ICICI Prudential Life: Ample insurance to sustain growth

Rising premium income, revenue share of protection biz will help

The market has been quick to spot the improvement at ICICI Prudential Life Insurance Company (IPru) in recent months, given the stock’s over 30 per cent gains in 2017. The good set of numbers for the March 2017 quarter (Q4) on all fronts — growth as well as profitability, lend further comfort. And if analysts are to be believed, there is more steam left in the stock for long-term investors.

Annualised premium equivalent or APE, which reflects an insurance company’s premium collections, grew at a strong 31 per cent in Q4 on the back of rising market share. Already the leading private life insurance company, IPru grew its market share of retail weighted received premium at 12 per cent in FY17 from 11.3 per cent in FY16. Retail weighted received premium is the sum of first-year premiums on regular-premium (individual) policies. These gains are driven by strong growth in financial savings as well as continued traction in the protection business (3.9 per cent of APE). Protection business’ share was 2.7 per cent in FY16. Notably, protection business enjoys higher margins compared to the ULIPs (unit-linked insurance plans) business and is also relatively under-penetrated. In this backdrop, the management's strategy to focus on growing this part of the business is in the right direction and will lead to more profitable growth. This was also reflected in improvement in its new business premium margin from eight per cent in FY16 to 10.1 per cent in FY17, which are more relevant for insurance companies. Not surprisingly, most analysts believe the stock's premium valuations are sustainable. 

"Strong premium growth, improving margin profile and consistent improvement in operating parameters will likely sustain current rich valuations of the stock," wrote analysts at Kotak Institutional Equities in a post-results report on the company. The stock currently trades at about 3x FY19 estimated embedded value. Embedded value (EV) represents the present value of future profits from assets, after adjusting for the risks at insurance companies.

Analysts expect the company to clock healthy growth in its business and believe its return ratios, too, could improve from here on. “We expect ICICI Prudential Life Insurance Company’s return ratios to improve further backed by improving business mix and continued benefits from improvement in persistency rate,” says Nitin Aggarwal, analyst at Antique Stock Broking.  The company’s APE is seen growing at a compounded annual rate of 21 per cent over FY17-19 and new business premium margin expanding to 11.8 per cent in this period. 

While the current bullishness in equity markets augurs well for IPru’s Ulip-heavy revenue mix (84 per cent of APE), any cyclical downside is a key downside risk.