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MOSL: ICICI PRUDENTIAL LIFE INSURANCE (INITIATING COVERAGE)-Moving up the profitability curve

ICICI Prudential Life Insurance (initiating coverage): Moving up the profitability curve

(IPRU IN, Mkt Cap USD8.2b, INR389, TP INR480, 23% Upside, Buy)

 

ICICI Prudential Life Insurance (IPRU) is amongst the market leader in the private sector life insurance space, aided by its strong brand, distribution capabilities and product portfolio. It has increased its market share in retail weighted premium to ~12% in FY18 (~6% in FY12) and has alongside reported sharp improvement in persistency ratios. This coupled with change in product mix in favor of protection business and strong cost control has enabled healthy margin expansion (16.5% VNB margin in FY18 v/s 10.1% in FY17). We expect margins to improve further to 18.2% by FY20E, boosting average operating RoEV to ~20% over FY18-20E. We value IPRU at INR480 per share using P/EV multiple of 2.7x (implied new business multiple of 21x). Initiate coverage with BUY.

 Growth leadership to sustain; diverse distribution gives distinct advantage

• IPRU has delivered ~18% CAGR in new business APE over FY15-18 aided by its robust distribution mix. Unlike other large bancassurers, IPRU has a balanced premium sourcing mix between bancassurance, agency, and direct sales channel. The strong distribution capability will thus enable IPRU to maintain healthy momentum in new business growth.

 Operating metrics improving; margin gap with peers has narrowed

• IPRU’s persistency ratios have shown marked improvement over past few years. This coupled with improvement in cost ratios and favorable product mix has aided steady margin expansion (16.5% in FY18 v/s 10.1% in FY17). We expect further expansion in new business margins from 16.5% to 18.2% by FY20E.

 Strongly positioned in ULIP products; sensitivity to tax rate has reduced

• IPRU has built a strong franchise in ULIP products (>80% of total new business APE) and yet it has been able to report steady expansion in margins. Owing to improved profitability the company’s sensitivity to tax-rate has also reduced significantly while dominance of customer friendly ULIP product has helped insulate it from potential regulatory changes on traditional products.