Market cheereed good earnings from ICICI Prudential Life Insurance, with share rising 10% as a reaction to the result. It reported 26.4% YoY growth in Embedded Value (EmbV) to Rs. 29,106 cr in FY21. Closer look at the results shows this growth is not entirely a result of company’s internal factors like product mix or operational efficiency.
Sensitivity analysis states 10% increase in equity values increased EmbV by 2.9% in FY21. 45% of company’s Rs. 2.1 lakh cr AUM is equity exposure and Nifty100 index rose 55 in FY21.
Second factor is falling interest rates increases EmbV without any change in business performance, in the same way as rising equity markets increases equity AUM for mutual funds. Thus as corollary, when interest rates rise (bottomed out at present), EmbV will decline without any changes at company’s end.
While company’s peer valuation remains attractive, especially compared to HDFC Life, some factors weighing on the entire life insurance sector include:
- LIC IPO planned in H2FY22, to be a mega divestment source for the government. LIC has got aggressive in selling policies at extremely competitive premiums
- Feb 2020 Budget introduced capital gain on ULIPs above Rs. 5 lakh, which will affect premium growth FY22 onwards. Thus, ICICI Pru’s 27% Q4FY21 annualised premium equivalent (APE) growth, achieved in the seasonally strongest quarter on a low base of last year, will be under pressure.
- Insurance is essentially a sales-push product. With physical meetings and branch visits restricted once again, growth will be difficult to come by in the near term.
- Over the longer term, if domestic income tax rates for life insurers increases to 25% (single-to-mid-teen tax rate between FY19-FY21), value of new business (i.e. profitability) will drop by 11% and EmbV by upto 6% pa, adversely impacting valuations without any change in company’s own operational parameters.
Thus, while YoY growth rates for other life insurers like HDFC Life (results on Monday) and SBI Life may be in healthy double digit, it should not really be seen as a cause for celebrations.
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