Non-Linked/Annuity and Group Protection in the near to medium term.

* COVID-19 update: It settled ~INR11.2b in total claims on account of the pandemic in 1QFY22 (a 3.2x increase over FY21), while settled claims net of reinsurance is INR5b (v/s ~INR2b over FY21). It held total provisions of INR4.98b (Mar’21: INR3.3b) towards future COVID-19 claims, including IBNR (Incurred but not reported) at the end of Jun’21. Thus, it made provisions of ~INR1.7b during 1QFY22.

* It posted robust VNB growth (78% YoY) of INR3.6b, with a sharp (500bp) improvement in VNB margin to 29.4% v/s 25.1% in FY21, aided by a product mix change towards higher margin segments (Protection/Non-Linked).

* Persistency trends improved by 60bp in the 13th month, while remaining stable in 25th/49th month. On a YoY basis, persistency trends have improved across cohorts.

* On the distribution side, the share of Banca channel in total APE stood at 38.6% (v/s ~42% in FY21), with the share of ICICI Bank declining to ~28% (v/s ~31% in FY21). The mix of non-ICICI Bank banca contribution stood at 11% in total APE. The share of the Direct channel has increased to ~13%.

* On the cost front, opex grew at 55% YoY, while commissions grew 31%. The growth in expenses has been in line with new business premium growth. Costto-total weighted received premium (TWRP) rose to 20.1% (v/s 14.8% in FY21, due to lower discretionary expenses). Cost/TWRP in the Savings business stood at 11.9% (v/s 9.6% in FY21).

Highlights from the management commentary

* Protection segment: There is a strong opportunity to offer Group term plans to large corporates as vaccination of their employees has improved sharply. Also, Credit Life has returned to pre-COVID levels. Therefore, the share of Group Protection has increased, while short term headwinds continue in Retail.

* Business momentum in ULIP has recovered now, and the management expects its share to remain around current levels.

* It continues to hold its guidance of doubling FY19 VNB by FY23, aided by: a) opportunity in the long-term Savings business, b) optimizing product mix along with business quality parameters such as persistency and cost ratios, and c) increasing focus on new distribution partnership

Valuation and view

The recent strategy changes made by IRPU in its product mix, with a higher focus on non-linked segments, backed by strengthened distribution, are driving healthy premium growth. The share of banca (excluding ICICI Bank) increased to ~11% v/s 5% in FY18. Persistency rate has improved, reflecting strength in business quality. We expect this trend to continue, aided by a higher mix of the Non-Linked Savings/Protection business, both of which have a higher persistency rate.

However, profitability has been affected due to higher settlement of COVID-19 claims (3.2x rise over FY21) and increased provisions. We estimate IPRU to deliver ~32%/36% CAGR in new business APE/VNB growth over FY21-23E, led by improving margin (29% by FY23E), thus enabling an improvement in operating RoEV to ~17%. We maintain our Buy rating with a TP of INR700/share (2.6x FY23E EV).

To Read Complete Report & Disclaimer Click Here

For More Motilal Oswal Securities Ltd Disclaimer http://www.motilaloswal.com/MOSLdisclaimer/disclaimer.html SEBI Registration number is INH000000412

Above views are of the author and not of the website kindly read disclaimer