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MOSL: ICICI PRUDENTIAL LIFE INSURANCE (Buy)-Robust performance-VNB margins a positive surprise

ICICI PRUDENTIAL LIFE INSURANCE: Robust performance; VNB margins a positive surprise

(IPRU IN, Mkt Cap USD8b, CMP INR382, TP INR475, 24% Upside, Buy)

 

• 1QFY20 PAT at INR2.8b came in marginally higher than our estimate of INR2.7b. Gross premium was up 14.7% YoY, mainly led by robust growth in single premiums. Group premiums grew 105% YoY to INR8.2b.
• Total APE grew 5.3% YoY to INR14.7b led by robust 88% YoY growth in Protection APE to INR2.1b, even as Savings APE declined 2.1% YoY to INR12.5b. Share of Protection in total APE improved further to 14.6% (8.2% in 1QFY19) while share of ULIPs in total APE declined ~860bp YoY to 71.2%.
• VNB margins increased ~350bp YoY to 21% due to improvement in product mix, which resulted in 26.6% YoY growth in the VNB to INR3.1b. Growth in the VNB was mainly led by Retail and the Group Protection business (Management expects to double the VNB over the next 3-4 years). Thirteenth month persistency declined 140bp YoY to 84.4% (330bp YoY improvement in 61st month persistency). According to the sensitivity analysis disclosures, a 100bp change in the interest rate could impact the VNB/EV by ~4.4%/~2.0%.
• Total operating expenses (incl. commissions) grew marginally by 4.1% YoY, even as commission expense declined 5.2% YoY aiding new business margins. Cost to weighted received premium, thus, declined to 17.0% in 1QFY20 from 17.5% in 1QFY19 while cost ratio in savings declined from 13.7% in 1QFY19 to 11.3% in 1QFY20. The share of agency/direct channel in the distribution mix stood at 21.2%/12.8%.
• Other highlights: (a) The share of Banca in the distribution mix declined 320bp to 52.4%, (ii) Total AUM grew 15% YoY to INR1.6t with debt equity mix of 52%:48%, (c) Solvency ratio stood at 217% (235% as at 1QFY19).
• Valuations and view: We estimate ~29% CAGR in the VNB over FY19-21E led by 17% CAGR in new business APE while operating RoEV is expected to sustain at ~20%. Thus, we estimate VNB margins to recover to ~22% by FY21E while operating metrics improve further. Despite the stock's outperformance over recent months, it is still trading at attractive levels of 1.8x FY21E P/EV (LTA of 2.5x), and thus, offers 24% upside to our fair value of INR475/share (2.3x FY21E EV). Maintain Buy.