IPO

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ICICI Prudential Life Insurance
First life insurance company to tap public
CM RATING49/100
ICICI Prudential Life Insurance Company is a joint venture between ICICI Bank, India's largest private sector bank in terms of asset size at Rs 7.2 trillion at end March 2016, and UK's Prudential Corporation Holdings, the largest private sector life insurer in India by total premium in FY2016 and assets under management at end March 2016. ICICI Bank has 67.52% stake in the company (before this offer for sale), while Prudential 25.83%. The company is one of the first private sector life insurance companies in India. It commenced operations in October 2000 and offers a range of life insurance, health insurance and pension products and services.

The market share, on retail weighted received premium basis, among all insurance companies in India (public and private sector) was 11.3% in FY2016, with the nearest private sector competitor having a market share of 9.7%. Among the 23 private sector life insurance companies in India, the company had a market share of 21.9% in FY2016.

The company offers products and services through an extensive multi-channel sales network across India, including through the branches of bank partners, individual agents, corporate agents, employees, offices and website. The company had 124,155 individual agents at end June 2016, while bank partners had over 4,500 branches as on 12 July 2016.

The gross premium income was Rs 19164 crore in FY2016, comprising Rs 4924 crore of retail new business regular premium, Rs 432 crore of retail new business single premium, Rs 11995 crore of retail renewal premium and Rs 1813 crore of group premium. The 13th month persistency ratio was 82.4% in FY2016, which was one of the highest in the sector.

The company had Rs 1.09 trillion of assets under management at end June 2016, making it one of the largest fund managers in India. Of these, 73% were in linked assets. Funds representing 94.2% of linked assets with identified benchmarks at end June 2016 had performed better than their respective benchmarks since inception. The expense ratio of 14.6% for FY 2016 was also one of the lowest among the private sector life insurance companies in India.

The company has an established track record of delivering annual returns to shareholders. The profit after tax was Rs 1653 crore in FY2016 and return on equity of 30%+ in last five years. The company has a strong capital position, with a solvency ratio of 320.0% at end March 2016 as against the IRDAI-prescribed level of 150.0%.

The value of new business grew from Rs 270 crore in FY2015 to Rs 412 crore in FY2016, representing an increase of 52.6%. The embedded value of the company stood at Rs 13939 crore at end March 2016.

As of March 2016, about 58.7% of the company's assets under management are unit-linked and without guarantees. Another 14.2% of assets are unit-linked and with guarantees.

ICICI Prudential Pension Funds Management Company is a wholly owned subsidiary of the company and is registered as a fund manager with the Pensions Fund Regulatory and Development Authority of India.

Business strategy

The objective of the company is to enhance market leadership among private sector life insurance companies and deliver superior profitability. In order to achieve its goals, the company plans to pursue the following strategies:

  • With India being the fastest growing economy, the Indian insurance sector provides huge growth potential. To leverage this market opportunity and maintain leadership position in the private sector life insurance sector, the company seeks to continue to deliver superior customer value, superior fund performance, focus on key local markets, and explore growth opportunities in emerging segments.
  • The company will focus on increasing value of new business, which has increased from Rs 270 crore in FY2015 to Rs 412 crore in FY2016, representing an increase of 52.6%. The value of new business is proposed to be enhanced thought three main drivers such as expand protection business, improve customer retention and maintain market-leading cost efficiency.
  • The multi-channel distribution architecture helps to navigate economic cycles when one distribution channel may be significantly impacted, provides access to different customer segments and reduces concentration risk without compromising scalability. To achieve sustainable growth, the company plans to further diversify distribution architecture by exploring non-traditional channels, while strengthening existing channels and relationships.
  • The company believes that digital technology has influenced and will continue to significantly influence customer advocacy, information search and insurance sales. By leveraging technology across the value chain in pre-sales, fulfillment and post-sales, the company aims to provide a convenient experience to the customers.

The Offer and the Objects

The company is coming out with the biggest Initial Public Offering (IPO) in nearly six years and would be the first insurer in India to list on exchanges. The offer comprises sale up to 18,13,41,058 equity shares of the company, representing about 12.63% of its equity share capital for cash, through an offer for sale by ICICI Bank.

The Offer for Sale (OFS) is of up to 181,341,058 Equity Shares by one of the promoters, ICICI Bank. The entire proceeds from the OFS will be paid to ICICI Bank. The OFS would mop up proceeds of Rs 5440 crore at the lower price band of Rs 300 per share (face value Rs 10 per share) and Rs 6057 crore at the upper band of Rs 334 per share.

The issue is to be made through a book building process and will open on 19 September 2016 and will close on 21 September 2016.

The objects of the offer are to achieve the benefits of listing the Equity Shares of the company on the Stock Exchanges. The listing of the Equity Shares will enhance the ICICI Prudential brand name and provide liquidity to the existing shareholders. The listing will also provide a public market for the Equity Shares in India. The company will not receive any proceeds from the Offer.

To reward the bank's existing share holders, the management has set a preference up to 10% of Prudential Life's shares for shareholders of ICICI Bank.

Strengths

The company is the largest private sector life insurer in India by total premium in FY2016 and assets under management at end March 2016. The company has exhibited an improvement in its market share, on retail weighted received premium basis, in the Indian life insurance sector, from 5.9% in FY2012 to 11.3% in FY2016. The market share among the 23 private sector life insurance companies in India has also increased from 16.1% to 21.9% in the same period.

From FY2012 to FY2016, the retail weighted received premium grew at a CAGR of 15.2% compared to a CAGR of 6.7% in the private sector and a decline of 2.1% per annum in the overall Indian life insurance sector for the same period.

The company prices its products competitively in order to provide superior value to customers. Most of its unit linked insurance products have had lower charges than the maximum permissible regulatory amounts.

The company has Rs 1.09 trillion of assets under management, making one of the largest fund managers in India.

The company has been at the forefront of leveraging technology in the Indian life insurance sector, while it focuses on digitization and transformation of sales, customer on-boarding and internal processes, which has led to a cultural change within organization. This has helped improve employee productivity, measured as retail weighted received premium per employee per annum, from 2.8 million in FY2014 to 4.6 million in FY2016, representing a CAGR of 29.1%.

The company has a strong capital position with a solvency ratio of 320.5% compared to the IRDAI-prescribed control level of 150.0%. The business did not require a shareholder capital injection since 2009 and continues to pay annual dividends since FY2012.

Over 95.1% of debt portfolio at end June 2016 is invested in domestic AAA-rated instruments, including sovereign instruments and AAA equivalent rated instruments.

The 13th month persistency ratio, which has been increasing in recent years, was 82.4% in FY2016, one of the highest in the Indian life insurance sector.

The company has leveraged the strong and established brands of shareholders, ICICI Bank and Prudential, to build ICICI Prudential into a recognized and trusted brand in its own right.

The company is managed by a team with extensive experience and know-how in the Indian life insurance industry.

Weaknesses

The Indian life insurance sector is highly competitive and may be subject to consolidation. The company will have to maintain its market position and sustain growth. If it fails to effectively respond to increasing competition in the Indian insurance industry, the profitability and market share could be materially and adversely affected.

Any termination or change in relationships with or performance of bancassurance partners may have a material adverse effect on business and prospects. The retail Annual Premium Equivalent (APE) through ICICI Bank represented 54.5%, 56.1%, 54.9% and 51.4% of retail APE in FYs 2014, 2015, 2016 and the three months ended June 30, 2016, respectively.

Changes in the regulatory environment in which the company operates could have a material adverse effect on business, financial condition, results of operations and prospects. The company has been materially affected in the past due to regulatory changes in the sector, including those governing unit-linked products introduced in 2010, which capped charges and prescribed minimum levels of sum assured, and those governing non-linked products introduced in 2013.

Any adverse effect on the equity markets in India could have a material adverse effect on business (especially as it is over-dependent on unit linked products). Changes in market interest rates could also have a material adverse effect on business and profitability.

The embedded value and value of new business information presented is based on several assumptions and may vary significantly if those assumptions are changed or if experience is different from assumptions.

Catastrophic events, including natural disasters, could materially increase liabilities for claims by policyholders and have a material adverse effect on business.

Valuation

For shareholders, the company has earned a PAT of Rs 405.02 crore and 1653.09 crore, respectively, for the June 2016 quarter and for the 12 months ended FY 2016. This gives an EPS of Rs 11.5 for FY 2016 on an equity share capital of Rs 1435.32 crore.

ICICI Bank in November 2015 raised Rs1950 crore by selling 8.6 crore shares (6% of share capital) to high pedigree investors such as Azim Premji and Temasak Holdings at Rs 226 per share, valuing the insurer at Rs.32500 crore

The company has a strong capital position, with a solvency ratio of 320.0% at March 31, 2016, compared to the IRDAI-prescribed control level of 150.0%. Thus, it is unlikely to need any capital infusion in the immediate future. However, existing shareholders will dilute their stake further.

At the upper band, the company is valued at around Rs 47939 crore. The embedded value (EV) as on March 2016 stood at Rs 13940 crore. The company is valued at 3.4 times EV. The company is able to consistently generate ROE in excess of 30% in the last five years.

The company fares well on most financial, operational and valuation parameters compared to Max Life (which is part of listed Max Financial Services) and which is planned to be merged with HDFC Standard Life. Upon the completion of merger, the combined HDFC and Max life can command a higher market share than ICICI Prudential Life.

For retail investors, insurance is a totally new industry and its financial and operational parameters will be too technical for most of them to understand and appreciate. Institutions, especially FIIs, will largely determine the company's fortunes on the bourses after listing

ICICI Prudential Life Insurance: Issue highlights
Offer for Sale Offer size (in Rs crore)
- On lower price band5440.20
- On upper price band6056.79
Offer size (in no. of shares )18.134 crore
Price band (Rs)*300-334
Post issue capital (Rs crore)1435.32
Post-issue promoter & Group shareholding (%)81.0
Issue open date19/09/2016
Issue closed date21/09/2016
ListingBSE,NSE
Rating 49/100

 ICICI Prudential Life Insurance: Consolidated Policyholders Account

1303(12)1403(2)1503(12)1603(12)1606(03)
Premium earned (net)13,417.2412,282.6515,160.4518,998.703508.78
Income from Investments 6,186.689,212.6018,738.541,208.365356.38
Other income 24.0717.2517.9220.8813.93
Contribution from the Shareholders' account627.2995.8838.85-5.28
Total Income20,255.2821,608.3833,955.7620,227.948884.37
Commission 765.42627.48553.17619.98125.73
Op. expenses related to Insurance business1,713.101,616.171,654.331,888.33552.01
Others335.00319.55313.17364.2894.22
Benefits paid (Net) 13,292.7012,083.3012,260.0012,424.802928.1
Change in valuation of policy liabilities2593.085661.7217956.113515.494956.95
Provision for taxation 35.0448.1451.1770.350.42
Total Expense18734.3420356.3632787.9518883.238657.43
PAT1520.941252.021167.811344.71226.94
Transfer to Shareholders' account 1,773.191,263.511,137.201,210.29249.68

ICICI Prudential Life Insurance: Consolidated Shareholders Account

1303(12)1403(2)1503(12)1603(12)1606(03)
Amounts transferred from Policyholders' account1,773.191,263.511,137.201,210.29249.68
Income from investments 416.10394.70537.40599.60195.7
Total2189.291658.211674.61809.89445.38
Expenses (apart from Insurance)5.8011.4045.3031.307.28
Contribution to policyholders account627.3095.9038.900.005.28
Others026.304.40
Total633.1133.684.235.712.56
PBT1556.191524.611590.41774.19432.82
Tax40.7-37.9-49.8121.127.8
PAT1515.491562.511640.21653.09405.02
EPS (Rs)*10.610.911.411.5#
* on current equity of Rs 1435.32 crore of face value of Rs 10 each
#EPS not annualized due to seasonality of business
Figures in crore, Source: Capitaline Database

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