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  • 26 April 2020 Results Review 4QFY20

    ICICI Prudential Life Insurance

    Lower costs, higher protection drive beat! Despite a 1.7% lower than expected FY20 APE of Rs 73.8bn, IPRU’s reported FY20 VNB of Rs 16.1bn was 3.5% above expectation. Higher protection mix and lower expenses drove VNB margins higher 470bps YoY to 21.7%.

     APE: Despite a strong performance in the group APE (+127.9/121.9% YoY/QoQ to Rs 2.5bn), total APE declined 19.6/3.3% YoY/QoQ to Rs 19.7bn. Retail APE declined 26.6/10.5% YoY/QoQ to Rs 17.2bn.

     Protection: Indiv. protection at Rs 2.2bn (+6.6/3.3% YoY/QoQ, 11.0% share) continues to trend higher even in a difficult environment. Group protection APE grew by ~1.4x both on YoY/QoQ basis. Growth seems to be primarily driven by credit protect. Protection share increased to 17.8% (+720bps YoY).

     Decline in ULIP sales (43.3/22.7% YoY/QoQ) continues to weigh on overall APE growth. Environment remains difficult for ULIP sales.

     FY20 VNBM at 21.7% (+470bps YoY) was a result of 1) business mix (+470bps), 2) higher effective tax rate due to removal of DDT (-110bps), 3) assumption changes (10bps), and 4) lower expenses (+100bps).

     Management indicated that protection business contributed to 59.7% of FY20 total VNB. Protection margins were lower by 2,340bps at 85.8% as within mix tilted towards lower margins limited pay variant.

     Cost/TWRP improved significantly to 14.0% (-190/-260bps YoY/QoQ) for overall business, while cost/TWRP of savings business was at 8.5% (-10/- 280bps YoY/QoQ). Management stated that focus on reducing variable costs in 4Q resulted in meaningful decline in costs.

     AUM declined 4.6/11.0% YoY/QoQ to Rs 1.53tn with 40% equity in mix.  FY20 PAT was lower by 6.4% YoY at Rs 10.7bn.  Near-term outlook: Stock to time correct until clarity emerges on new

    insurance sales in FY21E.

     We like IPRU’s re-engineered business model which is focused on a more diversified product mix along with an increased protection share. We expect VNB to grow at FY19-22E CAGR of 2.8%. We however remain wary of the current Covid-19 situation and believe that outlook for FY21E remains hazy. Lower than expected growth in FY21E may delay goal of doubling VNB by FY23E. We rate IPRU a BUY with a TP of Rs 460 (Mar- 21E EV + 21.1x Mar-22E VNB).

    Financial Summary

    (Rs mn) 4Q

    FY20 4Q

    FY19 YoY (%)

    3Q FY20

    QoQ (%)

    FY18 FY19 FY20 FY21E FY22E

    NBP 42.1 40.9 2.9 30.4 38.6 92.1 103.6 104.7 102.1 115.0

    APE 19.7 24.6 -19.6 20.4 -3.1 77.9 78.0 73.8 62.9 71.1

    VNB NA NA NM NA NM 12.9 13.3 16.1 12.1 14.4

    VNB Margin (%) # 21.7 17.0 467bps 21.0 0bps 16.5 17.0 21.7 19.3 20.3

    EV

    187.9 216.2 230.3 250.3 276.6

    P/EV (x)

    2.6 2.2 2.1 1.9 1.7

    P/VNB (x)

    25.0 22.2 16.6 20.8 16.1 # Refers are FYTD margins Source: Company, HSIE Research

    BUY CMP (as on 24 Apr 2020) Rs 337

    Target Price Rs 460

    NIFTY 9,154 KEY CHANGES

    OLD NEW

    Rating BUY BUY

    Price Target Rs 415 Rs 460

    VNB % FY21E FY22E

    16.6% 16.6%

    KEY STOCK DATA

    Bloomberg code IPRU IN

    No. of Shares (mn) 1,436

    MCap (Rs bn) / ($ mn) 483/6,329

    6m avg traded value (Rs mn) 1,328

    52 Week high / low Rs 538/222

    STOCK PERFORMANCE (%)

    3M 6M 12M

    Absolute (%) (35.3) (29.8) (7.3)

    Relative (%) (10.6) (10.1) 12.4

    SHAREHOLDING PATTERN (%)

    Dec-19 Mar-20

    Promoters 74.98 74.98

    FIs & Local MFs 5.52 5.53

    FPIs 13.30 13.34

    Public & Others 6.20 6.14

    Pledged Shares 0.00 0.00

    Source : BSE

    Madhukar Ladha, CFA madhukar.ladha@hdfcsec.com +91-22-6171-7323

    HSIE Research is also available on Bloomberg ERH HDF & Thomson Reuters

  • ICICI Prudential Life Insurance : Results Review 4QFY20

    Covid-19 situation  New policy sales were severely impacted in Mar-20 as the country entered lock-

    down. Sales reduced to a trickle in the last two weeks of the month.  During this lock-down situation IPRU has revamped business outreach and

    underwriting practices. IPRU is now using digital sales methods such as video calling, chat bots, tele-medicals etc to drive customer sales and servicing.

     Additionally the company through negotiations with its reinsurers has also increased the limit of maximum sum assured that can be underwritten without physical medical.

     Company believes strong digital capabilities will ensure that frauds are kept under check despite higher tele-medical based insurance.

     The company has obtained permission for use of digital KYC through aadhaar.  Management stated that the so far in Apr-20, IPRU is seeing growth in retail

    protection, while co targets small gains in PAR and NPAR products over 1QFY21. Management maintained that ULIP sales will continue to remain challenged in the short to medium term.

     Management also mentioned that enquiries for retail and group term products have increased significantly and believes that protection sales will benefit in this environment.

     IPRU is also allowing base term insurance on the basis of tele-medicals, with option to customers to increase cover post medicals after lock-down.

     The company is now focused on training channels especially distributors on digitally selling insurance products.

     In this uncertain environment IPRU plans to convert costs to variable. The company has cut capex plans, implemented a hiring freeze, and is reducing fixed costs wherever possible.

     Of the 723 Covid-19 deaths so far only two are IPRU policy holders and have filed for claims. The company is fairly confident about solvency and its underwriting practices even in these stressful times.

     In the last 10 days of Mar-20, client engagement through chat bots increased by 42%, Whatsapp by 61% and mobile login by 94%. The company is using the current situation to enhance digital capabilities.

     We believe that forecasting insurance sales remains challenging in this environment as we are not sure of when business will return to normal. Given that insurance is a push product the sales process traditionally has required a lot of face to face interaction. We remain cautious on the success of digital sales methods.

    Business update  Despite it being fairly obvious that FY21E will be a challenging year, the

    management retained its guidance of doubling VNB by FY23E.  Management believes it has sufficient levers to ensure higher margins despite the

    near term sales contraction.  Persistency was negative on a YoY basis for most buckets. Lower equity prices

    are also resulting in lower surrender and helping persistency. So far persistency has been fine, but we remain watchful of the same. We are building in a slight negative variance in FY21E.

     Investment book is pristine with no NPAs and no default events. The company has successfully avoided in investing in the recently defaulting companies.

    IPRU is now using digital sales methods such as video calling, chat bots, tele- medicals etc to drive customer sales and servicing.

    In Apr-20, IPRU is seeing growth in retail protection, while co targets small gains in PAR and NPAR products over 1QFY21.

    Management maintained that ULIP sales will continue to remain challenged in the short to medium term.

    IPRU plans to convert costs to variable. The company has cut capex plans, implemented a hiring freeze, and is reducing fixed costs wherever possible.

    We remain cautious on the success of digital sales methods.

    Page | 2

  • ICICI Prudential Life Insurance : Results Review 4QFY20

    According to the company, it has not invested in a single defaulting security over the last 20 years. Currently 94% of fixed income assets are invested in govt. securities and AAA rated paper. Only 1% of fixed income book is in A+ and below investment grade papers.

     Policy holder liabilities comprise NPAR 0.4%, ULIP 68%, Ulip 13% and NPAR protection 19.6%.

     IPRU has increased pricing for protection as reinsurance rates have increased. IPRU has re-filed products with revised pricing. New pricing is at levels that do not dilute margins.

     Given the near term challenges IPRU will not be paying a final dividend for FY20. The company has also cut its dividend policy to payment of 30% (- 1,000bps) of PAT as dividend.

     We expect 1QFY21E VNB margins to be under significant pressure given near term slowdown in sales.

     4Q renewal premium grew -4.1/23.1 YoY/QoQ to Rs 64.3bn. FY20 renewal premium declined 1.4% YoY to Rs 209.4bn, as new policy sales growth was weak in FY19. We remain concerned about weak renewal premium growth.

     4Q channel mix (APE): Banca/agency/direct/CA/group was at 44.3/21.7/13.0/8.2/12.8%. Banca contribution declined largely on back of reduction in ULIP sales.

    Embedded Value and VNB  EV for FY20 was negatively hit by Rs 2.25bn on account of operating assumption

    change. Higher effective tax rate damaged EV by Rs 5.5bn, while lower than expected expenses helped by ~Rs 3.3bn. The change in DDT as per Finance Act, 2020 has resulted in higher effective tax rates for insurance companies.

     EV was also negatively impacted negative economic variance/assum

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