We expect ICICI Prudential Life to deliver 4% y-o-y decline in VNB in FY2021E despite 19% y-o-y decline in APE, reflecting expansion in VNB margin of 410 bps to 25.8%.
Sharp decline in Annual Premium Equivalent (APE); lower protection margins temper value of new business (VNB). ICICI Prudential Life reported a sharp (35%) decline in VNB largely on the back of 44% lower APE. Pressure on protection-business margins, coupled with lower volumes, arrested expansion in overall VNB margins. With better pricing and improving volumes, we expect VNB to catch up over the next nine months to translate to mid-teen operating return on embedded value (RoEV).
Despite the recent rally, valuations (2.1X EV FY2022E) provide further room for expansion. Retain ‘buy’ with FV of Rs 500. VNB margin expansion to 24.4% (up 340 bps yoy/270 bps qoq) was driven by a decline in the share of ULIPs (down 2,760 bps yoy) and increase in the share of high-margin protection policies (1,145 bps yoy) and non-linked policies (up 1,615 bps yoy). However, the margin within protection was down yoy as the company did not fully pass on the hike in reinsurance rates to its customers. Notably, ICICI Life reported ~86% VNB margin in the protection business in FY2020; considering this as benchmark, the expansion in VNB margin should have been ~30% in 1QFY21. Lower volumes have also likely affected operating leverage of the company. While persistency at 81.8% in 13th month for 2MFY20 was lower than 82.5% built in its assumption, the company highlighted that the same had not yet been reflected in its VNB margins as persistency was improving month on month (82.2% in July 2020).
We expect ICICI Prudential Life to deliver 4% y-o-y decline in VNB in FY2021E despite 19% y-o-y decline in APE, reflecting expansion in VNB margin of 410 bps to 25.8%. This will be driven by a sharp increase in the share of high-margin protection (25% of APE, up 990 bps yoy), further increase in protection tariffs from July and non-linked businesses even as the VNB margin of savings business will broadly remain unchanged. Notably, the company does not share break up between par and non-par but highlighted that non-par business would remain low for the company. Lower unwinding, muted variances and significant decline in APE will offset margin expansion and drive 160 bps y-o-y decline in operating ROEV to 13.6%.
We are tweaking our EV estimates by about 1%. Post revision, we expect 17% VNB CAGR during FY2021-23E, marginally lower than the company’s guidance of 19%, following 4% decline in FY2021E. Our medium-term operating RoEV forecast remain stable at ~15-16%. Faster recovery in volumes and further traction in the non-linked savings business pose upside risks. At our AV-based fair value of Rs 500, ICICI Prudential Life will trade at 2.3X EV June 2022E.