ICICI Pru Life delivers margin surprise
Shares of ICICI Prudential Life Insurance (ICICI Pru Life) surged 7.1 per cent on Tuesday after it posted strong results for FY18. What cheered the Street was the 640-basis point (bp) expansion in the value of the new business (VNB) margin to 16.5 per cent. VNB is a key profitability indicator of an insurer, and is the present value of profit from new business over a given period of time, divided by the annualised premium.
According to the management, product mix changes mainly led to this sturdy improvement in margin. First, though the share of savings products in the total annual premium equivalent (APE; a sales measure for an insurance firm based on new business won by it) declined in FY18, an upward revision in Ulip charges, boosted the overall margin scenario for the company. Ulip contributed for a major chunk to savings products’ APE and around 82 per cent to the overall APE during the year. With markets turning volatile recently, it will be interesting to see how the Ulip segment performs in FY19.
Second, the share of protection products in total APE went up to 5.7 per cent in FY18 from 3.9 per cent a year ago, improving margins further as protection products are more profitable. Even going forward, the management indicated faster growth in protection products given the low penetration in India, healthy growth in retail credit (for credit protection), etc. Overall, ICICI Pru Life reported a good 17.6 per cent growth in total APE in FY18.
Apart from the product mix, improvement in persistency ratio, changes in assumptions and expenses also supported the company’s margin performance. While persistency ratio, which is the percentage of policies renewed after a specific period (indicates customer stickiness) improved across all the renewal periods, in terms of number of policies, management expenses (net commission paid plus operating expenses of an insurer) as a per cent of gross premium fell by 126 bps to 12.7 per cent in FY18. An improvement in persistency ratio is also reflected by over 23 per cent upswing in gross renewal premium in FY18.
What’s more for shareholders, ICICI Pru Life’s embedded value, too, increased by over 16 per cent (post dividend payout) and return on embedded value (ROEV) zoomed to 22.7 per cent in FY18 from 15-17 per cent during FY15-17. The embedded value is a valuation measure used by life insurance companies to gauge the value of shareholders' interest in an insurance company, and has a strong bearing on the stock price.
Considering the robust improvement in key indicators, analysts foresee further upside in the stock. “If key parameters such as VNB margin, APE growth, ROEV remain strong within this (FY18) range, the stock can go up by 20-25 per cent,” says Avinash Singh, analyst at SBICAPS Securities.