ICICI PruLife is ceding market share to aggressive competitors (Reuters)
ICICI PruLife is ceding market share to aggressive competitors (Reuters)

Why are investors willing to forgive ICICI PruLife's weak FY19 performance?

  • All the profitability metrics of ICICI Prudential Life Insurance held up. The value of its new business margin rose to 17% in FY19
  • ICICI PruLife saw its business growth drop because it shifted its focus to small-ticket products a few quarters ago

Mumbai: Life insurance as a product may be a hard sell but that doesn't seem to be the case with the stocks of life insurers.

ICICI Prudential Life Insurance Ltd’s stock surged 4% in opening trades today despite the insurer reporting a 23% drop in net profit for the March quarter and a 30% drop for the full year.

Even the most popular insurance growth story didn’t reflect in the metrics of the insurer with its annualised premium equivalent growing by just 11%. For the full year, it declined by 3%.

So what explains the sanguine reaction of investors today when fourth-quarter results aren’t any better?

Part of the reason could be that bad news had already been factored in by investors. To be sure, ICICI PruLife saw its business growth drop because it shifted its focus to small-ticket products a few quarters ago. Nomura Securities noted that the effect of this change on growth could last a year.

The silver lining of the results: The insurer squeezed profits even as its business growth fumbled. All its profitability metrics held up. The value of its new business margin, a key profitability metric, rose to 17% in FY19.

What's more, the share of margin-friendly protection business increased to 20.9% of new business premium for the year from just 11% the year before.

That said, ICICI PruLife is ceding market share to aggressive competitors, which is a bad sign. The insurer gave up its job of selling big-ticket products, mainly market-linked, to rich investors and turned its focus to smaller retail customers.

As insurance is a long term business, there is nothing wrong with this move. But in the short-term, this entails a lot of pain on the growth side, which is already visible now.

So far, investors seem to have taken the pain in stride in the hope of long-term dividends.

A testimony of this was the good response to the life insurer’s promoter stake sale a month back. Shares had gained 9% after the offer for sale sailed through.

Notwithstanding the rise, ICICI PruLife’s stock has gone nowhere in FY19, while its peers have seen modest gains. Also, the life insurer’s stock trades at a sober multiple than its peers. Jeffries India Pvt Ltd estimates the insurer’s embedded value for FY21 to be 25,922 crore and notes that valuations are reasonable.

Close