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Positive commentary fosters confidence; maintain Buy
* IPRU reported gross written premium (GWP) of Rs101.6bn (+16.4% yoy, +34.3% qoq), almost in line with our expectation despite the beat in new business premium (NBP) and in annualized premium equivalent (APE) on slow renewal growth.
* Value of new business (VNB) margin at 17% was 10bps lower than Emkay est. (+50bps yoy and flat ytd). Product mix helped margins by 220bps yoy, while assumption change contributed 90bps yoy; higher acquisition expenses led to a 260bps squeeze in margins.
* Persistency (excl. single premium) expanded for all major cohorts with 13th month persistency up by 30bps yoy to 86.1%, and 49th month persistency up by 110bps yoy to 63.9%. Sequentially, FY19 over 9M19 saw 13th month persistency picking up 200bps.
* IPRU seems to have started stabilizing its premium growth, supported by smaller ticketsize ULIPs and larger share of higher-margin protection segment. We maintain Buy rating with a revised TP of Rs425, implying 2.1x FY21E EV.
Larger protection segment boosts VNB
ICICI Prudential Life Insurance Company (IPRU) reported gross written premium (GWP) of Rs101.6bn (+16.4% yoy, +34.3% qoq), almost in line with our expectation despite the beat in new business premium (NBP) of 10% yoy to Rs34.6bn and 4.6% beat in annualized premium equivalent (APE) to Rs23.6bn on slower growth in renewals. The protection segment expanded 62% yoy in FY19 to Rs7.22bn, contributing 9.3% to APE (+350bps yoy). However, on superior margins, it contributed about 60% of the overall VNB. Of the protection pool, retail protection contributed 60%, followed by credit life at 22% and group at 18%.
NBS drags profitability
IPRU witnessed a decline in surplus with higher new business strain (NBS) in non-par protection and annuity business leading to a much lower profit of Rs2.6bn vs. Emkay estimate of Rs3.7bn. We cut our FY20E/FY21E EPS by 12.7%/17.6%. The higher acquisition cost in protection and reserving requirements in the annuity business should keep NBS high until operating leverage, in terms of higher APE growth, starts kicking in.
Embedded value (EV) walk-down:
IPRU reported return on embedded value (ROEV) of 20.2% (-250bps yoy). However, removing operating assumption change impact from both the years, it has increased by 70bps yoy to 18.7%. The 220bps positive impact came from a change in operating assumption in FY19, led by 1) reduction in maintenance cost/unit backed by improving persistency; 2) reduction in surrender rates in ULIPs beyond 5 years; and 3) effective tax rate benefit.
Outlook and valuations
IPRU seems to have started stabilizing its premium growth with the help of smaller ticket-size ULIPs and an increase in the share of high-margin protection segment. We maintain our Buy rating with a revised TP of Rs425, implying 2.1x FY21E EV. Volatility in equity markets and higher surrenders are key risks for IPRU.
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