Challenges outweigh ICICI Pru’s prospects

Investors hope that Bagchi will be able to drive premium growth, which has been a sour point. “Investor expectations are for improved growth that can aid re-rating; we see pick-up from FY25,” said analysts from Jefferies India in a report on 16 March. “ICICI Pru’s current CEO (Mr. N.S. Kannan) led diversification of channels/ products & better underwriting. ICICI Pru can gain from Mr. Bagchi’s strengths in savings platforms & client engagement,” they added.

Note that subdued annualized premium equivalent (APE) growth weighed on ICICI Pru stock even as it put up a strong show in its value of new business (VNB). VNB is measure of profitability for insurance companies.

According to ICICI Pru, under Kannan’s tenure, the company is on path to double its FY19 VNB by FY23. Company’s VNB margin was at 17% in FY19 and has risen consistently each year.

VNB margin for nine months ended December (9MFY23) was 32%. The growth was primarily driven by better product mix towards high-margin products.

But growth in APE has been subdued over past few years (see chart). Analysts point out that VNB growth via margin expansion can be sustainable only to a certain extent. Beyond that, premium needs to grow.

One factor that has hurt premium growth is the sharp drop in ICICI Bank channel’s contribution to APE. In the past few years, ICICI Bank preferred to sell certain categories of ICICI Pru’s insurance products, which has taken a toll on its overall APE growth. “Growth in the banca channel has been weak, so ICICI Pru is focusing on other partnerships to offset weak growth in ICICI Bank’s banca channel,” said analysts from Motilal Oswal Financial Services Ltd in a report on 17 March. Accordingly, the mix of ICICI Bank in overall APE has moderated to 16.9% in 9MFY23 from 48.8% in 9MFY20. On the other hand, other banca channel’s mix improved to 13.5% from 4.4%, the Motilal Oswal analysts said.

To be sure, while APE growth appears challenging due to weakness in the bancassurance distribution channel, the FY24 budget proposals that will be effective April could be a dampener for growth.

The budget has proposed to tax maturity proceeds on life insurance policies with an aggregate annual premium of over ₹5 lakh. While the insurance industry expects clarifications and relaxations in this regard, it could have a near-term impact across all life insurance companies.

ICICI Pru’s of share non-unit linked policies with annual premium of above ₹5 lakh is about 6% of its total APE for 9MFY23.

Plus, there is a fear that government’s push towards the new tax regime would reduce the appeal of life insurance products as tax-saving instruments. In this backdrop, as taxpayers plan for tax saving, the ongoing March quarter is expected to see a bump up.

Meanwhile, valuations are not demanding. Despite rising in the past two days, ICICI Pru’s shares are down 10% so far this calendar year. “Stock trades at steep discount of 1.5 times price to embedded value, compared to peers like HDFC Life, trading at around 2.2 times price to embedded value,” said Madhukar Ladha, director, Nuvama Institutional Equities.

But for a re-rating to happen, one of the main factors is the visibility on premium growth, he added.