ICICI Prudential provides growth protection

The shadow value or modified form of book value is the sum of the adjusted book value and the present value of future profits locked in existing policies.

The valuation cut can be attributed to disappointment in the trend in two important financial parameters. The company’s annual premium equivalent (APE) or total revenue grew just 4.7% year-on-year in FY2024. Compounding the problems, the economic profit margin, also known as value of new business (VNB) margin, fell to 24.6% in FY2024 from 32% a year earlier, as the share of ULIP, a less profitable product, rose to 43% from 36% in the overall APE.

The renewed interest in ICICI Prudential stock is mainly due to faster APE growth of 34.4% in the June quarter (Q1FY25), which raised investor hopes. The growth was mainly driven by 78% growth in ULIP sales, which now accounts for 51% of APE. Although, it reduced VNB margin by 600 basis points YoY to 24%, in line with the margin seen in the previous financial year, indicating that further margin contraction may be limited.

During an interaction with analysts last week, the company’s management reiterated the industry’s demand for adopting accounting based on International Financial Reporting Standards (IFRS). Accounting in insurance as per Indian accounting standards, especially in life insurance, is such that it drags down reported profit and earnings per share. As such, the price-to-earnings ratio for companies like ICICI Prudential seems quite high and is above 100x for the estimated earnings of some brokerages for fiscal year 2025.

For example, Indian accounting standards require that the total cost of acquiring a customer, such as commission paid to agents, should be recognised upfront in the profit and loss account, whereas IFRS 17 allows such costs to be deferred. With the adoption of IFRS, there is also a need for a risk-based capital requirement instead of a solvency-based one. A risk-based requirement allows for differentiated capital requirements based on the size and risk involved in the business of an insurance company, instead of a uniform solvency-based capital for all companies. The company’s management believes that the introduction of a new capital parameter would mean lower capital requirements and help in higher growth.

Going forward, VNB growth should reflect APE growth as most of the cost growth seems to be lagging and operating leverage is expected to come in. VNB growth will largely be a function of product mix. Hence, the effort would be to improve margins at product level by extending the term, increasing the sum insured, providing higher add-ons/additions etc. The company continues to focus on absolute VNB growth without a specific margin target. It is moving away from businesses with negative/low margins.

Hence, there could be further hikes in analyst estimates based on ICICI Prudential’s strong 28.5% year-on-year APE growth in the first five months of FY25. Analysts at Emkay Global Financial Services note that there is a risk to an upside in their APE estimates for FY25. They also add that there is a relatively lower risk for the company from the new buyback regulations that will come into effect from October as it has lesser reliance on unrelated savings products at 17% APE in Q1 FY25.