Companies' Research Facts

ICICI Prudential Life: Strong Buy ??

(A) Introduction

ICICI Prudential Life Insurance Co Ltd is amongst the market leaders in the private sector life insurance space. The company began its operations in the year 2001. Now, the company holds 6% market share for FY19 as per first year life insurance premiums. ‘ICICI Bank Ltd’ & Prudential Plc jointly promoted the company through their indirect wholly owned subsidiary ‘Prudential Corporation Holdings Ltd’.  

(B) Major Event Since Inception

ICICI Prudential Life Insurance Co Ltd incorporated on 20th July 2000. The company registered with IRDAI on 24th November 2000. Within a span of one year the company sold sell over 1 lakh policies given its renowned brand name. A brief description of the important milestones achieved by the company during the life time:

2001:

ICICI Prudential Life Insurance Ltd started operations

2002:

The company in 2001-02 sold 1,00,000 policies.

2005:

The company crossed the mark of 10,00,000 policies during the year.

2008:

The company’s total policies crossed 50,00,000 mark. Total premium receipts crossed Rs. 100 billion and Assets Under Management (AUM) reached Rs. 250 billion.

2010:

In order to carry on the operations of Pension Funds, ICICI Prudential established its subsidiary ‘ICICI Prudential Pensions Fund Management Company Ltd’.

ICICI Prudential earned its maiden profit of Rs 2.58 billion and achieved Rs 500 billion mark of AUM.

2012:

The company paid its first dividend.

2015:

AUM of the company crossed Rs. 1 trillion.

2016:

In September 2016, the shares of ICICI Prudential listed on both BSE & NSE and oversubscribed 10.48 times.

2017:

In July 2017, ICICI Prudential Life Insurance Co Ltd agreed on taking over policyholders’ liabilities and assets of Sahara India Life Insurance Co. Ltd, effectively wound up by IRDAI in previous month. The reported valuation of liabilities of Sahara Life at the time was Rs. 9 billion (less than 1% of Company’s balance sheet size). Later during the month, IRDAI directed the company to take over life insurance portfolio of Sahara Life. Portfolio was less than 1% of the balance sheet size of the Company.

2018:

BOD of the company appointed Mr. NS Kannan as MD and CEO of the company w.e.f 19 June 2018 subject to approval from IRDAI. This was post resignation of Mr. Sandeep Bakshi as MD and CEO of the company. Mr. Sandeep Bakshi continued as non-executive director of the company. ICICI Bank appointed Mr. Sandeep Bakshi as MD and CEO. Mr. Kannan was CFO and executive director of ICICI Bank between 2009 and 2013.

Later in Sept 2018, the company joined hands; bancassurance partnership with Saraswat Co-operative Bank wherein branches of Saraswat Bank shall offer the entire range of Protection and Savings products of ICICI Prudential Life.

2019:

Pension Fund Regulatory and Development Authority (PFRDA) granted the PFM, on its application, the license to act as Point of Presence (PoP) entity for distributing products under NPS.

(C) About the Promoter

ICICI Bank Ltd is India’s leading private sector bank with a total consolidated assets at Rs 12,388 billion in FY19. ICICI Bank holds 52.87% of the stake in the company out of total promoter holding of 74.98%.

Prudential Plc, incorporated in England & Wales is financial services group.  The group serves over 26 million customers and had £657 billion worth assets under its management as on December 2018. The company is listed on the stock exchanges in London, Hong Kong, Singapore and New York. The subsidiary of Prudential Plc that is Prudential Corporation Holdings Ltd holds 22.11% stake in ICICI Prudential Life Insurance as on 30 June 2019.

(D) ICICI Prudential Life Insurance Management

The board of directors of the company consists of industry veterans with wide experience in the insurance and investment industry. Since ICICI Prudential Life is a joint venture between ICICI Bank Ltd and Prudential Corporation Holdings, the company finds representatives of both the companies on its board.

ICICI Prudential is currently managed by Mr N.S. Kannan, MD & CEO, after the previous MD &CEO Mr Sandeep Bakshi was elevated to be the MD & CEO of ICICI Bank Ltd. Mr Kannan joined the ICICI group as a Project Officer and his career spanned over 28 years in the group.

Mr Puneet Nanda is the Deputy Managing Director of the company. He has an experience of over 2 decades in financial service and worked in ICICI Securities & J.P. Morgan before joining ICICI Prudential Life Insurance. As Deputy MD, Nanda is responsible for overseeing functions like Sales & Distribution, Product Design & Management, Brand & marketing, Investment Management, Digitalisation & Technology, Customer Service & Operations as well as Underwriting & Claims.  Further, he attends the conference call with analysts along with the CFO of the company.

In FY19, the board of directors including the KMP withdrew Rs 23.33 crores which formed 0.4% of the overall APE and 0.45% of the individual APE.

(E) IPO of ICICI Pru Life Insurance Co Ltd

ICICI Prudential Life Insurance Company came up with an IPO with an offer for sale of 18,13,41,058 equity shares of Rs 10. The issue remained open from September 19th to 21st and the shares were offered at a price band of Rs 300-334 per share. The shares were offered in a lot of 44 equity shares with minimum number of shares being allotted as 44.

The issue got overwhelming response and oversubscribed 10.48 times. The stock listed on 29th September 2016 on both BSE & NSE, but the shares tumbled nearly 11% on the first day. Because, the analysts expressed their concerns over the expensive valuation of the company. Even after opening at a discount, the shares fell further as investors panicked after Indian army launched surgical strike on the terror camps in Pakistan.

(F) Shareholding Pattern

As on 30th June 2019, the promoter entities of ICICI Prudential held 74.98% shares in the company while the remaining 25.02% of the shares held by the Public.

Amongst the public shareholders, Institutions comprising of Mutual Fund entities, foreign investors, Financial Institutions/ Banks and Insurance companies held 17.81% of the stake. On the other side, Non-Institutions including retail investors, trusts, corporates and NBFC’s held 7.21% of the shares of the company. Click to enlarge the image:

icici prudential life insurance shareholding pattern 2019
icici prudential life insurance shareholding June 2019

(G) Shareholders holding more than 1%

icici prudential life shareholders holding more than 1%
icici prudential life major shareholders

(H) Products Offered

ICICI Prudential offers a wide array of products covering the saving as well as protection needs of the client. The products include policies offering term insurance, health insurance, ULIP, Savings and Retirement plans. The company also provides group plans like protection against loan liability, gratuity cover, payment of compensation, leave encashment, annuity plans etc.

ICICI Prudential also provides micro insurance term plan designed specifically for the rural population with lower premiums and simple procedures. Further, the company has bundled the product offerings in the form of:

  • Pure Protection Plans- These plans are simplest of all the plans and provide predetermined amount to the dependents in case of an unfortunate event within the term of the policy.
  • Protection & Savings/Retirement Plans- These plans help a policyholder in not only creating wealth but also offer the advantages of a life cover.
  • Group Plans- These plans cover an entire group of people with a single insurance policy, the group can be a formal group comprising of an employer and an employee or an Informal group based due to cultural or social organization.

(I) ICICI Prudential Life Insurance Premium Breakup

Premium refers to the lump sum or regular amount which a client needs to pay to an insurer for a contract of insurance. The bifurcation of premium income:

1. On the basis of year of policy/renewal

First year premium is premium on new business, the renewal premium is premium received on old policies which are being continued with the company and the single premium is the one-time payment of premium.

In FY19, the company’s first year premium constituted 23% of its total premium income, while renewal and single premium constituted 66% and 11% share respectively. Click to enlarge the image:

icici prudential life premium income for different policy categories
icici prudential life premium income for different policy categories

2. On the basis of Product Segments

ICICI Prudential Life Insurance deals in broadly 2 types of products – Savings & Protection. Savings constitute the major chunk of premium and accounted to 90.7% of the total premium received in FY19 while the protection business accounted to 9.3%.

Savings premium of the company includes premium from ULIP, Participative, Non-participative, Annuity & other products whereas Protection includes premium from Retail protection, Credit life & Group term protection products. Click to enlarge the image:

icici prudential life insurance premium income for different types of products offered
icici prudential life insurance premium on the basis of product segments

As a % of APE (Annualised Premium Equivalent)

Amongst the 9% premium from Protection business, Retail protection products form 60% of the business, while credit life and group term protection products form 22% & 18% of the business respectively.

3. On the basis of year of Geographical Presence

ICICI Prudential Life Insurance deals only in India and thus, the entire premium income for the company is from India with none from the foreign nations.

4. On the basis of year of Distribution Channels

An insurance company sells its insurance products using the distribution channels of Bancassurance, Agency, Direct, Corporate Agents & brokers and Group.

The company has a diversified distribution mix with non-promoter channels contributing around 50% of the APE in FY19. Click to enlarge the image:

icici prudential life insurance distribution channels contribution to premium income
icici prudential life insurance distribution channels contribution to premium income

(J) ICICI Prudential Life Insurance Assets Under Management

Assets under Management refer to the total investments that an insurance company manages on behalf of clients. The AUM of ICICI Prudential gre\w its assets under management from Rs 1039 billion in FY16 to Rs 1604 billion in FY19.

icici prudential life insurance assets under management AUM growth in last 4 years
icici prudential life insurance assets under management growth in last 4 years

In FY19 for its linked products, the company invested over 60% of the AUM into Equity products and the balance into debt based funds. Whereas for its Non-Linked products, the company invests over 80% of the funds into Debt based products and the balance into equity based products, a limited exposure of less than 1% is made towards real estate.

On an overall basis, AUM mix in FY19 consisted of 51.8% investments into Debt and 47.9% investments into Equity and meagre 0.3% investments in to Real Estate and others. Click to enlarge the image:

icici prudential life insurance assets under management AUM mix under debt, equity or other investments
icici prudential life insurance assets under management AUM mix

(K) New Business Margin

  • Value of New Business FY19 – Rs. 13.28 billion
  • Value of New Business Margin FY19 – 17%

In FY19, the value of new business with ICICI Prudential grew by 3.3% year on year, the Value of New Business Margin showed an improvement of 50bps from 16.5% in FY18 to 17% in FY19.

This was largely due to company’s focus on protection business which has better margins than the savings products. Protection new business premium of the company has multiplied seven fold with in a span of 3 years. It now constitutes ~20% of the new business premium received; although as a part of Annualised Premium Equivalent, protection only forms 9.3%.

VNB is the measure of future profit streams from the new business written during the year. It is the present value of future profits to shareholders as measured in the year in which the new business is written. VNB is reported net of new business expenses.

VNB margin is the ratio of VNB for the period to APE for the period. It is similar to the profit margin for any other business/industry.

(L) Persistency Ratio

Persistency ratio is an important metric to track as persistency is a key driver of profitability for an insurer. In insurance parlance, policy retention is known as “persistency” and “persistency ratio” measures how long customers stay with their policies. Persistency ratio that’s disclosed by the insurance companies measures the number of policies (both by count and premium) that continue in its books by the end of the first year (13th month persistency), second year (25th month persistency), third year (37th month persistency), fourth year (49th month persistency) and fifth year (61st month persistency). Click to enlarge the image:

icici prudential life insurance persistency ratio FY18 vs FY19
icici prudential life insurance persistency ratio FY18 vs FY19

ICICI Prudential has the industry leading 13th month persistency ratio of 87.4% in FY19. The 13th month persistency level of the company has been increasing steadily for the company reflecting the quality of sale of the company. On the other hand, the 49th month persistency level depicts the proportion of the customers who are continuing with the company’s policy. Click to enlarge the image:

icici prudential life insurance persistency ratio in last 4 years
icici prudential life insurance persistency ratio in last 4 years
icici prudential life insurance persistency ratio for ULIP Par Non-Par and protection products
icici prudential life insurance persistency ratio for different product categories

The 13th month Persistency of ICICI Prudential is maximum for the Non-Participative product at 99% followed by Protection product at 90.8%, Participative product at 89.4% and lastly by ULIP with 86.6%. On th         e other hand, the 49th month persistency is maximum for Non-Participative products at 96.8%, followed by ULIP with 64.8%, Participative product at 62.7% and lastly by protection at 50.2%.

(M) Solvency Ratio

The solvency ratio is a key metric used to measure an enterprise’s ability to meet its debt obligations and is used often by prospective business lenders. The solvency ratio indicates whether a company’s cash flow is sufficient to meet its short-and long-term liabilities. In India, IRDAI the regulator of insurance industry requires life insurance companies to maintain a solvency ratio of more than 150%.

ICICI Prudential has a fairly high amount of solvency. In FY19 the company’s solvency stood at 215% which was more than that of HDFC Life which had solvency of 182%.

The company’s solvency ratio over a period of previous 4 years is illustrated below: Click to enlarge the image:

icici prudential life insurance solvency ratio from FY16 to FY19
icici prudential life insurance solvency ratio from FY16 to FY19

(N) Commission Expense

Commission forms an important element of the cost as it is directly involved in the sourcing of business and is also called as the Acquisition cost. The company’s commission as a percentage of APE is 5.6% in FY19 while the same stood at 5.5% in FY18. The bifurcation of the Commission paid by the company can be done on the following basis:

1. On the basis of Category of Business

In FY19, 72% of the commissions paid by the company were directed towards the first year premiums, whereas 25% of the commissions were paid on the renewal premiums and balance 3% were paid towards single premium plans. Click to enlarge the image:

icici prudential life insurance commission expenses for different first year renewal and single premium
icici prudential life insurance commission expenses for different business categories

2. On the basis of Distribution Network

In FY19, ICICI Prudential paid 73% of its total commissions to corporate agents. Further, 22% towards individual agents and 5% of the commissions were paid to others including brokers, marketing firms and web aggregators. Click to enlarge the image:

icici prudential life insurance commission paid to agents and distributors
icici prudential life insurance commission paid to agents and distributors

(O) Market Share

Being among the top 3 private life insurance companies, ICICI Prudential owns a considerable market share. With passing years the company has made all the attempts in order to maintain and further grow the market share. As per IRDAI in FY19, LIC held the largest market share in Life insurance business with 53% share followed by top 3 private sector life insurance companies with 29% market share while other players hold a market share of 18%.

At FY19 end, ICICI Prudential has 6% market share on the basis of first year premiums.

(P) Subsidiary Company

As on March 2019, ICICI Prudential has one wholly-owned subsidiary ‘ICICI Prudential Pension Funds Management Company Ltd’ which acts as a pension fund manager under the National Pension Scheme.

The company was successfully able to get license from Pension Fund Regulatory & Development Authority (PFRDA) to act as Point of Presence entity for distributing products under NPS with effect from Feb 13, 2019.

(Q) Penalties

In March 2017, ICICI Prudential was penalised by the insurance regulator with a penalty of Rs 20 lakh. The company was penalised on a number of charges like the insurer making pay outs to group master policyholders in the name of marketing support fee for display of products on the latter’s premises. While the charges including inability of the company in settling maturity claims within prescribed time, delay in processing surrenders/ partial withdrawals and free look cancellations not being in line with the regulations did not attract any penalty on the company by the regulator.

(R) Corporate Actions

ICICI prudential has been paying regular dividend since the company listed on the stock exchanges. But the company has no history of issue of bonus shares, rights issue, split etc.

After the company listed on the stock exchanges, the promoters of the company twice announced offer for sale, the details are:

June 2018- ICICI Bank Ltd offered up to 1,43,55,550 equity shares representing 1% stake in ICICI Prudential at a floor price of Rs 390/- share.

March 2019- Prudential Corporation Holdings Ltd offered up to 3,73,30,397 equity shares of the company representing 2.6% of the stake, the company also gave an option to additionally sell 1,59,37,028 equity shares representing 1.1% of the stake at a floor price of Rs 300/- share.

(S) Opportunities and Risk/Concerns

Opportunities

(i) Provision of Social Security

Given the patriarch society of India, where till today the male is the breadwinner, loss of the breadwinner imposes a lot of hardships on his family. Life Insurance enables the fulfilment of the family’s financial goal even in the absence of breadwinner.

(ii) Favourable Demographics

India by the year 2030 shall have around 724 million people in the age group of 25-59 years, looking for securing the future finances and thus, be opting for plans including Life Insurance, Savings options as well as pension plans for their retirement.

(iii) Huge Protection Gap

Protection Gap is the difference between the resources needed and resources already available for the dependents to maintain their standard of living in the event of untimely death of the earning member of the family. As per Swiss Re, the protection gap for India is nearly USD 8.56 trillion. Not only the protection gap but Protection ratio which is the ratio between protection gap and protection needs is also very high for India at 92% while for countries like Japan it is 56%, South Korea 85% etc.

(iv) Lack of Formal Retirement Provision

Ex the organized sector, a larger portion of the population in India remains out of the coverage of a formal retirement provision. Thus, exposing them to a future without any financial security leading to dependence on the children and the government at large.

(v) Amendments by Pension Fund Regulatory & Development Authority (PFRDA)

PFRDA has allowed government employees to choose the funds they want to invest in as well as the choice of asset allocation. With this regulation, the private sector is open to tremendous scope amongst the government employees. Further, PFRDA licensing ICICI Prudential Pension to act as POP (point of presence) entity further enhances the scope of growth for the company.

(vi) Emphasis on Credit Protection Plans

With growing number of NPA’s and the cases of inability of a borrower to repay loans, the life insurance companies have come up with credit protection policy. Wherein the families of a deceased are protected from the repayment of credit, thus providing an additional advantage over the plain vanilla life insurance policy.

Risks/Concerns

(i) Investment Risk

Companies like ICICI Prudential whose large part of the business is formed by the savings product with stand the risk of returning the guaranteed amount. In case the companies due to any reason are unable to park their funds under correct and growing businesses, a huge burden shall haul over the company at the time of maturity. Further, the product mix of ICICI Prudential is highly towards ULIP and susceptibility of ULIP’s to market fluctuations makes the company’s operations vulnerable to the vagaries of the market. 

(ii) Meeting the Regulatory Requirements

Insurance industry in India is governed by IRDAI who is the watchdog for insurance companies. Company’s need to follow the guidelines of the regulator like maintaining minimum solvency ratio, ensuring the quick disbursal of claims etc. In case the company is unable to meet such criteria’s it faces penalties from the regulator which tarnish the image of the company.

(iii) Mortality & Morbidity risk

Mortality risk is the risk that the insurance company will have to bear financially in case most of its life insurance policyholders die before their expected lifespans. Morbidity Risk refers to the frequency with which diseases appear in the population. Although, in order to avoid financial crisis arising out of mortality and morbidity, ICICI Prudential diversifies its products.    

(iv) Distribution Channel Related Risk

The insurance companies largely depend on the third parties in order to sell their products who on successful selling are entitled to a fixed amount of commission. In order to earn more commission these agents may mis-sell products which not only harasses the buyer but also lead to a negative impact on the operating metrics like Persistency Ratio, Cost expense ratio of the company.

(v) Open Architecture in Distribution

With government allowing open architecture in Bancasssurance, now the banks would be allowed to sell products of 3 life insurers, general insurers and health insurers each. Thus, the banks would now have an upper hand in demanding more commissions from the Insurance companies.

(vi) Declining Market Share

In the previous few years, the market share of ICICI Prudential has been lowering. While its peers are not only able to grow new business but also the margins, the company’s VNB Margins continue to hover around 17%. A continuing loss of market share to the competition would impact negatively on the growth of the company.

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References:  Annual Reports, News Publications, Investor Presentations, Corporate Announcements, Management Discussions, Analyst Meets & Management Interviews.

Disclaimer: The report only represents personal opinions and views of the author. No part of the report should be considered as recommendation for buying/selling any stock. The report & references mentioned are only for the information of the readers about the industry stated.

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