Strong growth to support ICICI Pru Life valuations

ICICI Prudential Life Insurance Company (ICICI Pru) has multiple reasons to feel optimistic about. The company made best use of the opportunity thrown up by demonetisation and increased its market share in the private sector by 210 basis points to 27.2 per cent in November 2016 as compared to October 2016. It is amongst the few bank-led insurance companies that have managed to cash in on the higher footfalls in its bank branches in November. Even as the high growth in premiums in November (up 79 per cent y-o-y) may not be easy to replicate, growth is expected to remain healthy.
 
Firstly, the demonetisation process brought in unaccounted money into the banking system and led to many accounts being opened. Secondly, with most banks cutting rates sharply (and more cuts could be on the way), ICICI Pru stands to gain given that its unit linked insurance products (ULIPs) are positively correlated to falling rates. This is because these products invest into equity and debt markets which tend to benefit in a falling interest rate regime.
 
In this backdrop, it is not surprising that leading foreign brokerage Morgan Stanley has raised its growth estimates as well as target price for ICICI Pru in a report dated January 5, 2017. "We raise our value of new business (VNB) estimate to reflect lower rates and pickup in financial savings since demonetisation as well as likely steady persistency trends helped by zero cash collections," according to the Morgan Stanley analysts. VNB represents present value of premiums. Morgan Stanley has raised ICICI Pru's FY18 estimated VNB by four per cent and its target price by five per cent to Rs 385 a piece. This indicates an upside potential of 16 per cent from current levels. The upgrade pushed the stock to a new 52-week high of Rs 338 on Friday.

 
Notably, post this surge the ICICI Pru stock has crossed its listing price of Rs 334 a piece. Though seen as expensive by many, the stock is likely to sustain valuations of 2.8 times FY18 estimated embedded value given the strong fundamental growth triggers. Embedded value (EV) represents the present value of future profits from assets, after adjusting for the risks at insurance companies. Key downside risks include weak equity markets and rising competition intensity.