ICICI Prudential Life

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1 INDUSTRY INSURANCE CMP (as on 24 Apr 2018) Rs 418 Target Price Rs 515 Nifty 10,614 Sensex 34,617 KEY STOCK DATA Bloomberg IPRU IN No. of Shares (mn) 1,435 MCap (Rs bn) / ($ mn) 600/9,054 6m avg traded value (Rs mn) 536 STOCK PERFORMANCE (%) 52 Week high / low Rs 507/363 3M 6M 12M Absolute (%) (3.8) Relative (%) (12.3) SHAREHOLDING PATTERN (%) Promoters 80.7 FIs & Local MFs 3.8 FPIs 6.5 Public & Others 9.0 Source : BSE Madhukar Ladha madhukar.ladha@hdfcsec.com Stellar Margins ICICI Pru Life delivered a strong set of numbers of 4Q. Higher share of protection, operating efficiency and lower tax rate drove its full year margin to 16.5% (9M: 13.7%). With this margin, ICICI Pru has narrowed margin gap with competitors despite higher share of ULIPs (VNB Margins- HDFC Life: 23.2%; SBI Life: 16%, Max Life: 18.5%). 4Q APE came in at Rs.22.1bn (+2.1% YoY); growth was subdued on higher base and as new business premium declined in Jan and Feb 18. For, IPRU recorded New Business and Renewal Business premiums of Rs96.2bn (+17.1%) and Rs77.9bn (+23.1% YoY) respectively. For, savings and protection APE grew 71.5% and 15.4% respectively resulting in the share of protection improving 180bps to 5.7%. Strong improvement in margin resulted in VNB increasing 93.1% in to Rs 12.9bn. PAT for the quarter was down 16.4% YoY at Rs 3.4bn due to high new business strain and negative investment income. We upgrade our margin assumptions resulting in VNB increasing by 19.9/19.7% RESULTS REVIEW 4Q 25 APR 2018 ICICI Prudential Life BUY for FY19/20. We continue to like ICICI Pru Life as it benefits from financialization of savings and further margin levers. We maintain BUY with an increased TP of Rs 515 (FY20 EV+ 25x FY20E VNB). Highlights of the quarter Management highlighted increase in margin for doesn t have any one offs (while change in tax rate does provide a bump up to margins it is recurring in nature) and expects further improvements in margins as share of protection increases and persistency sustains in all the buckets. For contribution of ULIP is 81.9% compared to 84.1% in. 13 th persistency (without single premium) improved to 86.9% in 11M from 84.7% (). ROEV for stood at 23.4% compared to 16.5% in as lower tax rate boosted operating variance. AUM increased 0.8% QoQ to Rs 1.4tn with 47% Equity mix. Near-term outlook: We expect premium growth to improve. Business Summary (Rs bn) 4Q 4Q YoY (%) 3Q QoQ (%) E FY19E FY20E NBP APE VNB NM NM NM NM NM VNB Margin (%) 16.5# 10.3# 640bps 13.7# NM EV MCap/EV (x) P/Bv (x) ROEV # Refers to and margins respectively HDFC securities Institutional Research is also available on Bloomberg HSLB <GO>& Thomson Reuters

2 Protection APE showed stellar growth of ~71% in VNB Margin improved from 10.1% for to 16.5% for. This improvement was largely as a result of change in product mix (higher protection business and more profitable savings products). Company has not yet changed its persistency assumptions despite seeing improvements in the same. It is waiting for sustained improvements in all cohorts. Concall highlights Business ICICI Pru Life continues to focus on customer centric products. While business growth for the quarter (APE +2.1% YoY) looks muted due to high base, over the last 1/3/5yrs, the company has delivered APE growth of 17.6/18.0/17.1%. Renewal premium at Rs175bn was up +23.1% for. Protection has grown strongly at 71% for ; credit life, within protection, has grown the fastest. Protection has contributed 40% to retail business policies issued. 13th persistency, one of the most important parameter for quality of business, has continued to improve and come in at 87.8%; Persistency excluding single premium has also improved for all cohorts. IPRU is using technology to drive superior customer experience cost efficiencies; Currently 64% of policies are issued within 2 days. Company currently has 252% solvency while the regulatory requirement is 150%. As the company grows its capital consuming protection business it may stop paying special dividend in order to conserve capital. Embedded Value and VNB VNB margin has shown strong improvement from 10.1% in to 16.5% in. A 400bps improvement in VNB is attributed to change in product mix i.e. higher protection mix, along with better product features. Product mix and changed features have resulted in better margins. For 9M, the company had reported VNB margin of 13.7%. Other components in VNB margin improvement have been positive expense experience +1.1% and other assumption changes (excluding expenses) of 1.3%. Savings margin is improving also as a result of improving cost efficiencies in assumptions; Company is now using effective tax rate instead of chargeable tax rate. Similar change in VNB resulted in 130bps (most of it) YoY margin improvement. Non-commission based cost has reduced resulting in lower sensitivity of acquisition cost factor to VNB; Improved profitability has also helped sensitivity. ICICI Pru Life has not made any material change in the persistency assumption and continues to remain conservative on this front. It wants to change assumption in a material way only after all cohorts show sustained improvement. A Rs 7.64 bn positive variance in the operating assumption is largely owing to tax related change and is non recurring. Future margin levers: Higher share of Protection, improvement in persistency and cost efficiency would drive further improvement in margins and will also increase EV. Business Outlook Protection business is expected to grow faster than rest of the portfolio. This can further enhance VNB margins. The company is not targeting any specific product mix. Page 2

3 Five Quarters At A Glance (Rs Bn) 4Q 1Q 2Q 3Q 4Q YoY(%) QoQ(%) Growth Growth Premium Earned Premium on re-insurance Net premium earned Investment income Other income Total Income Commission Paid Expenses Tax on policyholder funds claim/benefits paid change in actuarial liability Total outgo PBT Tax on PAT New Business Premium Total APE Savings APE Protection APE Savings APE Share (%) bps -582bps Protection APE Share (%) bps 582bps Cost to Total Premium (%) bps 121bps VNB Margin (%)# bps NA Strong growth in protection business as seen in the changing mix. Partly also as a result of re-classification. Sharp increase in margins driven by product mix, persistency and lower tax rate assumption. AUM Rs (bn) Equity Mix (%) bps -100bps Debt Mix (%) bps +100bps Linked (%) NA NA NA Non-Linked (%) NA NA NA #Refers to 9M and 9M margin; for 4Q is refers to margin Page 3

4 93% jump in YoY NBV in. (Rs Mn) FY16 E Opening IEV 138, , ,840 Value of New Business 4,123 6,660 12,860 Expected return on existing business 17,072 16,290 23,940 IEV operating earnings 21,195 22,950 36,800 Economic variances From actual return in excess of expected real-world return -6,159 5,820 1,120 From change in economic assumption 524 na Na Other non-operating variances Total IEV earnings 15,560 28,770 37,920 Capital contributions / dividend payouts -14,414-6,320-11,880 Closing adjustments Closing IEV-Year End 139, , ,880 ROEV return % 11.3% 20.6% 23.4% APE 51,085 64,965 77,920 VNB Margin 8.1% 10.3% 16.5% ICICI Pru Life % chg in VNB % chg in EV % chg in VNB % chg in EV Reference rate up 100 bps Reference rate down 100 bps Lapse/Surrender rate up 10 % Lapse/Surrender rate down 10 % Maintenance expenses up 10 % Maintenance expenses down 10 % Mortality up 10 % Mortality down 10 % Tax Rate increased to 25%/28.84%* -22% -11% Tax Rate increased to 34.6% NA NA Page 4

5 APE growth was muted at 2.1% YoY. Protection business share improving is hugely beneficial for the company s margins. APE trend ( Rs bn.) Rs bn Total APE FY16 1Q 2Q Growth - RHS 3Q 4Q Product Mix On APE -ULIP -PAR -Non-PAR -Group Protection 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% FY16 Margin has seen a strong improvement on change in tax assumption, higher share of protection business and lower cost assumptions. VNB Trend( Rs bn.) Rs bn VNB VNB Margin - RHS 18.0% 16.0% 14.0% 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% AUM Mix 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Equity Debt 0.00 FY16 0.0% FY16 1Q 2Q 3Q Page 5

6 Persistency Trend Channel Mix On APE Persistency has been improving across all buckets except for 61 st 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 13th FY15 FY16 25th 37th 49th 61st Bancassurance Agency Direct Corporate Agents Group 100% 80% 60% 40% 20% 0% FY16 1Q 2Q 3Q 4Q We have changed our margin assumptions resulting in significant increase in our VNB and EV projections. Change In Estimates Rs bn FY19E FY20E New Old Change(%) New Old Change(%) APE 90,609 90,609 0% 108, ,609 0% VNB 15,860 13, % 19,826 16, % VNB Margin (%) 17.5% 14.6% 290bps 18.3% 15.3% 300bps Embedded Value 211, ,813 7% 241, , % Source: HDFC sec Inst Research Peer Comparison Rs Bn Mcap (Rs bn) CMP (Rs) Reco TP VNB EV P/EV (x) VNB Multiple (x) APE GROWTH (%) VNB Margin (%) E FY19E FY20E E FY19E FY20E E FY19E FY20E E FY19E FY20E E FY19E FY20E E FY19E FY20E HDFC Life# 1, NR NR SBI Life BUY % 25.6% 23.7% ICICI Pru Life BUY % 21.8% 19.9% Max Financial BUY % 19.4% 19.4% Source: Companies, HDFC Sec Inst Research, * For Max Life, #Consensus Estimates for HDFC Life Page 6

7 Policyholder AC (Rs mn) FY19E FY20E Total Premium earned 221, , , ,643 Income from investments and other income 150, , , ,163 Transfer from shareholders AC Total Income 371, , , ,805 Commission 7,589 8,950 10,523 12,441 Operating expenses 23,572 27,717 32,116 37,554 Provisions 4,288 4,501 4,725 4,960 Total Expenses 35,450 41,168 47,365 54,955 Benefits Paid 149, , , ,521 Change in valuation of liabilities 174, , , ,498 Total 324, , , ,019 Surplus 11,527 13,628 16,639 17,831 Tax ,159 Net Surplus 10,738 12,696 15,641 16,672 Transfer to shareholders AC 11,315 11,680 14,077 14,505 Shareholders AC (Rs mn) E FY19E FY20E Transfer from policyholders' a/c 11,315 11,680 14,077 14,505 Investment income 6,932 6,641 7,552 8,560 Total income 18,248 18,321 21,629 23,065 Expenses Contribution to policyholders' a/c Profit before tax 17,850 17,913 21,190 22,593 Taxes 1,028 1,164 1,377 1,469 PAT 16,822 16,749 19,813 21,125 Page 7

8 Key Ratios In % E FY19E FY20E Premium Growth NBP Growth 16.2% 22.4% 8.5% 18.8% APE Growth 27.2% 19.8% 16.3% 19.9% Commissions Growth Opex Growth Commissions / premium Opex / premium PAT Growth RoAA RoE EPS (Rs) BV (Rs) DPS (Rs) EV (Rs mn) 161, , , ,122 VNB (Rs mn) 6,660 12,860 15,860 19,826 EVOP (Rs mn) 22,950 36,800 33,854 39,858 ROEV P/E (x) P/ABV (x) P/EV (x) P/NBV (x) Balance Sheet (Rs mn) E FY19E FY20E Source Share capital 14,353 14,353 14,353 14,353 Reserve and surplus 46,996 55,370 65,277 75,839 Net worth 61,350 69,724 79,630 90,193 Credit/debit balance in fair value a/c 2,731 2,731 2,731 2,731 Policyholders' a/c 1,148,941 1,303,167 1,503,855 1,745,352 Funds for future appropriation 6,042 6,785 6,954 7,128 Total Liabilities 1,219,063 1,382,406 1,593,170 1,845,404 Application Shareholders' Investments 66,403 75,520 85,596 96,332 Policyholders' investments 270, Asset to cover linked liabilities 878,783 1,303,683 1,504,371 1,745,869 Loans Fixed assets + DTA 2,138 2,138 2,138 2,138 Net current assets Debit balance in P&L Total Assets 1,219,063 1,382,406 1,593,170 1,845,404 Page 8

9 RECOMMENDATION HISTORY ICICI Pru Life TP Date CMP Reco Target 28-Dec BUY Jan BUY Apr BUY Apr BUY Apr-17 May-17 Jun-17 Jul-17 Aug-17 Sep-17 Oct-17 Nov-17 Dec-17 Jan-18 Feb-18 Mar-18 Apr-18 Rating Definitions BUY : Where the stock is expected to deliver more than 10% returns over the next 12 period NEUTRAL : Where the stock is expected to deliver (-)10% to 10% returns over the next 12 period SELL : Where the stock is expected to deliver less than (-)10% returns over the next 12 period Page 9

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