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1 BSE SENSEX S&P CNX 28,599 8,780 Issue summary Period September 19-22, 2016 Price band (INR) Size (INR m) No. of shares (m) MCap post issue INR 54-61b offer for sale 181.3m offer for sale INR b 16 September 2016 IPO Note Sector: Financials ICICI Prudential Life Offer price: INR Offer for sale The offer for sale (OFS) is for 181.3m shares at a price of INR At this price range, the total offer works out to be INR55b-61b, and the value of the company works out to be INR431b-479b. The OFS is by an existing investor (ICICI Bank) and there will be no dilution. Post issue, ICICI Bank s stake would reduce by ~12% to ~55%. The number of shares outstanding pre and post offer is 1.44b. About the company ICICI Prudential Life (IPRU) was incorporated in 2001 and is the largest private sector insurance player and the second largest overall, behind LIC, in terms of premiums. The company is owned 68% by ICICI Bank, 26% by Prudential Corporation, UK, 4% by Hasham Traders (Azim Premji), and the rest by other institutional investors and employees. Book running lead managers: BofA Merrill Lynch, ICICI Securities and CLSA Registrars: Karvy Computershare P Ltd Objects of the issue To provide liquidity to current shareholders Investment view Underpenetrated market and favorable demographics Even after opening up the insurance sector to private players in 2000, India is an underpenetrated insurance market. This is despite a 17% premium CAGR over the past 15 years. India s insurance penetration to GDP at ~2.6%, insurance density of USD43, protection gap of 90%+ (USD8.5t opportunity as of December 2014), rising working age population (1.5% PA), favorable and young demographics (28 years median age and 90% population below age of 60 by 2020), high financial savings rate of 40% of household savings (~7.5% of GDP) and insurance share in overall savings pool of just 19% augurs favorably for the development of the insurance sector. According to a CRISIL report, insurance growth in India over the next five years is likely to be 11-13%. Private players regaining market share The Insurance sector opened for private players in 2000 and within a span of 10 years, private players gained 52% market share in retail weighted received premium (RWRP), driven by ULIP. Share of ULIP in the industry product mix increased to 55% by FY10, largely led by private players, whose share stood at 83%. Post significant regulatory changes in 2010 and 2013 and muted capital, private players growth came under significant pressure and their market share declined to 38% in FY14. However, over the last two years, private players realigned operations (making them leaner and more efficient), focused on improving persistency (key to embedded value growth) and introduced changes in product mix. Consequently, not only has profitability improved, but growth too has returned. As a result, the market share of the private sector increased from 38% in FY14 to 52% in FY16. Alpesh Mehta (Alpesh.Mehta@MotilalOswal.com); / Piran Engineer (Piran.Engineer@MotilalOswal.com); Sunesh Khanna (Sunesh.Khanna@MotilalOswal.com); / Krishnan ASV (A.Krishnan@motilaloswal.com); Investors are advised to refer through important disclosures made at the last page of the Research Report. Motilal Oswal research is available on Bloomberg, Thomson Reuters, Factset and S&P Capital.

2 IPRU gaining market share on the back of ULIPs and strong distribution IPRU grew 23% during FY14-16 and its market share increased to 11.3% in the industry and 21.9% amongst private players. Post significant regulatory changes towards ULIP products and increased value proposition for customers, IPRU focused on ULIPs to drive growth and market share, despite lower profitability of this product. IPRU capitalized on its low cost strong bancassurance tie-ups with ICICI Bank (4,500+ branches), Standard Chartered Bank (100 branches), local area banks (new SFB addition), and direct marketing initiative to drive growth. The share of bancassurance and direct marketing in overall distribution increased to 59% and 10%, respectively from 37% and 4%, respectively in FY12. Significant improvement in persistency and cost ratios Post regulatory changes, IPRU focused on cutting the flab in the system and reduce the opex ratio. Overall opex-to-rwrp reduced to 13.1% in FY16 from 17% in FY12. With regulatory changes and focus on low cost bancassurance channel, commission ratio has declined to 3.2% from 4.3% in FY12. Strong growth and operating efficiency led to reduction in other opex ratio to 9.9% from 12.7% in FY12. Higher persistency is the key for improvement in profitability and embedded value (EV a key valuation parameter). IPRU has the best 13 th month amongst private players. The 61 st month persistency has improved sharply, which is leading to better profitability and higher EV growth. High payout ratio; priced at x FY16 EV Improvement in profitability and healthy solvency ratio of ~320% is leading to strong dividend payout. IPRU has a stated policy of 40% dividend payout ratio; over and above that, the board also announces special dividend. Over the last two years, overall payout ratio stood at 61% and 88%. On FY16 dividend, dividend yield works out to % at the price band. As per the EV (Milliman Advisors) of INR139b for FY16, the issue is priced at x EV. With an RoEV of 15.3%, IPRU is amongst India s most profitable insurers. Financials snapshot FY12 FY13 FY14 FY15 FY16 Net Premiums (INR b) Growth (%) (22) (4) (8) APE (INR b) Growth (%) (37) 14 (22) Linked AUM (INR b) Total AUM (INR b) ,030 Commission ratio (%) Operating expense ratio (%) Share of ULIPs (%) Persistency % 13th month th month st month Source: Company 16 September

3 Company description Incorporated in FY01, IPRU is the second largest insurer in India and the largest private sector insurer by premiums as well as AUM. It is a joint venture between ICICI Bank and Prudential Corporation, UK. ICICI Bank holds 68% stake in the JV, while Prudential holds 26%. The rest is held by institutional investors and employees. Since inception, the company has grown leaps and bounds driven by increased distribution, wider product offerings and enhanced use of technology. Total premiums increased at 16% CAGR over the past decade. Its overall market share (individual APE basis) improved from 5.9% in FY12 to 11.3% in FY16, while its private sector market share improved from 16.1% to 21.9% over the same time period. Net premium growth moderated during FY12-14, led by higher surrenders (due to muted capital markets) and regulatory changes in 2010 and 2013 for insurance products Exhibit 1: Net premium growth bounced back over FY14-16 Premiums earned (INR b) Growth % (4) (8) (22) FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 Exhibit 2: Growth has resumed led by focus on Retail ULIP business APE (INR b) Growth (%) Exhibit 3: Sharp improvement in market share over FY12-16; capitalizing on strength of strong banca channel Overall (%) Private sector (%) (19) (37) FY11 FY12 FY13 FY14 FY15 FY16 FY12 FY13 FY14 FY15 FY16 1QFY17 16 September

4 Product mix weighted towards retail linked business Earlier, IPru was exclusively a ULIP player, but diversified its product offerings post ULIP regulations in 2010 IPRU s focus is predominantly on linked business. Unit linked insurance products (ULIPs) comprised 82% of retail APE in FY16. While the ULIP business was hit by regulations as well as subdued stock market performance over FY12-14, it has witnessed a strong uptick over FY14-16 from INR22b in FY14 to INR42b in FY16 (38% CAGR). Due to the high share of ULIPs in total premiums, the average policy size (individual annualized premiums per policy) is much higher than others and stood at INR85,607 in FY16. Exhibit 4: Trend in linked premiums Total Premiums (INR b) Growth (%) (12) (14) (30) FY11 FY12 FY13 FY14 FY15 FY16 Exhibit 5: Share of ULIPs in retail APE bounced back ULIP Par Non-Par FY10 FY11 FY12 FY13 FY14 FY15 FY16 Share of group business is negligible. The company has positioned itself more towards the individual segment as compared to group. Its strong brand pull and vast reach gives it a competitive edge over peers. As a result, retail annualized premiums earned account for ~98% of total APE. Exhibit 6: Share of individual APE IPru Life is predominantly a retail-focused player FY14 FY15 FY16 1QFY17 16 September

5 Capitalizing on the strength of strong banca channel Post regulatory changes Banca has emerged as the strong distribution channel. As per the management, while growth in this channel is higher, experience on persistency is also better. Due to the strong reach of its parent and distribution partner, ICICI Bank, the company has a widespread geographical presence (4500+ branches). Further company has tie up with Standard charted Bank (100 branches) and recently tied up with capital local bank (recipient of SFB licenses) Around 60% of the retail APE was sourced through this channel in FY16. The company also has the largest agency network after LIC comprising over 120,000 individual agents. Exhibit 7: Share of bancassurance in retail APE has been increasing Share of premiums from bancassurance and direct channels have been increasing Bancassurance Indiv agents Corp agents Direct FY14 FY15 FY16 1QFY17 Exhibit 8: Channel mix Comparison with peers (FY16) Indiv agents Banks Direct Others IPru Life HDFC Std Life SBI Life Max Life Kotak Mahindra Old Mutual Life 56% of premiums come from the top five states Exhibit 9: Share of largest states Others, 44 Maharashtra, 24 Gujarat, 7 New Delhi, 9 Karnataka, 6 Tamil Nadu, 8 16 September

6 Significant improvement in expense ratio Given the high share of Bancassurance in the distribution channels, IPRU has managed to keep its expense ratio best-in-class. Commission ratio (ratio of commissions to total premiums earned) declined from 4.3% in FY12 to 3.2% in FY16. In addition, total management expense ratio (includes commissions) declined from 17.0% in FY11 to 13.1% in FY16 and is best-in-class among peers. Enhanced use of technology coupled with high share of premiums from bancassurance have helped IPru achieve superior cost ratios compared to peers Improvement in cost ratios was driven by strong premium growth coupled with enhanced use of technology. The company focuses on five main initiatives to drive the digital agenda increasing digital marketing and sales; utilizing big data and machine learning techniques; building a modular information technology platform; digitizing sales and service processes; and partnering with organizations across the eco-system. The IT platform I-Neo+ has enabled a structured sales process, faster turnaround, less paperwork and improved efficiency. The percentage of new applications initiated through digital platforms increased from 65% in FY14 to 92% in FY16. Exhibit 10: Trend in commission ratio (%) Exhibit 11: Trend in total management expense ratio (%) FY12 FY13 FY14 FY15 FY16 FY12 FY13 FY14 FY15 FY16 Exhibit 12: % of new application & renewal premiums paid electronically New Renewal Exhibit 13: Retail APE per employee (INR m) Improvement in employee productivity FY14 FY15 FY16 1QFY17 FY14 FY15 FY16 16 September

7 Persistency ratio and VNB on an improving trend IPRU is the largest private sector insurer in terms of Embedded Value (EV), which stood at INR139b at end-fy16. While its margins are lower than peers due to a higher share of ULIPs and lower share of non-participating products, its operating RoEV of 15.3% (FY16) compares well with competitors. VNB (value of new business) margins (post overruns) stood at 8% in FY16, up from 5.7% in FY15. The company has also improved its persistency ratio. 61 st month persistency ratio improved from 13% infy14 to 46% in FY16. Exhibit 14: Value of new business Post overruns VNB (INR b) VNB margin (%) Exhibit 15: Persistency Ratio 13th month 49th month 61st month FY15 FY16 FY14 FY15 FY16 1QFY17 Persistency ratio has improved over the past few years Exhibit 16: 13 th month persistency across products FY14 FY15 FY16 1QFY ULIPs Par Non-Par Pure Protection Total 16 September

8 Exhibit 17: 61 st month persistency across products FY14 FY15 FY16 1QFY ULIPs Par Non-Par Pure Protection Total Persistency ratio compares well with peers too Exhibit 18: Persistency measures well across peers 13th month 49th month IPru Life HDFC Std Life SBI Life Max Life Kotak Mahindra Old Mutual Life IPru is well-capitalized for growth IPRU is well capitalized with a robust solvency ratio of 320%. This compared well with its private sector peers. Solvency ratio is the ratio of available capital (assets minus liabilities) to required capital. Insurers are required to maintain a solvency ratio above 150% at all times. Exhibit 19: Healthy solvency ratio Max Life IPru Life Kotak Life SBI Life HDFCSL 16 September

9 Embedded value of INR139b FY16; ROEV of ~15% Embedded value is the sum of book value and PV of future profits of policies in force Embedded Value (EV) is a measure of the present value of shareholders interests in the earnings distributable from the assets of the business after an allowance for the aggregate risks in the business. Simply put, it is the book value of the company plus the present value of future profits of all policies in-force. There are multiple assumptions on the future performance on parameters impacting earnings, such as persistency, mortality, morbidity and external factors such as interest rates and equity market performance. Embedded value for IPRU remained largely stable in FY16. While the value of new business written during FY16 stood at ~INR4b, the return on existing business was ~INR12b and operating variance was ~INR4b due to improved persistency and mortality. However, the company paid a large dividend of INR14b (including dividend tax), resulting in unchanged EV. Embedded value remained largely unchanged due to the high dividend payout Exhibit 20: EV build-up in FY IEV (FY15) Return on business Value of new business Operating variance Change in Change in economic investment assumptions return Dividend IEV (FY16) RoEV (%) Source: Company - RHP, MOSL EV (INR b) RoEV (%) FY FY16 Embedded Value Operating Profit is a measure of the increase in the EV during any given period due to matters that can be influenced by management. It excludes changes in the EV due to external factors like changes in economic variables and shareholder-related actions like capital injection or dividend pay-outs. Return on Embedded Value is the ratio of EVOP for any given period to the EV at the beginning of that period. IRPU s RoEV remained largely stable at 15-16% over FY Exhibit 21: Embedded Value - Sensitivity Analysis Sensitivity Analysis % change in IEV % change in VNB 100bps increase in rates (2.5) (5.7) Equity values decrease 10% (2.2) (2.1) 10% increase in maintenance expenses (1.1) (6.4) 10% increase in acquisition expenses - (24.2) 10% increase in policy withdrawal rates (1.1) (12.3) 5% increase in mortality rates (0.4) (3.2) Tax rate increases to 35% (14.9) (34.2), Milliman Client Report 16 September

10 Management team Ms. Chanda Kochhar - Chairperson Ms. Kochhar is the Chairperson of the Company and has been associated with the company as a Director since She currently serves as the Managing Director and CEO of ICICI Bank. She has also obtained a master s degree in management studies from Jamnalal Bajaj Institute of Management Studies, Mumbai and is the recipient of the Padma Bhushan Award, Mr. N.S. Kannan Nominee Director Mr. Kannan is a Nominee Director of ICICI Bank and has been a Director since He currently serves as an Executive Director of ICICI Bank. He has obtained a bachelor s degree in mechanical engineering from the National Institute of Technology, Tiruchirappalli and post graduate diploma in business administration from the Indian Institute of Management, Bengaluru. Mr. Adrian O Connor Nominee Director Mr. O Connor is a Nominee Director of Prudential Corporation and has been a Director since He has obtained both his Bachelor of Science degree in Experimental Physics and his Master of Business Administration from University College Dublin. He is a fellow of the Institute of Actuaries and a fellow of the Society of Actuaries. Mr. Sandeep Bakhshi Managing Director and Chief Executive Officer Mr. Bakhshi is the Managing Director and Chief Executive Officer of the Company. He obtained his bachelor s degree in mechanical engineering from Punjab Engineering College, Chandigarh and a post graduate degree in business management from Xavier Labour Relations Institute, Jamshedpur. He joined ICICI Group in 1986 and worked across various functions such as project financing, general insurance, etc. He also served as Deputy Managing Director and Head of Retail at ICICI Bank. Mr. Puneet Nanda Executive Director Mr. Nanda is an Executive Director-Business of the Company. He obtained his bachelors degree in engineering from Malaviya Regional Engineering College, University of Rajasthan, Jaipur and a post graduate diploma in management from the Indian Institute of Management, Lucknow. He is part of the company since inception and initially set up and managed the Investment function as Chief Investment Officer. His current responsibilities include sales and distribution, product design and management, brand and marketing, customer service and operations, underwriting and claims, digitization, technology and information systems. Mr. Sandeep Batra Executive Director Mr. Batra is an Executive Director of our Company. He is a qualified chartered accountant registered with the Institute of Chartered Accountants of India and a qualified company secretary registered with the Institute of Company Secretaries of 16 September

11 India. He has been one of the founder members of the Company and has worked with the Company as CFO until 2006, post which he moved to ICICI Bank. He is currently responsible for functions in investments, business intelligence and strategy, enterprise risk management, actuarial, finance and accounts, taxation, internal audit and compliance, legal and secretarial, operational risk, policy affairs and corporate communications. 16 September

12 Key risks Product concentration Over 80% of retail APE for FY16 was in ULIPs. This makes the company prone to the cyclicality of the stock markets, as retail investors generally purchase ULIPs during stock market booms and vice-versa. This could impact new business premiums as well as margins. Additionally, the company has a low share of non-participating business, which is a high-margin business. Termination of bancassurance partnership could disrupt business The company relies heavily on bancassurance and has tied up with ICICI Bank, Standard Chartered Bank and Capital Small Finance Bank for product distribution. Bancassurance accounted for over 58% of retail APE in FY16. We believe termination of one or more of these partnerships poses significant threats to the business over the medium term. Increase in tax rate The Indian life insurance sector enjoys low tax rate. The tax rate for IPru in FY16 amounted to 7%. If this were to increase to 35%, the impact to IEV would be ~15% (as per Milliman Client Report) and could pose a key risk to the stock. 16 September

13 Financials and valuations INR m FY12 FY13 FY14 FY15 FY16 Policyholder Account Premiums earned (Net) 139, , , , ,987 Income from Investments -1,325 61,867 92, ,385 12,084 Contribution from SH 4,043 6, Other income Total (A) 142, , , , ,279 Commission 6,055 7,654 6,275 5,532 6,200 Operating expenses 20,161 20,481 19,357 19,675 22,526 Benefits paid (net) 84,582 13, , , ,248 Change in valuation of policy liabilities 17, ,531 56, ,561 35,155 Total expenses and provisions (B) 127, , , , ,129 Surplus / (deficit) (C)=(A)-(B) 14,312 15,559 13,001 12,190 14,151 Provision for taxation Surplus / (deficit) after tax 13,898 15,209 12,520 11,678 13,447 Shareholder Account Transfer to Shareholders account 16,041 17,732 12,635 11,372 12,103 Income From Investments 2,188 4,156 3,848 5,370 5,996 Other income Total income 18,234 21,893 16,582 16,746 18,099 Operating expenses Contribution to the Revenue Account 4,043 6, Provisions (other than taxation) Profit / (Loss) before tax 14,175 15,562 15,246 15,905 17,742 Provision for Taxation ,211 Profit / (Loss) after tax 13,857 15,155 15,624 16,402 16,530 Total Dividend 4,816 5,640 12,791 9,973 14,479 Balance Sheet INR m FY12 FY13 FY14 FY15 FY16 Share Capital 14,289 14,289 14,293 14,317 14,323 Reserves and Surplus 33,847 34,123 35,526 38,326 38,926 Networth 48,136 48,412 49,818 52,643 53,249 Policyholders Funds 658, , , , ,495 Other liabilities 10,513 8,265 10,430 17,590 16,893 Total Liabilities 716, , , ,573 1,025,637 Investments Shareholders Investments 34,758 49,188 53,488 58,568 62,157 Policyholders Investments 91, , , , ,156 Assets held to cover linked liabilities 578, , , , ,958 Loans Fixed assets 1,804 1,723 2,015 2,150 2,195 Net current assets -8,190-7,060-8,113-6,691-7,258 Deferred tax assets Misc. Expenses Debit balance in P&L 18,320 8,805 5, Total Assets 716, , , ,573 1,025, September

14 Disclosures ICICI Prudential Life This document has been prepared by Motilal Oswal Securities Limited (hereinafter referred to as Most) to provide information about the company (ies) and/sector(s), if any, covered in the report and may be distributed by it and/or its affiliated company(ies). This report is for personal information of the selected recipient/s and does not construe to be any investment, legal or taxation advice to you. This research report does not constitute an offer, invitation or inducement to invest in securities or other investments and Motilal Oswal Securities Limited (hereinafter referred as MOSt) is not soliciting any action based upon it. This report is not for public distribution and has been furnished to you solely for your general information and should not be reproduced or redistributed to any other person in any form. 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ECOSCOPE. Real GDP growth eases on lower net indirect taxes. The Economy Observer. Real GVA growth exactly as expected

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