Attractive valuations make ICICI Prudential Life Insurance a long term buy

ICICI Prudential Life Insurance Company (IPru) is struggling to generate growth in the value of new business (VNB).

This is due to a combination of weak growth through the parent bank’s channels, a shifting product mix in favour of unit-linked life insurance policies (ULIPS), and higher payouts to third-party channels.

Leverage from current investments, a further reduction in contributions from ICICI Bank, and a pick-up in non-participating policies from the end of the year is key for this metric in the near to medium term.

However, after a sell-off from disappointed investors, valuations have corrected and the stock may be worth a long-term buy.

IPru reported a 3.2 per cent year-on-year (Y-o-Y) growth in the annual premium equivalent (APE) to Rs 2,060 crore in Q2FY24.

The protection segment grew 2.6 per cent Y-o-Y, while the annuity segment declined 6.7 per cent Y-o-Y during the quarter.

The VNB declined 7 per cent Y-o-Y to Rs 580 crore due to moderation in margins.

The VNB margin for the quarter stood at 28 per cent, a 200 basis points Q-o-Q decline.

For H1FY24, APE stood at Rs 3,520 crore and VNB was at Rs 1,010 crore with a VNB margin of 28.8 per cent.

Analysts have cut the estimated APE and VNB margins for FY24 and FY25.

There could be a 7- 8 per cent VNB decline in FY24, given a 7 per cent VNB decline in H1FY24.

The APE growth was also low due to weakness in ICICI Bank (down 15 per cent). The ICICI Bank contribution to APE is now down to 14 per cent.

Other (non-ICICI) banks and direct channels saw 13-25 per cent growth Y-o-Y.

The expense ratio increased to 17.2 per cent in H1FY24 versus 14.4 per cent in H1FY23, despite an increase in the share of ULIPs.

Assuming better performance through ICICI Bank channels in H2FY24, the VNB margin could move back to around 30 per cent.

IPru is focusing on adding agents, growing in smaller towns, and this should pay off in the medium-term.

The insurer is also launching new products.

These include a retail health plus protection policy in partnership with ICICI Lombard and a guaranteed product (Gift Pro) and a linked product.

Key variables to watch out for include possible comeback of APE growth and a more balanced product mix with higher new business margins and more volume coming through in non-ICICI Bank channels.

After four quarters of decline, the ULIP APE grew 13 per cent Y-o-Y in Q2FY24.

ULIPs reported growth was driven by the pick-up in direct channel and other bancassurance channels.

Retail protection growth was strong at 84 per cent Y-o-Y in Q2FY24, following declines of 17 per cent and 31 per cent in FY2023 and FY2022 respectively.

The cut in tax benefit for big-ticket policies has led to re-focus on this segment.

Management said the share of Rs 5 lakh ticket size policies remained stable, despite change in taxation, but the product mix has shifted from non-par to par and to ULIP.

The stock is trading at a discount to its private peers because it has underperformed versus its peers.

This could make it attractive for long-term investors who may compute fair value with some upside to the current share price.

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