ICICI Pru Life Q4 review: Compelling valuations make it a worthy contender

Neha Dave
Moneycontrol Research

ICICI Prudential Life Insurance, one of India’s top private insurers, reported strong FY18 earnings, underpinned by significant margin improvement and superior growth in the value of new business (VNB). The company is well positioned in a structural growth sector, with lowest operating cost and distribution strength through bancassurance, making it a stock worth considering at current valuations.

Healthy growth led by ULIPS
The company posted an 18 percent year-on-year (YoY) growth in annualised premium equivalent (APE), led by strong growth in unit linked insurance plans (ULIPS). The latter constituted 82 percent of the insurer’s APE. ICICI Life has taken advantage of consolidation in the ULIPS market, post the regulatory change in FY10 which capped charges on ULIPS and improved its market share. Despite ULIP being a low-margin and cyclical product, the insurer has achieved profitability through efficient operations.

Financial snapshot

Operating efficiency a key positive
Despite the higher share of ULIPs, VNB margins improved to 16.5 percent in FY18 as compared to 10.1 percent YoY. This was primarily driven by high margin savings products introduced by the insurer since June last year and reduced operating expenses. The insurer reported a 140 basis points improvement in operating cost to total weighted received premium at 13.7 percent. Persistency ratio improved at the shorter end with the 13-month ratio increasing to 86.9 percent versus 84.7 percent YoY.

Potential upside can accrue from growth in protection business
India has a high protection deficit among key Asian countries at 92 percent, as per 2014 estimates by Swiss Re. This implies that for every $100 needed for protection, only $8 is spent by a typical Indian household, leaving a massive mortality protection gap. This represents a huge opportunity. Though protection business (pure term insurance) constitutes only six percent of the insurer’s APE and has grown steadily from 1.6 percent in FY15. While maintaining its predominant position in ULIPS, ICICI Life’s ability to grow its high margin protection business will be key driver of future profitability.

Protection gap

Moderate valuations
We insurance sector is in a sweet spot driven by structural factors such as a gradual but steady shift to financial savings, increasing share of life insurance within financial assets, buoyant capital markets, favourable product mix and cost structure changes. ICICI Life, in our view, is well positioned in the insurance space with its strong brand recall, lowest operating cost structure, strong distribution network and improving profitability metrics

Despite return on embedded value (RoEV) improving to 22.7 percent in FY18 from 16.5 percent in FY17, ICICI Life’s stock has underperformed the Nifty in the past one-year. The stock is currently trading at 3.7 times its trailing price to embedded value (P/EV), a significant discount to its closest peer.

Given ICICI Life’s improved return ratios and profitability levers, the valuation discount of more than 70 percent compared to its closest peer is unwarranted. We expect the gap to narrow in the near- to medium-term, offering upside to the current stock price. Investors looking to participate in this reasonably priced insurance growth story should buy into the stock.

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