Fiscal year 2017-18 was not expected to be a great one for ICICI Prudential Life Insurance. The now second-largest insurer, after SBI Life beat it on market share, was facing slowing business growth. That was why its stock was languishing. Adding to its woes were the troubles its parent ICICI Bank is mired in.

But good days are here for this stock. The bumper growth of 93% in value of new business reported for FY18 came as a surprise and drove the stock up over 8% on Tuesday. Though the insurer reported a slower new business premium growth of 17.6% compared with 28% in 2016-17, even this growth is not to be sneezed at. What stole the show was an impressive 93% jump in value of new business (VNB) or in other words, the extent of profitability of new customers for the insurer.

While the management conceded that such a big growth in value for new business cannot be on a sustained basis, there are enough impulses for the insurer to avoid a sharp decline in growth, the company said.

That explains why the stock was bought like hot cakes during the day. But even if we dig deeper, there aren’t any nasty surprises.

What should please investors is that the products the insurer underwrote will bring more profits than before on a consistent basis. ICICI Prudential Life has rightly focused more on protection products which have a woefully low share in the overall product mix. Its customers are turning more profitable and they are sticking to their insurer too.

The company saw improvement in the persistency ratios across all periods during FY18 compared with the previous year. Profitability has increased not by merely generating more revenue but also through cost reduction.

ICICI Prudential Life’s cost ratios improved even though its commission surged. The management said that its new products have a higher commission rate explaining the surge in commissions but the company expects to maintain its cost ratios going forward.

Does this mean that the stock now needs a re-rating?

Granted that protection products are growing at a scorching pace of 70% but the company has rightly said that such growth rates are not sustainable for a long period. Also, the protection product share is still just 5.7% of total portfolio, unlike other insurers which have a higher share.

Until there is a meaningful rise in the margin-friendly protection business, the stock already reflects most of the positives of the insurer.

At the current level, the stock trades at around three times its FY18 embedded value, lower than HDFC Standard Life and almost on par with its close rival SBI Life.

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