Full year should be ~15% yoy growth, but Q4’18 expected to be lower than Q4’17. Seems to be on account of a very high business quarter last year, rationalisation of expenses recently and tighter internal controls on account of Rajasthan misselling issue.
ICICI Prudential declared a very good set of results for Q4FY18 & FY18.
Few interesting points from results & conf call ->
- VNB & VNB Margin: VNB grew from 6.66bn (FY17) to 12.86bn (FY17) resulting in growth of 93%. The VNB margin increased by phenomenal 640bps from 10.1% to 16.5%.
- Embedded Value: IEV increased from 161.84bn to 187.88bn despite healthy dividend of 11.88bn. EVOP of 36.8bn & RoEV of 22.7% are very healthy. The company said that dividend will go down in FY19 as they need to preserve capital to support growth in non-ULIP business. My feeling is healthy dividend is probably paid to help in troubles of parent group.
- Protection APE: The protection business grew by phenomenal 71% i.e. 2.6bn in FY17 to 4.46bn in FY18. This has lead to growth in VNB & VNB margin. The growth in credit cover business was higher than individual life businesses. For the first time, I noticed credit protect products - Loan Protect, Loan Protect Plus, Group Loan Secure. This business has been such a driving force for HDFC life. With more players trying to get into credit protect segment, it would be interesting to track how this space evolves.
Retail Franchise: ICICI Pru has a very retail focused franchise where 98% of APE is from retail. Retail franchise has better margins than group business (high proportion for HDFC Life).
Cost Efficiency: ICICI Pru has reduced cost/TWRP from 15.1% to 13.7% i.e. reduction of 1.4%. As non-ULIP portfolio grows, it would be interesting to see how this number evolves. The cost has gone up for HDFC Life.
Renewal Premium: Renewal premium has grown at 23% for FY18 compared to 11% for HDFC Life. This might be on account of lower share of group business or more retail focused franchise.
Tax rate assumption: The company has used lower effective tax rate similar to what some of the industry players have been doing. This has added ~ 1.4bn in EV & ~1.3% in VNB margin.
Valuation: I still struggle to put a valuation number to life insurance companies. After going through several research reports for Indian & overseas insurance companies, appraisal value (AV) seems like one decent metric. AV = EV + multiple * VNB. Many reports seem to have used multiple ranging from 10-30. One can use his own multiple & come up with AV.
Disc - Forms more than 5% of portfolio. No transactions for last 90 days.
Very good set of numbers!
However my observations are that ape ticket size for protection is coming down . Is there some sort of pricing pressure??
There has been a dip in market share and growth is less than that of industry growth for the period
Most encouraging thing is faster growth in protection when compared to savings. Protection. Share has increased to 6 % from 4%
It will be interesting to see how vnb margins shape up when protection share goes to 10-15%
Q1 2018 results out. Can anyone who is tracking this stock please analyze the results. I don’t have much understanding of insurance business.
Indian Embedded Value is the main matrix used to analyze Life insurance company, which they do not publish every quarter.
Their stated position is we will publish IEV half-yearly in-line with best industry practices. Their competitors do it every quarter. I really do not know what best industry practices this group follow. Top management in all the organizations of the group seem to follow most opaque and crooked policy in name of transparency and corporate governance.
It is difficult to analyze the company given management choose not publish IEV for reasons best know to them.
It is difficult to analyse the performance of the insurance companies as the embedded value is a function of many assumptions…however we can always compare the performance of HDFC life and ICICI pru and use them as bench marks…
HDFC life is way better than icici life in terms of performance but HDFC is almost 2.5 times costlier on the basis of price to EV…other way of looking at it is that ICICI pru is undervalued…
HDFC will command that premium due to their excellent mgt and unique initiatives but we need to define that premium…for my calculation purpose i am keeping a 40% premium for HDFC life over icici life…so with HDFC life as a benchmark which has a PEV ratio of minimum 6-6.25, the ICICI should have a PEV of 3.75…to reach that PEV, the ICICI share should be valued at Rs. 491…
Q1 FY19 RESULTS UPDATE
- There was de-growth in APE for the Q1 FY19. The management claimed that de-growth was due to high base in Q1 FY18 & equity market performance. The de-growth was much lesser in the month of June. The protection APE continued to grow which has aided in growth of VNB.
- The renewal premium growth came in at 29%, which I find to be very good.
- There was marked improvement in the 49th month persistency & that also I find to be very good.
- As % of protection business grows, the cost ratios will continue to inch up.
- The VNB margin increased by 100bps to 17.5% compared to March’18 due to higher protection buinsess share & lower APE. Let’s see if they can maintain/improve VNB margins through the year.
Overall I find results to be satisfactory. Insurers start making money from 2nd, 3rd years of their business due to high cost of acquisition. The growth in renewal premium & 5th year persistency numbers are very good in that direction.
The company is focused on growing VNB & VNB margin through up-scaling protection side of the business. This direction will bring product mix closer to competitors like HDFC Life or Max Life & hopefully VNB margins will also be closer to them over time.
In the short term (FY19), if company can stem the de-growth in savings side of business & continue to grow protection side of business at this rate, we might see healthy VNB growth (50%+) by the end of the year.
On the question of EV development, one can assume the unwind of 7-10% and add VNB of the current year to get approximate estimate of EV for next year.
Disc - The stock forms > 5% of my portfolio and no transactions in last 90 days. This is not a buy/sell recommendation & investors are advised to do their own due diligence. I am not a SEBI registered analyst.
This should be cause of concern for investors. We don’t even have one matrix to compare life insurance companies!
I would argue that assumption which affect the valuation of Life insurance companies should be decided by regulator. Also they should be disclosed more readily by companies.
Can someone please explain as to why did ICICI Pru go after the ULIP market in such an aggressive manner, given the cyclicality in this segment and very lower margins? What are the advantages of being in this business apart from the growth that was witnessed in the last few years in this segment?
Uploading the H1 investor presentation for reference. Slide 22, VNB drivers (4P’s concept is pretty interesting - Premium Growth (APE), Protection Premium Growth, Persistency and Productivity) is an interesting read!.
H1-FY2019-Business-Presentation_IPRU.pdf (461.5 KB)
Disclosure: Initiating position through long term SIP
Disc : No holding. Waiting for <250 levels