ICICI Prudential Life's new strategy fails to click with investors

Decision to adopt an SIP-like model for ULIPs could keep premium flows soft in the near term

Even after two years of listing, ICICI Prudential Life Insurance (ICICI Pru Life), India’s largest private life insurer, is yet to see meaningful gains.

While the year started on a high note, gains faded with the stock losing about 15 per cent so far.

But the Street remains optimistic. Its leadership position, coupled with undemanding valuations, has kept analysts positive on the stock.

But the insurer is set to face earnings trouble in the near term, thanks to its new strategy with respect to its key equity-linked plans or unit-linked insurance plans (ULIPs).

ULIPs constitute over 80 per cent of ICICI Pru Life’s annualised premium and are known to find most takers among high net-worth individuals (HNIs).

The average ticket size of ICICI Pru Life’s ULIPs is about Rs 93,000 based on FY18 numbers, while those of SBI Life and HDFC Life stood at Rs 63,000 and Rs 56,000 respectively.

Therefore, in the context of steep volatility in the equities market, the insurer’s ability to garner lumpy money into ULIPs may be tough. It has adopted the SIP (systematic investment plan) approach of mutual funds. Accordingly, the insurer has given the flexibility for ULIP investors to break down the lump sum into monthly flows. The change in policy, which happened in October, has resulted in 23 per cent year-on-year decline in premium inflows from individuals or the retail segment in November. On a year-to-date basis it has led to 5 per cent decline in premium growth.

ICICI Pru Life has also ceded pole position in terms of individual new business growth to SBI Life though it maintains leadership in assets under management.

The Street is divided on the impact of the new strategy. Analysts at Morgan Stanley have factored in a 4 per cent decline in premium growth for December-March 2018-19. 

However, they believe persistency risk or the risk of investors stopping monthly flows has been minimised. 

“The company has ensured a very high rate of direct debit mandate under these policies,” one of them said. Those at Nomura, on the contrary, envisage near-term growth challenges due to stagnancy in higher-ticket ULIPs.

While retaining the “buy” recommendation on the stock, they factor in 3 per cent contraction in FY19 growth. Analysts at Citi also doubt the success of the strategy. 

“We believe that this is an untested strategy and we need to see if it succeeds, especially given the continued volatility in equity markets,” an analyst said.

That said, all agree that the approach is essential to sustain ULIP flows, considering how ICICI Pru Life enjoys the largest ULIP ticket size among top private insurers. 

Also with the decision of its parent, ICICI Bank, which is ICICI Pru Life’s bancassurance partner, to stop selling PAR products (participating policies), analysts say the share of protection policies should rise. 

Currently accounting for about 8 per cent of ICICI Pru Life’s annualised premiums, the share of protection plans has almost doubled over the year. 

Analysts at Morgan Stanley note stronger growth in group protection plans should drive premiums.

However, until stability sets in, investors in ICIC Pru Life may have to stomach two-four quarters of earnings vagaries. 

Meanwhile, the undemanding valuations (2.7x FY20 price-to-embedded value) work in its favour, making the stock “buy on dips” for investors.