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Flat premium income growth, margins continue to contract

Weak premium income growth: ICICI Prudential Q3FY24 net premium income increased by 4.9% YoY to Rs 9,929 Cr which was mainly led by first year premium growth of 11.3% YoY. Income from investment was the driver for growth with 111.3% YoY to Rs 16,315 Cr. APE/NBP both increased by 4.8% YoY, however, declined by 7.5%/5.6% QoQ. Commission expenses and expenses of management (EOM) dragged down the profitability during the quarter; hence, PAT reported a growth of 2.4% YoY to Rs 227 Cr. The commission expense is due to the re-design in commission structure, pursuant to the IRDAI guidelines across all channels.

Unit linked and annuity plans see traction: Unit linked products continue to interest the customers as the product recorded growth of 8.7% YoY in the APE. The increase in products mix seemed highly skewed towards par products and unit linked as compared to the non-par products. Along with unit linked products, annuity products also saw a growth of 17.3% YoY. On the overall APE mix, unit linked products and annuity products increased by 162bps/68bps YoY while other products saw a decline.

Fall in VNB Margins: As the product mix saw increase of unit products and annuity products, the effect of such shift had an effect on the VNB margin which declined by 1106bps YoY to 22.9%. The management said that it faced competitive pressure in the non-par and annuity segments which led to compression of margins.

Balanced distribution mix: The company saw an increase in sale of premiums in the agency channel which was due to capacity addition in the previous quarter. The agency channel contributed 30.3% in the overall APE mix with a growth of 194bps YoY. With regards to the bancassurance, the share of ICICI Bank in the bancassurance channel stood at ~13-14% of the overall APE mix while the contribution of other banks stood at 11% of the APE mix which has grown by 11% YoY. The bank has strategic partnership with banks which helps in diversification of channel mix and penetrate in rural markets.

Positive guidance going forward: The management expects more than 10% YoY growth in APE which will be driven by the combination of products, investment in channels, initiatives taken to products and capacity addition. The company has invested in the proprietary channel and expects that VNB growth will be driven by the growth in APE. The management remains focus on providing products to customers which suits their needs and in line with this, they launched credit life product which saw an APE growth of 20% YoY and will continue to drive growth going forward.

Valuation & Outlook: We remain positive on ICICI Prudential which is driven by its diversified distribution channel, growth in retail premium and its product launches. The company expects to see double digit growth in APE in Q4FY24 along with stabilizing margins going forward. However, in the near term it is facing challenges due to low premium growth, decline in margins and increasing commission costs. Factoring this, we revise our target price downwards to Rs 577 while maintaining a Buy rating valuing the company at 1.5x of its FY26E embedded value per share

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