Should You Invest In ICICI Prudential Life Insurance's IPO?

As the first life insurance company makes its debut in the primary market, institutional investors seeking an exposure to this growing sector are expected to take early stakes in this company. The better response in the anchor investing rounds has been quite good.

But should retail investors take a look at the IPO? Life insurance has always been at the core of the Indian psyche and the penetration of life insurance products has been at one of the main products of household savings.

Insurance penetration is around 2.7 per cent of GDP and forms around 19 percent of household savings. For life insurance firms like ICICI Prudential Life Insurance (IPruLife) growth for a long while has been coming through financial savings products like ULIPs, which comprises of 82 per cent annual premium equivalent (APE). This is insurance lingo for mix in premiums.

However, lately with the restructuring in the norms of ULIP policies back in 2010, the persistency ratio of ULIPs has been edging lower. Hence, insurance firms like IPruLife have been focusing on the growing the protection side of the business, which is pure insurance offering without any savings features for individuals. The protection business comprises 2.5 per cent of APE, which is high margin with lower costs and has a better persistency ratio.

IPruLife is the market leader among private life insurance firms with a huge distribution network. The firm has a network of 521 offices and over 1.21 lakh advisors. With its huge direct distribution and bancassurance channels, the firm has much lower expense ratio in the industry at 14.6 per cent in FY16, down from 18.8 per cent in FY14.

The firm has been growing at steady pace of 8 per cent in new business premiums, and net profits of 5 per cent over the last four years. The company also has one of the highest claim-settlement ratio of 96.2 per cent in the industry as compared to 94 per cent by Max Life and 91 percent of HDFC Life.

The business of the firm is likely to grow at a decent pace in the coming years due to the increasing penetration of life insurance products and better equity market conditions. The firm has also generated a high return on equity of over 30 per cent in the last four years, which provides a strong degree of comfort in the IPO.

IPruLife is also paying steady dividends for the last few years due to its strong solvency ratio which stands at around 320 per cent. The dividends are expected to remain in the high zone in the coming years due to the expected growth in the industry.

However, the pricing of the IPO is stiff and captures some of the future growth in the company. The firm has an embedded value (EV) of around Rs 97, a measure to calculate potential future profits. This pegs the IPO price of Rs 334 at the higher end at about 3.4 times of EV.

However, as the business of life insurance and protection is expected to grow by around 12-15 per cent as per Assocham report 2016, the IPO provides a decent scope for long-term investors. Hence, it may be prudent to avoid seeking just listing gains from the IPO.