ICICI Prudential Life’s rerating odds have improved despite lukewarm Q1

Is ICICI Prudential Life primed for re-rating?

In FY17-18, ICICI Prudential Life Insurance took a bold move to step away from its tested business approach of targeting deep-pocketed high-networth individuals (HNIs) with large life insurance products. The company has now completed this transformation, which has resulted in a more diversified product mix.

Volatile, market-linked policies now constitute not more than 40 percent of its portfolio, while margin-friendly, simple, protection (term insurance) policies comprise 24 percent. The share of market-linked products was as high as 80 percent in FY18-19, while term insurance had a 9 percent share. The life insurer has also fired up other distribution channels, reducing its dependence on its parent ICICI Bank. All this would help ICICI Prudential Life show a steady state of elevated growth.

This is the key reason that the underwhelming first quarter performance didn’t dampen the optimism of brokerages. The private sector life insurer reported a 7 percent year-on-year (YoY) fall in the value of new business (VNB), and also a dip in its VNB margin. For a life insurer, these metrics are more important than quarterly net profit as the business involves taking a bulk of the (added) costs upfront, whereas profits are staggered over a long period of time. The displeasure of investors was evident from the sharp fall in the share price.

But not only are most brokerages optimistic, several brokers have even raised their target price for the stock. “IPRU’s re-engineered business model, focused on offering customers a diversified product and channel mix, is gradually visible in industry-leading share in the sum assured,” noted analysts at HDFC Securities in their report. A rerating is around the corner.

The bet on growth

To its credit, the management’s post-earnings commentary was bullish, with new chief Anup Bagchi stressing on the focus on VNB growth. Bagchi said the company will focus on profitability through topline growth and not chase margins.

Analysts believe that the underwhelming growth in annualised premium equivalent (APE) was mainly due to the change in tax policy announced in the budget in February. The government made life insurance premiums in excess of Rs 5 crore taxable, thereby reducing the appeal of large policies that helped HNIs save on taxes. Since the new rules came into effect in April, the sales of such policies surged during March in a last-ditch effort to save taxes.

What has caught the attention of brokerages is the quickening retail growth in term insurance. This segment jumped 61 percent in Q1FY23-24, and its share went up to 7.6 percent in the overall product portfolio. Morgan Stanley and CLSA have highlighted retail protection as one of the factors for a positive growth outlook. Simply put, Indians are grabbing ICICI Prudential Life’s term plans faster than before, and coupled with a healthy persistency ratio, such plans give more bang for the buck to a life insurer.

Analysts also believe that ICICI Prudential Life has several levers in place for growth to pick up from here on. Its investments in distribution channels have already paid off, with non-ICICI Bank channels showing 20 percent growth in APE and offsetting much of the drag from bancassurance (the sale of insurance policies by banks). Within the banca channel, non-ICICI Bank partners showed a growth of 17 percent in June, according to Jefferies India. The share of business from ICICI Bank branches has been decelerating over the past several quarters.

This was the reason why analysts were willing to overlook the dip in margins. “The margin moderation was primarily on account of higher expenses, as management focus on growth is being backed by investments in augmenting distribution channels and increasing productivity,” Emkay Global Financial Services analysts said in a note.

It should be noted that a diversified product and distribution channel mix has been the primary reason for investors to ascribe premium valuation to competitor HDFC Life Insurance. Notwithstanding the outperformance over the past six months, ICICI Prudential Life’s valuations are still lower compared with rival HDFC Life. There is enough of a gap to be bridged here. The former trades at 1.7 times its estimated embedded value (EV) for FY24-25, while the latter’s multiple is more than twice its estimated EV.

Proof of the pudding

ICICI Prudential Life’s first quarter performance reinforces the expectations that its agents and banking partners would continue to push more term plans, which would not only boost premium growth but also help expand margins. But whether investors will bite depends on how the life insurer performs in the coming quarters. “ICICI Pru has to report double digit APE growth for the coming quarters in order to get re-rated. Bagchi’s comments have shown the company is on the right track, because only growth brings profitability,” said an analyst requesting anonymity.

To be sure, ICICI Pru’s share of unit-linked plans have decelerated, and in Q1FY23-24 it shrank 36 percent. That said, the contraction is partly by design as the life insurer continues to keep a diversified book. The growth momentum in protection and non-participatory products needs to be enough to offset the drag from ULIPs. Only then would the overall APE growth meet investor expectations.

Analysts believe the stock is primed for a rerating and a consistent improvement in the APE will ensure higher valuation. While that is a no-brainer, market valuations are also relative. The stock trades at an embedded value multiple that is lower than peers such as HDFC Life and SBI Life Insurance. Both HDFC Life and SBI Life are scheduled to release their first quarter results in the coming days.  The performance of these rivals would be key to how investors perceive ICICI Prudential Life.