Challenges loom large over ICICI Pru’s prospects

Shares of ICICI Prudential Life Insurance Company Limited (ICICI Pru) have gained nearly 6 per cent in the last two trading sessions. Anoop Bagchi, executive director of ICICI Bank, will take over as the new managing director (MD) and chief executive officer (CEO) of ICICI Pru with effect from June 19, the company said on Thursday.

Investors expect Bagchi to be able to drive premium growth, which has been a sore point. “Investor expectations are for better growth which may aid re-rating; “We see a pick-up from FY25,” analysts at Jefferies India said in a report on March 16. Strength in savings platform and client engagement,” he added.

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Graphic: Mint

Note that ICICI Pru stock was weighed down by low annualized premium equivalent (APE) growth even as it put up a strong performance in value of its new business (VNB). VNB is a measure of profitability for insurance companies.

Under Kannan’s tenure, the company is on track to double its FY19 VNB by FY23, according to ICICI Pru. The company’s VNB margin stood at 17% in FY19 and has consistently increased every year.

VNB margin for the nine months ended December (9MFY23) stood at 32%. The growth was primarily driven by an improved product mix geared towards higher-margin products.

But the growth in APE has been slow over the years (see chart). Analysts say VNB growth through margin expansion can be sustainable only to a certain extent. Also, the premium needs to go up.

One factor that has hurt premium growth is the sharp decline in ICICI Bank channel’s contribution to APE. Over the years, ICICI Bank prioritized selling certain categories of insurance products to ICICI Pru, which impacted its overall APE growth. Analysts at Motilal Oswal Financial Services Ltd said in a report on March 17, “Growth in the Banca channel has been weak, so ICICI Pru is focusing on other partnerships to offset weak growth in ICICI Bank’s Banca channel. ” Accordingly, the mix of ICICI Bank in overall APE has moderated to 16.9% in 9MFY23 from 48.8% in 9MFY20, said analysts at Motilal Oswal. On the other hand, the mix of other Banka channels improved from 4.4% to 13.5%.

To be sure, while APE growth appears to be challenging due to weakness in the bancassurance distribution channel, the FY24 budget proposals that will be effective from April could be a disincentive for growth.

Budget proposes to tax maturity proceeds on life insurance policies over and above the total annual premium 5 lakhs. While the insurance industry looks forward to clarifications and relaxations in this regard, this could have an impact on all life insurance companies in the near term.

ICICI Pru Share Non-Unit Linked Policies with Above Annual Premium 5 lakh which is around 6% of its overall APE for 9MFY23.

Also, there is a fear that the push from the government towards the new tax regime will reduce the attractiveness of life insurance products as tax-saving instruments. Against this backdrop, the current March quarter is expected to see a boom, as taxpayers plan for tax savings.

Meanwhile, the ratings are not demanding. Despite rising in the last two days, ICICI Pru shares are down 10% so far this calendar year. Madhukar Ladha, director, Nuwama Institutional Equities, said, “The stock is trading at a steep discount to its valuation of 1.5 times the embedded value as compared to peers like HDFC Life.”

But for the re-rating to happen, one of the key factors is visibility on premium hikes, he said.


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