IPO Note | Insurance
September 16, 2016
ICICI Prudential Life Insurance Co. Ltd.
NEUTRAL
Issue Open: September19, 2016
Issue Close: September 21, 2016
ICICI Prudential(I-Pru) is the largest Pvt Sector insurance player with a market
share of 21.9% in the pvt sector and 11.3% share in the overall industry. The
Issue Details
company had a persistency ratio of 82.5% and solvency ratio of 320%, one of
Face Value: `10
the best in the industry.
Embedded Value reflects the value of existing & expected profit from past
Present Eq. Paid up Capital: `1,433cr
policies in force: I-Pru’s FY16 Embedded Value (EV) was
`13,939cr,
Offer for sale: 18.1 cr Shares
comprising of Adjusted Net worth of `5,514cr and Value in Force of Existing
business at `8,426cr. Since insurance is a long-term contract the cash inflow
Amount raised: `5,440- `6,057crs*
happens over multiple years, while a large part of the expenses occurs in the
Post Eq. Paid up Capital: `1,433crs
initial stage. So, Value in force is the value of future cash flows of all the
policy in existence, discounted at Risk Free Rate.
Market Lot: 44 Shares
Scope for improving VNB margin: The ability to growth new business
Price Band: `300 - 334
premium (APE) and improve the margins on that, is another critical factor for
valuing an insurance company, the resultant of which is called Value of New
Post-issue implied mkt. cap `43,060 - `47,940cr*
Business (VNB). I-Pru has been able to improve its net new business margins
Note: * indicate at a lower end and upper band respectively
from 5.7% of the premium in FY15 to 8% in FY16. The margins are still low
compared to others but what gives confidence is the increasing trend. While
the APE grew by 9% in FY16 to `5,170, the VNB grew by 52.6% to `412cr,
Book Building
largely due to improved margins (backed by increasing business from pure
protection plans). Further, assuming acquisition cost were reduced by 30% as
QIBs
50%
per the management the VNB would have been `710cr for FY16.
Non-Institutional
15%
Higher stickiness of clients & funds attracts high valuation for insurance
companies: Customer stickiness in insurance business is normally higher than
Retail
35%
other financial services & hence the profitability is also high vis a vi others like
AMC business. Another key positive what we observed is the ability to
generate higher profit on a given AUM by insurance companies. On an AUM
Pre Issue Shareholding Pattern(%)
of `1.1 trillion, ICICI Prudential reported a PAT of `1,653cr in FY16.
Promoters Group
93.5
The last deal of ICICI Prudential was done valuing the company at
`32,500cr: ICICI Prudential had sold a 6% stake in Nov 2015, for `1,950cr,
DIIs/FIIs/Public & Others
6.5
valuing the company at `32,500cr. While the IPO values the company at
`47,870cr at the upper price band. While part of the rise in valuation can be
due to the fact that the company has improved its persistency rates and the
new business margins a lot could be attributed to expected future growth.
Valuations & View: At the price of band of `300-334 the issue is offered at
3.1x and 3.4x its reported FY16 EV. While the company has enough scope for
business growth in the future, we believe the issue is fully priced in and hence
we have a NEUTRAL rating on the issue.
Key Financials
Y/E March (`cr)
FY2013
FY2014
FY2015
FY2016
Net Premium Income
13,417
12,283
15,160
18,999
% Growth YoY
(8.5)
23.4
25.3
Total Income
20,255
21,608
33,956
20,228
% Growth YoY
6.7
57.1
(40.1)
PAT
1,516
1,563
1,640
1,653
% Growth YoY
3.1
5.0
0.8
VNB
270
412
VNB Margins%
5.7
8.0
Solvency Ratio%
337
320
RoEV(%)
15.4
15.3
EV
13,822
13,939
Siddharth Purohit
Mkt Cap/ EV ( Upper Band)
3.4
+91 22 39357800 Ext: 6872
Mkt Cap/ EV ( Lower Band)
3.1
[email protected]
Source: RHP, Angel Research
Please refer to important disclosures at the end of this report
1
ICICI Prudential Life | IPO Note
Issue Details
ICICI Prudential is offering 18.13cr equity shares of `10 each via book building
route in price band of `300-344/share, entirely comprising offer for sale by
current promoters ICICI Bank.
Exhibit 1: Shareholding Pattern
Pre-Issue
Post-Issue
Particulars
Cr Shares
(%)
Cr Shares
(%)
Promoter Group
1,43.53 100.0
1,27.21
88.6
Employees, Retail & HNI Investors
0
0.0
8.2
5.7
Institutional Investors
0
0.0
8.2
5.7
Source: RHP, Angel Research
Objects of the Offer
Objects of the Offer are to achieve benefits of listing equity shares on stock
exchanges and to carry out the offer for sale. Listing of equity shares will
enhance ICICI Prudential’s brand name and provide liquidity to existing
shareholders. The listing will also provide a public market for the equity shares
in India.
September 16, 2016
2
ICICI Prudential Life | IPO Note
About the Company
ICICI Prudential Life Insurance (I-Pru) is a JV between ICICI Bank and Prudential
Corp. I-Pru commenced its operations in FY2001 and currently offers range of Life
& Health Insurance, Pension products to its customers.
In FY2016 I-Pru’s market share on Retail Weighted Received Premium (RWRP)
basis amongst all Insurance companies was 11.3%, as compared to 9.7% market
share of the nearest player.
Amongst 23 private players in Indian Life Insurance space, I-Pru in FY2016 had
21.9% market share. ULIPs accounted for
82.6%/75.2% of I-Pru’s Retail
Annualized Premium Equivalent (APE) in FY2016/1QFY2017. APE from ULIPs
increased from `2,210cr in FY2014 to `4,179cr in FY2016, representing 37.5%
CAGR.
As of June 30, 2016, I-Pru had `1.09tn of Assets under Management, making it
one of the largest fund managers in India. Of these 73% were in-linked assets.
Funds represented 94.2% of linked assets with identified benchmarks as of June
30, 2016, which have performed better than their respective benchmarks since
inception. I-Pru’s 13th month persistency ratio is at 82.4% for FY2016, one of the
highest in the sector. Expense ratio as of FY2016 is at 14.6%, one of the lowest
among private sector life insurance companies in India.
Exhibit 2: Product Mix Q1FY17
5.70%
2%
3.30%
15.70%
73%
Retail ULIPs Retail par products
Retail non-par products Pure protection Others
Source: RHP, Angel Research
September 16, 2016
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ICICI Prudential Life | IPO Note
Investment rationale
Scope for improving VNB margin: ICICI has been able to improve its net new
business margins from 5.7% of the premium in FY15 to 8% in FY16. The margins
are still low compared to other players but what gives confidence is the increasing
trend. On a APE of `5,170cr the company reported a VNB of `412cr, and it is
worth noting that, assuming acquisition cost were reduced by 30% as per the
management believes the VNB would have been `710cr for FY16.
Exhibit 3: New Business Margins
` In Cr
FY15
FY16
% Growth YoY
APE
4,744
5,170
9.0%
VNB
270
412
52.6%
VNB Margin
5.7%
8.0%
VNB, assuming acquisition cost were
710
reduced by 30%
Source: RHP, Angel Research
Embedded Value reflects the value of existing & expected profit from past policies
in force: I-Pru’s FY16 Embedded Value (EV) was `13,939cr, comprising of
Adjusted Net worth of `5,514cr and Value in Force of Existing business at
`8,426cr. Since insurance is a long-term contract the cash inflow happens over
multiple years, while a large part of the expenses occurs in the initial stage. So,
Value in force is the value of future cash flows of all the policy in existence,
discounted at Risk Free Rate. The below mentioned table shows the movement of
EV for the company in FY16.
Exhibit 4: Analysis of Movement in IEV (FY16)
Source: RHP, Angel Research
September 16, 2016
4
ICICI Prudential Life | IPO Note
Improving persistency Ratio & Solvency Ratio: The Company has been able to
increase the persistency ratio in most of the product category over last few years.
The 13th month persistency ratio has gone up from 71.5% in FY14 to 82.5% in
Q1FY17, while the 49th month persistency has gone up from 20.3% to 61.5%
during the same period. Higher persistency is an indicator of better profitability
going ahead. ICICI Prudential has high solvency ratio of 320% compared to the
mandatory 150% by the regulator, indicating that the company will be able to
meet the business growth without raising capital in the near term.
Exhibit 5: Persistency Ratio Trend
90.00%
80.00%
70.00%
60.00%
50.00%
40.00%
30.00%
20.00%
10.00%
0.00%
FY14
FY15
FY16
Q1FY17
13th Month
49th Month
Source: RHP, Angel Research
Exhibit 6: Comparative Persistency Ratio
90.00%
80.00%
70.00%
60.00%
50.00%
40.00%
30.00%
20.00%
10.00%
0.00%
ICICI Prudential
HDFC Life
Max Life
SBI Life
13th Month
49th Month
Source: RHP, Angel Research
September 16, 2016
5
ICICI Prudential Life | IPO Note
Higher stickiness of clients and funds attracts high valuation for insurance
companies: Customer stickiness in insurance business is normally higher than
other financial services, and hence the insurance company is in a position to
deploy and generate return on the funds over a long period of time. ICICI
Prudential has consistently gained market share, its market share within the pvt
industry has gone up from 16.1% in FY14 to 21.9% in FY16, ability to retain
market share and improve the persistency ratio could lead to better profitability
going ahead. Another key positive what we observed is the ability to generate
higher profit on a given AUM by insurance companies. On an AUM of `1.1
trillion, ICICI Prudential reported a PAT of `1,653cr in FY16
Exhibit 7: Market Share %
25.0%
23.0%
21.9%
18.9%
20.0%
18.5%
16.1%
15.0%
11.3%
11.3%
10.0%
7.0%
7.2%
5.9%
5.0%
0.0%
FY12
FY13
FY14
FY15
FY16
Share Within Pvt Sector
Market Share Within Industry
Source: RHP, Angel Research
The last deal of ICICI Prudential was done valuing the company
at `32,500cr
ICICI Prudential had sold a 6% stake in Nov 2015, for a consideration of
`1,950cr, valuing the entire company at `32,500cr. While the current issues values
the company at `47,870cr at the upper band of the price. While part of the rise in
valuation can be due to the fact that the company has improved its persistency
rates and the new business margins a lot could be attributed to expected future
growth.
September 16, 2016
6
ICICI Prudential Life | IPO Note
Industry Overview
The India life insurance sector is the tenth largest life insurance market in the world
and the fifth largest in Asia, according to Swiss Re, sigma No 3/2016. The size for
fiscal 2016 was `3.7 trillion on a total premium basis.
The Insurance industry in India has undergone transformational changes post
2000, IRDA (Insurance Regulatory and Development Authority) issued license
paper to three companies, which are HDFC Life Standard, Sundaram Royal
Alliance Insurance Company, and Reliance General Insurance.
As of March 31, 2016, there are a total of 24 companies in the Indian life
insurance sector with LIC being the only public sector life insurer. The private sector
has grown significantly since 2000 and it accounted for 51.5% of the life insurance
sector, on an RWRP basis, in fiscal 2016.
Recently, The Government increased the maximum permissible shareholding of
foreign investors in Indian life insurance companies from 26% of paid-up equity
capital to 49% in its Insurance Laws (Amendment) Bill, 2015.
The Indian life insurance is a highly underpenetrated market.
The total premium in the Indian life insurance sector grew at a CAGR of
approximately 17% between fiscal 2001 and fiscal 2016. Despite this, India
continues to be an underpenetrated insurance market with a life insurance
penetration of 2.7% in fiscal 2015, as compared to 3.7% in Thailand, 7.3% in
South Korea and a global average of 3.5% in 2015. At US$43 in fiscal 2015, the
insurance density in India also remains very low as compared to other developed
and emerging market economies.
Exhibit 8: Insurance Density (In US $)
3,000
2,717
2,500
1,940
2,000
1,719
1,500
1,000
688
500
215
178
153
43
43
17
15
0
Source: RHP, Angel Research
September 16, 2016
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ICICI Prudential Life | IPO Note
Market Share
The opening up of the sector post-2000, private sector companies have gained
significant market share. The financial crisis in 2008 and regulatory changes in
fiscal 2010 resulted in loss of market share for private sector companies, and their
market share declined to 37% in fiscal 2012.
Private sector companies have regained significant market share in the last two
years; increasing their share from 38% of the overall Indian life insurance sector in
fiscal 2014 to 52% in fiscal 2016( on RWRP basis). This growth in market share
has been driven by improved product design, primarily for linked products that
offer a superior customer value propositions. Private sector companies have also
increased their focus on bancassurance for marketing their products.
Product Mix and channel distribution
ULIPs accounted for 92% and 75% of the new business premiums for private sector
companies and the overall industry, respectively in fiscal 2008.
There has been a significant shift in the channel mix of the Indian life insurance
sector from the earlier agency-only model to a diversified distribution mix. The cap
on ULIP charges, introduced in 2010, has led to a rationalisation of owned agency
network and introduced a shift towards third-party channels and well-developed
banking sector in India and the nationwide presence of banks.
This resulted in the increase of bancassurance share from 5.6% of the retail
business, on a new business premium basis, in fiscal 2007 to 24.0% in fiscal
2016, while the share of new business premiums from individual agents decreased
from 90.5% in fiscal 2007 to 68.5% in fiscal 2016.
Valuations & View
The Company has disclosed its FY16 Embedded Value (EV) at `13,939cr,
comprising of Adjusted Net worth of `5,514cr and Value In Force of Existing
business at `8,426cr. At the price of band of `300-334 the issue is offered at 3.1x
and 3.4x its reported FY16 EV. While the company has enough scope for business
growth in the future, we believe the issue is fully priced in and hence we have a
NEUTRAL rating on the issue.
September 16, 2016
8
ICICI Prudential Life | IPO Note
Balance Sheet
Y/E March (` cr)
FY13
FY14
FY15
FY16
Q1FY17
Shareholders’ Funds
Equity
1,429
1,429
1,432
1,432
1,433
Reserves & Surplus
3,412
3,553
3,834
3,893
4,311
Net Worth
4,841
4,982
5,265
5,325
5,744
Policyholder's Fund
Policy Liabilities
11,028
13,813
17,259
20,255
21,138
Provision for Linked
57,389
60,265
74,775
75,295
79,369
Liabilities
Fair Value Change
318
546
1,232
1,029
1,370
Funds for Future
508
497
527
662
639
Appropriation
Sources of Funds
74,084
80,103
99,059
102,565
108,260
Investments
Shareholders
4,919
5,349
5,857
6,216
5,547
Policyholders
11,277
14,443
18,858
21,516
22,972
Asset held for Linked
57,521
60,310
74,778
75,296
79,370
Liabilities
Loans
9
12
20
44
50
Fixed Assets
172
202
215
220
213
Net Current Assets
(694)
(810)
(669)
(726)
108
Misc Expenditure
881
597
Application of Funds
74,084
80,103
99,059
102,565
108,260
Policyholders Account
Y/E March (` cr)
FY13
FY14
FY15
FY16
Q1FY17
Premium earned net
13,417
12,283
15,160
18,999
3,509
% YoY Growth
-8.5%
23.4%
25.3%
Income from Investments
6,187
9,213
18,739
1,208
5,356
Other Income
24
17
18
21
14
Contri. from shareholders a/c
627
96
39
53
Total A
20,255
21,608
33,956
20,228
8,884
% YoY Growth
6.7%
57.1%
-40.4%
Commission
765
628
553
620
126
Operating Expenses
1,713
1,616
1,654
1,888
552
Benefits Paid (net )
13,293
12,083
12,260
12,425
2,928
Change in valuation of liab.
2,593
5,662
17,956
3,516
4,957
Others
335
320
313
364
94
Provisions for tax
35
48
51
70
0
Total (B)
18,734
20,356
32,788
18,883
8,657
% YoY Growth
8.7%
61.1%
-42.4%
Surplus/ ( Deficit)
1,521
1,252
1,168
1,345
227
Transfer to shareholders A/c
1,773
1,264
1,137
1,210
250
September 16, 2016
9
ICICI Prudential Life | IPO Note
Shareholder's Account
Y/E March (` cr)
FY13
FY14
FY15
FY16
Q1FY17
Transfer from
1,773
1,264
1,137
1,210
250
Policyholders Account
Income from investments
416
395
537
600
196
Total A
2,189
1,658
1,675
1,810
445
Expenses
6
11
45
31
7
(aprt from insurance )
Contribution to
627
96
39
5
policyholders account
Others
-
26
4
Total B
633
134
84
36
13
Profit/ (Loss) before tax
1,556
1,525
1,590
1,774
433
Provision for taxation
41
-38
-50
121
28
Profit (loss) after tax
1,516
1,563
1,640
1,653
405
% YoY Growth
3.1%
5.0%
0.8%
September 16, 2016
10
ICICI Prudential Life | IPO Note
Research Team Tel: 022 - 39357800
E-mail: [email protected]
Website: www.angelbroking.com
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