ICICI Prudential Life disappoints on Q3FY22 growth but offers robust outlook

ICICI Prudential Life Insurance Company

ICICI Prudential Life Insurance Company Ltd’s Q3FY22 growth was disappointing, clouding the outlook on the life insurer’s future profitability.

For the quarter, though, the 20 percent year-on-year growth in value of new business (VNB) and a highest-ever new business margin offered investors some succour.

For life insurance companies, the key profitability metrics are the VNB that captures profitability from total business in a given period, and new business margin that tells investors how much the life insurer can squeeze out of each policy written.

VNB is used to measure the profitability of new business written in a period. New business margin is a system used by insurers to measure the cost of and profit from writing new policies.

ICICI Prudential Life's management, in an earlier call with analysts, assured that future business growth would live up to their expectations.

For the October-December quarter, the private-sector life insurer reported a mere 3.3 percent year-on-year (YoY) growth in new business premium to Rs 618 crore, analysts at Jefferies India Pvt Ltd pointed out.

On an annualised premium equivalent (APE), the insurer saw a 6 percent YoY contraction. According to Jefferies, this was driven by a sharp 24 percent contraction in market-linked products to Rs 778 crore and a 15 percent fall in retail protection business to Rs 83 crore.

Diversification route

“We have created a resilient platform in terms of diversification. There is no need to tweak products or channels. I want to assure that even with those who we have tied up, there is a long way to go in terms of productivity enhancement,” said N S Kannan, Chief Executive Officer, in the post-earnings call.

Chief Financial Officer Satyan Jambunathan added that ICICI Prudential Life has added eight new banks and 66 non-banks as partners.

The management also said the company is moving more towards mass and mass affluent growth, a divergence from its business approach two-three years ago where it targeted fat-pocketed high net worth individuals aggressively.

The shift in its approach has also meant that its market-linked product growth has decelerated although the pandemic years ensured some bounce-back, in general, across products.

For the October-December quarter, market-linked products shrank by a massive 24 percent, partly due to a high base. What should perturb investors is the deceleration in business growth from the bancassurance channel, which has been ICICI Prudential Life’s backbone.

To be sure, the life insurer has aimed for a diversified distribution channel and therefore part of this is by design. Even so, the fact that its parent ICICI Bank hasn’t been contributing to growth for several quarters now is seen as a lost opportunity by analysts.

The management believes that a diversified distribution channel would offer enough hedge if one channel weakens in the future, and other bank partners will step up where ICICI Bank steps back. “We will take it as given and focus on what we can do with those circumstances,” said Kannan.

Margin versus growth conundrum

Analysts participating at the call pointed out that much of the VNB is being driven by margins and not by growth which puts outlook under a cloud.

Indeed, new business margin for ICICI Prudential Life has been on an upswing for several quarters now. It improved to 33.9 percent for the third quarter, a massive improvement of 7.22 percentage points YoY, points out Jefferies.

Kannan acknowledged the lop-sided contribution of margins to profitability and said that top-line growth would soon manifest in the new financial year.

“We can grow VNB in line with the sector. We can see 15-20 percent of VNB growth for FY24,” he said. Further, he added that margins may sustain owing to the favourable product mix that the life insurer has achieved.

The share of market-linked products has come down to 41 percent now from more than half two years ago while the share of margin-friendly protection and annuity products has increased.

Non-participatory savings products now form 15 percent of the mix, up from 11 percent a year ago. The insurer intends to keep a diversified product mix and ensure that its products reach the masses through appropriate distribution channels.

A subtle shift towards agency channels has been witnessed during the past nine months, analysts point out. “The increase in agent recruitments and the strong pace of new partnership additions will continue to support premium growth. Further, the strategy of approaching customers with a wider product bouquet through all channels will boost premium growth,” wrote analysts at Motilal Oswal Financial Services Ltd.

Shares of the ICICI Prudential Life were under pressure on Wednesday, slipping roughly 1 percent in reaction to the dismal business growth numbers. The outlook provided by the management, however, seems to have offered some comfort to the market.