Valuations support ICICI Prudential Life despite margin challenges

ICICI Prudential Life Insurance (IPRU) disappointed the market even though some analysts said the Q3FY25 results were in line. Most analysts cut margin estimates. The insurer reported M9FY25 growth of 8.5 per cent year-on-year (Y-o-Y) in value of new business (VNB) premium to Rs 1,575 crore, while total annual premium equivalent (APE) grew 27.2 per cent to Rs 6,910 crore. But margins contracted by 390 basis points (bps) Y-o-Y to 22.8 per cent. On a quarter-on-quarter (Q-o-Q) basis, VNB margins contracted 220 bps from Q2FY25 levels of 23.4 per cent.

 

The margin compression was explained by significant growth in group savings (+347 per cent Y-o-Y, 206 per cent Q-o-Q), decline in group protection (-4 per cent Y-o-Y, -4 per cent Q-o-Q), and higher share of lower yielding unit linked insurance plan (ULIP) products (75.2 per cent of savings business compared with 61.9 per cent in Q3FY24). The new surrender norms did not materially impact the company.

 

The 29 per cent growth in individual APE for M9FY25 was led by the sustained growth of business for bancassurance, agency, and direct channels which delivered 26 per cent, 41 per cent, and 18 per cent Y-o-Y growth, respectively. The annuity segment had 50 per cent Y-o-Y growth in Q3FY25, while protection growth slowed to 9.2 per cent Y-o-Y. Within savings, ULIPs grew 42 per cent Y-o-Y while non-linked business contracted 24 per cent Y-o-Y in Q3FY25. The change in mix implies limited growth in higher-margin products and higher base effects.

 

Management highlighted protection sales were strong through ICICI Bank. In group protection, credit life weakness was most obvious in the microfinance institution (MFI) segment. Its gross premium grew 23 per cent Y-o-Y to Rs 12,660 crore. Renewal premium was flat Y-o-Y at Rs 6,090 crore. The 170 bps Y-o-Y dip in VNB margin to 21.2 per cent was due to the rising share of ULIPs in the overall product mix (49.2 per cent of Q3FY25 vs 44.4 per cent in Q3FY24). The company also sourced a lumpy group fund premium during the quarter. The momentum in ULIPs has been sustained in Q4FY25 so far. On a premium basis, Y-o-Y persistency improved across all cohorts. The asset under management (AUM) grew 8 per cent Y-o-Y to Rs 3.1 trillion, while the solvency ratio stood at 211.8 per cent. 

 

Commission expenses grew 10 per cent Y-o-Y to Rs 1,100 crore. However, the implementation of a new commission structure across channel partners led to an 11 per cent sequential decline in expenses. Total expenses declined 85 per cent Y-o-Y to Rs 3,890 crore due to changes in actuarial liabilities. In distribution, the bancassurance share is at 25 per cent, and within that, the share of ICICI Bank is even lower, leaving IPRU relatively better placed in case bancassurance-specific regulations are announced. In terms of surrender charges, the company has already implemented changes in the commission structure with most of the channel partners, and the impact is seen in the sequential decline in commission costs.

 

For Q3FY25, IPRU reported a 43 per cent Y-o-Y growth in shareholder PAT to Rs 320 crore and for 9MFY25, it reported a net profit of Rs 800 crore (+18 per cent Y-o-Y). Management is confident about the distribution network. The focus remains on VNB growth, which primarily depends on APE growth. Going forward, the ability to sustain strong premium growth and improve VNB margin will be crucial.

 

The slowdown in the credit life business has been due to ongoing challenges in the MFI segment. However, the outlook is improving. Credit life business contributed 38 per cent of the protection business, within which MFI business contributed 45 per cent.

 

After a sharp selloff, IPRU looks relatively inexpensive in valuations compared with its peers. Investors will have to offset continuing margin pressures versus the trend of volume growth.