ICICI prudential life (ICIR) is the largest private life insurer in India by assets and ranks highest on metrics that we believe drive long-term growth and margin expansion. FY17 results were ahead of our expectations on new business value (NBV) growth and mix improvements, while premium persistency continued to improve. We now have more conviction that ICIR will achieve a significant expansion in RoEV (return on embedded value) over the next 5 years, and raise our FY22E RoEV to 26.4% from 24.8% previously. We upgrade ICIR to Buy and roll forward our valuation to FY19e, driving our TP to Rs 450 which offers 12% potential upside.
Multiple drivers of NBV growth and margin expansion
(i) Persistency gains to be gradually reflected; (ii) improving protection mix; (iii) improvement in cost efficiency with scale; and (iv) post-demonetisation premium inflow. ICIR reports quarterly NBV growth, together with key metrics. We believe investors will gradually gain confidence over its valuation upside given this transparency and consistent delivery.
Growing interest in life insurance industry SBI has announced a plan to list its life insurance operation (May 11), while Max Financial Services (not rated) continues to seek a merger of its life insurance business with HDFC Life (Aug 8, 2016). We expect an increase in interest and potentially in fund flows into the sector as it becomes a larger part of India’s equity market.
Our 12-month TP of Rs 450 is based on 2.7X FY22E P/EV discounted back to FY19E at a 12.9% cost of equity. We also reduce FY18-20e EPS by 9- 22%, reflecting higher costs related to selling protection product.
Clear path to margin & RoEV upsides ICIR ranks highest across key metrics that will drive long-term growth and margin expansion. We raise our FY22E RoEV to 26.4% from 24.8%, and expect NBV margin expansion to drive the majority of the RoEV expansion. This, in turn, is driven by positive gains in premium persistency and mix improvements. We also fine-tune our estimates post FY17 results, and reduce our FY18-20 EPS estimate by 9-22%, reflecting higher costs related to selling protection products and a moderate increase in tax rate post GST implementation.