Growth, moderate valuations positive for ICICI Prudential Life Insurance

Value of new business growth and margins remained strong in Q2

The quarter two results for the 2022-23 financial year (Q2FY23) for ICICI Prudential Life Insurance got a mixed reaction from analysts. The value of new business (VNB) grew strongly by 21 per cent year-on-year (YoY) to hit Rs 620 crore. But another key metric, annualised premium equivalent (APE), was flat with roughly 1 per cent growth. In Q2 however, the gross premium grew 3.8 per cent YoY to Rs 9,900 crore, well below expectations of Rs 10,900 crore, with new business premium up 7.3 per cent YoY and renewal premiums up 1.3 per cent.

Margins remain excellent and, in fact, improved on a high base, due to a successful focus on selling higher margin products. The insurer looks to be on course for its target of doubling the VNB between FY19 and FY23. The VNB margin rose to 31 per cent, which is a big jump of 300 basis points (bps), over the 2018-19 margin of 28 per cent. VNB is expected to have a compounded annual growth rate (CAGR) of 15 per cent between FY22 and FY25. The margins are supported by a higher share of annuity business and strong drive in group protection business but there seems to be a slowdown in individual protection, and likely increase in competition from bank deposits.

The share of non-linked business – plans which are not linked to both participating and non-participating equities -- increased to 29 per cent in Q2, from 26 per cent share a year ago. The ULIP market share was down 1,000 bps YoY to 41 per cent -- this is part of a well-documented pullback from equity by individuals.

One cause of concern is that APE growth was muted in Q2, at 1 per cent YoY due to sales via the ICICI Bank channel dropping 40 per cent YoY. In alternative channels, the APE growth, ex-ICICI, stood at 17 per cent. Clubbing together the first two quarters, APE grew 10 per cent YoY in the first half of FY23 (H1FY23), to around Rs 3,500 crore.

The life insurer’s net premium income increased 3 per cent YoY in Q2FY23 while profit after tax increased 37 per cent YoY to Rs 350 crore H1. The share of protection in the mix improved 485 bps YoY to 19 per cent, driven by group protection, though the retail protection segment was weak. Persistency improved, with 13th month, up 90 bps QoQ to 85.9 per cent while 61st month persistency improved 940 bps QoQ to 61.2 per cent.

The management guidance is that the company will double the absolute level of FY19 VNB by FY23. This implies a 23 per cent growth in VNB in FY23. Key contributions to growth are from non-linked savings, protection and annuity segments.

The wider product suite has helped the company add new agents and partners with ICICI Bank now contributing 17 per cent to total APE. The insurer is expanding its agency network with 15,500 additions in the H1FY23 (total additions of 25,000 in FY22. Other bank channels have also increased.

The price/embedded value ratio, which is also a crucial valuation metric for insurance firms, is estimated to be between 2x to 2.3x for FY23, based on an estimated Rs  3.65 trillion embedded value by the end of FY23. This is moderate.

Various analysts have target prices between Rs 600 to Rs 690, which is a comfortable upside from the current price of Rs 509.