Buy ICICI Prudential Life Insurance For Target Rs.780 by Motilal Oswal Financial Services Ltd
Miss across key parameters; margin contracts to 21.2%
Minimal impact of surrender charges
* ICICI Prudential Life Insurance (IPRU) reported new business APE growth of 28% YoY to INR24.4b (6% miss). For 9MFY25, APE grew 28% YoY to INR69.1b.
* VNB margin for the quarter stood at 21.2% vs. our estimate of 23%. Absolute VNB grew 19% YoY to INR 5.2b (13% miss).
* For 3QFY25, IPRU reported a 43% YoY growth in shareholder PAT to INR3.2b (27% beat). For 9MFY25, it reported a PAT of INR8b (+18% YoY).
* Management is confident in its well-diversified distribution network along with multiple levers available to achieve alpha over the market in terms of premium growth. The ongoing focus would remain on VNB growth, which will primarily depend on APE growth.
* Considering IPRU’s 3Q performance, we cut our APE growth and VNB margin estimates. For FY25, we expect new business APE/VNB/PAT to grow 23%/ 15%/37% YoY to INR111.5b/INR25.6b/INR11.7b. Going forward, the company’s ability to sustain strong premium growth and improve VNB margin will be crucial. Reiterate BUY with a TP of INR780 (based on 1.7x Sept’26E EV).
VNB margin contracts; costs on a declining trajectory
* IPRU’s gross premium grew 23% YoY (5% miss) to INR126.6b. Renewal premium was flat YoY (11% miss) at INR60.9b.
* The 170bp YoY dip in VNB margin to 21.2% was owing to the rising share of ULIPs in the overall product mix (49.2% of 3QFY25 vs. 44.4% in 3QFY24 APE mix). Further, the company sourced a lumpy group fund premium during the quarter, which was in the linked segment. The momentum in ULIPs has been sustained in 4QFY25 so far.
* Retail protection and annuity, the key focus areas for IPRU, experienced strong growth of 40% and 50% YoY, respectively. The share of retail protection/annuity in APE was 6.0%/7.5% vs. 5.5%/6.4% in 3QFY24.
* Commission expenses grew 10% YoY to INR11b. However, the implementation of the new commission structure across most of the channel partners led to an 11% sequential decline in expenses.
* Total expenses declined 85% YoY to INR38.9b, largely due to changes in actuarial liabilities.
* On the distribution front, agency/direct channels experienced strong growth of 26%/23.1% YoY. With the bancassurance share at 25%, and within that, the share of ICICI Bank being even lower, the company is relatively better placed in case any bancassurance-specific regulations are announced.
* On a premium basis, YoY persistency improved across all cohorts. 13th/49th/61st month persistency stood at 85.8%/66.8%/63.1%.
* AUM grew 8% YoY to INR3.1t, while the solvency ratio stood at 211.8%.
Highlights from the management commentary
* APE grew 27% YoY, but a mix shift toward lower-margin products adversely impacted VNB. However, compared to 1H, there has been a positive movement for 9M.
* Post-surrender guideline changes, different partners have agreed to different structures aligned with their opex requirements and separate business models. Pending discussions will be over in a few weeks.
* A slowdown in the credit life business has been largely due to the ongoing challenges in the MFI segment. However, the outlook is gradually improving. Credit life business contributed 38% of the protection business, within which MFI business contributed 45%.
Valuation and view
IPRU’s VNB margin has been under pressure during the quarter, mainly owing to the shift in product mix (higher share of ULIPs). In terms of surrender charges, the company has already implemented changes in the commission structure with most of the channel partners, and the impact is reflected in the sequential decline in commission costs. Considering IPRU’s 3Q performance, we cut our APE growth and VNB margin estimates. For FY25, we expect new business APE/VNB/ PAT to grow 23%/15%/37% YoY to INR111.5b/INR25.6b/INR11.7b. Going forward, the company’s ability to sustain strong premium growth and improve VNB margin will be crucial. We expect APE/ VNB to grow at a CAGR of 19%/18% during FY24-27. Reiterate BUY with a TP of INR780 (based on 1.7x Sept’26E EV).
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