ICICI Pru: Good record, growth prospects

Given its business strengths, sound financials and high growth potential, long-term investors could consider the public offer

ICICI Prudential Life Insurance Company is the country’s leading privately owned entity in the segment. It has strong parentage, a record of consistent premium growth, healthy profitability and high return ratios. It is in an under-penetrated sector, with high growth potential.

The company has been growing ahead of the sector average in the past few years and garnered more market share in the process. Positively, the management expects this trend to continue.

At the upper price band of Rs 300 to Rs 334, its initial public offering (IPO) of equity values the company at 3-3.4 times the FY16 embedded value (EV). “This is lower than the 4.1 times EV commanded by the HDFC Life-Max Life combine,” estimates Suresh Ganapathy, financials analyst at Macquarie Capital. Embedded value (EV) represents the present value of future profits from assets, after adjusting for the risks at insurance companies.

On future business estimates, too, the valuations are lower than HDFC Life-Max Life combined. For FY18, leading brokerage Nomura estimates the IPO is valued at 2.45-2.73 times EV, a 20-30 per cent discount to the multiple of HDFC Life-Max Life, which trades at about 3.5 times.

While on a comparative basis, the IPO valuations appear reasonable, investors must remember these are 47 per cent higher than the previous stake sale to Premji Invest and Temasek, which valued ICICI Pru Life at Rs 32,500 crore. Interestingly, both these private insurers command a high growth potential premium over global counterparts such as AIA and China Life, which trade at 0.9-2 times on a price to EV basis. Overall, even as most analysts are positive on ICICI Pru Life’s business prospects, some are concerned on its valuations.

“At such lofty valuations, there is very little left on the table for investors,” adds Ganapathy. Another way to look at these companies is by valuing them as asset managers, as about 70 per cent of assets are towards linked products for ICICI Pru Life, he adds.

Going forward, though, the management aims to grow its high-margin protection products over unit-linked ones. This, with continued focus on increasing of cost efficiencies, will fuel margins for the company and narrow the gap with private peers. Notably, the company's value of new business (present value of future earnings of the new policies written during a particular period) margin is already improving—it increased to eight per cent in FY16 from 5.7 per cent in FY15. Given the strong management record and high growth potential, investors with a long-term view can consider the issue.

Consistent leadership position in the private life insurance space, a diversified multi-channel distribution network (among the best in private sector life insurance players) and rising focus on digitisation are other positives.

The company's persistency ratios, which measures the duration that customers continue with their policies, have also increased consistently over the past few years. It is among the best in the private sector here. Capital positioning remains strong, as reflected in the solvency ratio (a measure of capital adequacy at insurance companies) of 320 per cent in FY16. This is more than double the sector regulator’s stupulation of 150 per cent.