ICICI Prudential Life needs a growth punch more than brokerage blessings

The ICICI Prudential Life Insurance Co. Ltd stock has come a full circle since it went public two years ago. The life insurer’s scrip is now 4.5% below its issue price, after having risen over 50% within 10 months of listing. The recent underperformance should not be surprising, given that the company has had a bumpy ride on business growth so far in FY19.

ICICI Prudential Life decided to focus on its monthly premium plan and low-ticket products, and ignored high-value policies that were the backbone of its new business growth.
As Nomura Securities notes, the life insurer has offered unit-linked plans though the systematic investment plan (SIP) route, which breaks down yearly premium into monthly flows.

Insurance is a push product and the decision to focus on the average Joe, instead of high net-worth individuals with fat pockets, appears to have backfired, notwithstanding the friendly SIP route.

Hence, the annualized premium equivalent (APE) for the first eight months of FY19 fell 11% from a year ago. ICICI Prudential Life was the only listed life insurer to witness a fall in APE. An update from the insurer shows it didn’t fare well in December too and the APE contraction for the April-December period chalked up to 4%.

The troubles at its parent ICICI Bank Ltd resulted in a change in top management at both the bank and ICICI Prudential Life. Given these changes, the outlook on growth was bound to get murky.

The new managing director N.S. Kanan indicated that the insurer will maintain decent growth, but did not give a target.

But where investors have feared to tread, analysts have stuck to their positive ratings. Of the 25 brokerages featured on Bloomberg, none have a sell rating. Foreign brokerage firms such as Morgan Stanley have retained their overweight rating. They seem to be taking comfort from the improvement in value of new business (VNB) margin, a key gauge for profitability. The VNB margin rose to 17.5% from 11%, which shows that despite the collapse in premium growth, ICICI Prudential Life has been able to squeeze out profits.

Also, insurance business is a long-term bet and the growth story of the sector continues to remain. But perhaps, it is time to heed the lone dissenter Jefferies India Pvt. Ltd. Analysts at the brokerage firm have downgraded the stock to hold.

Jefferies India believes that profitability has peaked and the outlook on new business growth is muted for FY19. The brokerage firm notes that there is a secular fall in all categories, except protection plans. “We expect premium growth to suffer from declines in the high-ticket savings business, capping further improvement in persistency and slower fixed-cost amortization,” said Jefferies India in a 10 December note on the insurer.

The company’s valuations are modest compared with its peers. Even so, Jefferies believes they do not justify any more given the recent sharp slowdown in business.

At a 4.5% fall from issue price, the insurer is trading at a multiple of two times its estimated embedded value for FY20.

ICICI Prudential Life has to either grab more customers faster than everyone else, or go back to doing what it did best—targeting high-premium policies. Else, investors will soon figure out that the initial public offering wasn’t a good bet, whatever the time period.

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