ICICI Pru Life Insurance: Focus on growth critical to curb underperformance

ICICI Prudential Life Insurance
The ICICI Prudential Life Insurance or I-Pru Life stock has always enjoyed preference among investors, though mainly for its cheapest valuation among the listed life insurance stocks. At 2.5x FY21 estimated price-to-embedded value, the I-Pru Life stock trades at a 25 - 40 per cent discount to peers. However, seen against SBI Life and HDFC Life’s gains of 10-17 per cent in the last three months, the I-Pru Life stock has lagged them with 8 per cent gains -- the reason being a greater contraction in monthly premia collected.

While April-June could be regarded as the period when the business was under moratorium and reeling from the lockdown, July and August haven’t been any better. With a 29 per cent YoY fall in monthly premia collected during August, I-Pru Life’s performance is the worst among the lot.
To be fair, a lot of efforts have gone into reshaping the product profile and the value of new business (VNB) margin. Protection policies accounted for over a fourth of its product mix in the June quarter (Q1FY21), almost doubling in a year, and the VNB margin expanded from 21 per cent to 24.4 per cent during this period. While this is commendable, given the tough times, analysts at Nomura note much of it is already absorbed in its stock valuation. Therefore, to move up the pecking order, the insurer needs to pay attention to monthly premia growth.

 

 
But that may be no easy task in the near term. A steep fall in demand for unit-linked insurance plans (ULIP) may have shrunk the premia collected for I-Pru Life. Given the volatility in the equity market, the share of ULIPs to its product mix dipped from 71 per cent last year to 43.6 per cent in Q1FY21. Weather protection, group insurance, and other businesses make up for ULIPs’ decline is the critical aspect. Compared to ULIPs, these products entail higher cost and steep growth targets may require the insurer to cede a bit on the VNB margin. Further, analysts at Edelweiss note that I-Pru Life has decided to stay away from promoting non-par savings product. These tend to be like simple fixed-deposit instruments and offer decent growth potential (but less value yielding) for insurers.
However, having made the choice, opting between growth and margins will be a tricky proposition for I-Pru Life. Under these circumstances, growth may entirely hinge on an overall change in sentiment towards insurance products and customers’ affordability coming back to normalcy.



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