IPO Under the lens – ICICI Prudential Life Insurance Company Limited

ICICI Prudential Life Insurance Company Limited is the largest private sector life insurer in India by total premium in fiscal 2016 and assets under management at March 31, 2016. It’s a joint venture between ICICI Bank Limited, India’s largest private sector bank in terms of total assets and Prudential Corporation Holdings Limited, a part of the Prudential Group, an international financial services group. It offers a range of Life insurance, health insurance and pension products and services.

Source: Kotak Securities

Quick facts

1. They were the largest private sector life insurer in India by total premium in fiscal 2016 and assets under management at March 31, 2016.
2. In fiscal 2016, their market share on a retail weighted received premium basis was 11.3% compared to a market share of 9.7% of its nearest competitor among all private and public insurance companies.
3. As of March 31, 2016 they had 1, 21,016 individual agents and as of July 12, 2016 their bank partners had over 4,500 branches.
4. Their expense ratio of 14.6% for fiscal 2016 was one of the lowest among private sector life insurance companies
5. As of March 31, 2016 their solvency ratio was 320% compared to IRDA prescribed level of 150%

Strengths

1. Consistent and robust fund performance

Funds representing 92.9% of their market linked assets performed better than their respective benchmarks since inception.

2. Quality service experience

In fiscal 2016 their grievance ratio was 153 per 10,000 new policies issued compared to private sector average of 345 per 10,000 new policies issued.

In fiscal 2016 their claim settlement ratio for retail death claims was 96.2% compared to private sector average of 89.4%.

3. Their expense ratio of 14.6% for fiscal 2016 was one of the lowest among private sector life insurance companies

4. Diversified multi-channel distribution network

They have a growing bancassurance network. ICICI Bank and Standard chartered             Bank currently exclusively distribute their life insurance products. As of March 31, 2016 they had 1, 21,016 individual agents and as of July 12, 2016 their bank partners had over 4,500 branches. According to CRISIL Research, Life Insurance Industry Report, July 2016, they have one of the largest channels among private sector life insurance companies in India in terms of premium as on 31 March, 2016.

5. Digitisation and transformation of sales, customer onboarding and internal processes:

They have created a device agnostic technology platform that provides their customers, employees and distributors with seamless experience from sales to claim settlement. In fiscal 2016, 92.3% of their new business applications were initiated on their digital platform either by distributors or customers. This has also helped them improve employee productivity. Their retail weighted premium received per employee grew at a CAGR of 29.1% from fiscal 2014 to fiscal 2016. They have an architecture which can integrate their systems with partners quickly which facilitates faster issuance of policies.

6. Robust risk management and control processes

Risk is an integral part of an insurance business. They have risk management and control processes with a detailed cost benefit analysis for risk mitigation and a strong focus on credit quality of their portfolios.

7. Experienced Senior Management Team

Their CEO, Mr. Sandeep Bakhshi has been with their company for over 5 years. He joined ICICI group in 1986 in project financing group of ICICI ltd. He has over 32 years of experience in the banking, financial services and insurance sector. 28 of top 36 members of their management team have been with ICICI group for over 10 years. Senior managerial persons in the actuary, investment, underwriting and claims department have average functional experience of 16 years.

8. It has fairly good persistency ratio compared to peers

Data Source: kotak Institutional Equities

Risk factors

1. Adverse effect on equity market in India could have an impact on their business as it will have an impact on their market linked products.
2. Change in market interest rates could have impact on their investments and business profitability.
3. Their inability to attract or retain distributors, key sales employees could have a material impact on their finances.
4. Any shift in consumer attitude towards financial savings could have an impact on their business.
5. Catastrophic events, including natural disasters could increase their liabilities for claims and have an impact on their finances.
6. Most of their new business premiums come from few products. Any constraints in selling these products due to regulatory changes could impact their business.

Valuations

The embedded value (EV) represents present value of future profits from assets after adjusting for risk. The price to embedded value multiple is approx. 3.4 times FY16 EV. Compared to multiple of HDFC and max life which is 4.2 times FY16 EV, valuations are attractive.

 

Data Source: Mint, 14 September 2016

Our opinion: Subscribe, but only if you are doing so for the long term

Whilst it is the first of its kind IPO in its space and has a large distribution network, strong brand franchise, strong solvency ratio, good settlement ratios, an attractive price to embedded value ratio relative to Max/HDFC and an experienced management, the fair value of the stock in our opinion is lower than the current offer price for the IPO. Thus, you should look to subscribe to this issue only with a long term investment horizon, as the offer price currently does not provide significant upside in the short term in our opinion.

 

 

 

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Have you chosen the right life insurance for yourself?

Insurance is an important part of Financial Planning. Let’s understand whether you have chosen the right life insurance policy for yourself.

Term Insurance – A must have

How does it work?

Term insurance is the most basic type of life insurance. It provides cover for a defined period of time. If something happens to the insured in the period in which he holds the policy then the nominee will be in receipt of the sum assured.

The amount of life insurance cover that you need will be based on your income multiple. Also while deciding the amount of cover you should consider the regular expenses of your family, the ongoing liabilities, the value of important goals like child education and wedding and reduce the value of your available assets to get to the amount of cover that you will need to buy.

Is it a good choice?

This is a must have for all those who have dependants. If something happens to you the Sum Assured will help your family maintain the same standard of living as before.

There could also be a case where you have enough wealth, at some stage in your life then you will not need life insurance cover because your wealth will be sufficient for your family to lead a decent standard of living. The other situation could be when you have saved enough for your regular expenses both retirement and post retirement or you have some regular stream of income like rental income or payouts like interest and dividends from your investments which will be sufficient to sustain your family’s expense needs. Also if that point in time you are in your 50s when your kids may start to become independent and most of you important goals like children’s education and wedding have been taken care of, in this situation also you may not need insurance cover.

Whole life plans

How does it work?

A term plan provides a life cover for a limited period. On the other hand a whole life policy is in force till the insured is alive. The whole life policy gives you an option to pay the premium till a certain age. On the death of the insured the Sum will be paid to the nominee. Whole life policy is mostly used for estate creation purposes.

Is it a good choice?

If it is bought at an early age the premiums are lower. The lower premium for the rest of your life is an advantage that you will get if you have bought your policy early. It is certainly not a good idea if you buy it closer to retirement again because premiums will be high due to age.

Endowment Plan

How does it work?

It is designed to pay a lumpsum after a specific term either on its maturity or on death whichever is earlier. Mostly the maturities range between 10, 15 or 20 years.

Is it a good choice?

It is a traditional life insurance product, suitable for conservative investors but the returns are rather low. So it better to invest in a debt or an equity product for the purpose of earning returns.

Money Back Policy

How does it work?

Money back policies generally give you a fixed percentage of your sum assured every few years. For eg you may have a twenty year money back plan which may give you 15% of your sum assured every five years and on maturity you will receive the balance amount along with bonus if any.

Is it a good choice?

These policies give a guaranteed sum of money on the date as mentioned in the policy document but if you sit back and calculate the returns that you may have made on your policy against the premiums that you have paid, they tend to be very low. If you would invest the same sum of money that you are paying towards your premium into any other debt or equity instrument as per your asset allocation, it will yield comparatively better returns.

ULIP

How does it work?

A Unit Linked Insurance Plan (ULIP) is product which offers you a combination of insurance cover and investment. A ULIP is a market linked product. They take money from investors and invest in a combination of stocks and bonds that you choose, and are structured like mutual funds. They have a lock in period of 5 years. ULIPs have a multiple charges that need to b analysed carefully before you decide what is to be done. ey does not get invested.

Is it a good choice?

The higher initial charges and lock-in makes ULIPs unattractive, along with the lack of flexibility of changing managers along the way in case of underperformance.

Our view,

Insurance and investments should be kept separate. Insurance should be bought for the purpose of buying a life cover. Therefore, when it comes to life insurance a term plan is ideally what you should look at.

Image credit:www.insurancecompanycompare.com

 

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The NRIs guide to buying the right health cover

Two things that all Indians don’t like to compromise on are healthcare for their family and the education of their children. Healthcare inflation in India is usually 1.5-2 times the rate of consumer price inflation. Given the already high cost of healthcare and the fact that it will continue to spiral upwards rapidly, non-resident Indians (NRIs) who plan to return to India soon should buy adequate health insurance for their families. The cover should be purchased 2-4 years prior to their return. This will ensure that the waiting period for exclusions is crossed while they are still abroad and the family is well protected on its return to India.

Healthcare inflation in India is usually 1.5-2 times the rate of consumer price inflation. Given the already high cost of healthcare and the fact that it will continue to spiral upwards rapidly, non-resident Indians (NRIs) who plan to return to India soon should buy adequate health insurance for their families.

Image Source: http://www.khushbooofindia.co.in

NRIs who are not sure about their plans to return to India may not buy a health cover in advance. They should build a separate corpus earmarked for healthcare needs. This money will need to be invested in riskier but higher-yielding assets like equities to have any hope of keeping up with healthcare inflation.

NRIs who are not sure about their plans to return to India may not buy a health cover in advance. They should build a separate corpus earmarked for healthcare needs

NRIs also need to ensure that their aged parents living in India are adequately covered.

Get adequate cover

When trying to decide the amount of health insurance to buy, NRIs should take into account the city that they plan to settle down in. Healthcare costs are higher in the metros than in smaller towns. They should also consider the type of health care—premium or mid-level—that they would like to avail for their family when deciding on the amount of cover. Take the advice of a certified financial planner (CFP) if you can’t decide how much health cover you need.

When trying to decide the amount of health insurance to buy, NRIs should take into account the city that they plan to settle down in.  They should also consider the type of health care—premium or mid-level—that they would like to avail for their family when deciding on the amount of cover.

 

Image Source: allhealthcaretips.com

A family consisting of two adults and one child should buy a floater policy of Rs. 15-25 lakh if it plans to settle down in a tier 1 or tier 2 city, and Rs. 7-10 lakh if it plans to settle in a tier 3 or 4 town. Review the size of the cover every five years. Remember that in the matter of deciding on how much health cover you need, it is usually better to err on the side of excess.

A family consisting of two adults and one child should buy a floater policy of Rs. 15-25 lakh if it plans to settle down in a tier 1 or tier 2 city, and Rs. 7-10 lakh if it plans to settle in a tier 3 or 4 town. Review the size of the cover every five years.

Overseas, out patient expenses also get covered by the health coverage whilst in India this is not common. When buying a cover in India, NRIs may look for a policy that covers Outpatient expenses as well, though they are expensive.

How to choose the right policy

Here are some of the factors that NRIs should give primacy to while choosing a health cover for their family.

Sub-limits: Avoid policies that come with sub-limits on things like room rent, surgery, ICU charges and so on.

Loading: In many policies the premium goes up the next year if you have made a claim in the current year. This is called loading. Look for policies without loading.

Wide network: Prefer a health insurer whose network of hospitals includes some of the major ones near where you live.

Exclusions and waiting period: Most policies don’t cover some conditions (like cataract and knee replacement) for a certain period of time. Most also have a waiting period for pre-existing diseases (2-4 years). Choose a policy that has a shorter waiting period and a smaller list of exclusions.

Claim settlement ratio: This figure tells the percentage of claims that the insurer settled in the previous year. Go with one with a better track record on this count.

Get adequate cover for aged parents

NRIs who plan to return should not include their aged parents in the family floater cover that they will buy for their nuclear family. The premium on a family floater cover depends on the age of the eldest member of the family. Including your parents will make your floater policy very expensive. Moreover, your parents need a high amount of coverage individually in their old age. Hence, buy separate covers for them.

NRIs who plan to return should not include their aged parents in the family floater cover that they will buy for their nuclear family.

NRIs who plan to take up a job in India shouldn’t rely on their employer’s group health cover for their parents. What if you change your job and the next employer’s group health cover doesn’t include parents? Employers are increasingly doing away with cover for parents to reduce the premium they have to pay on group covers. Also, at a later stage you may decide not to work in the corporate sector. To guard against these eventualities, buy personal covers for yourself and your parents. Remember that it gets harder to get a health cover as people get older. Also, more and more conditions begin to fall under the category of pre-existing diseases that will not be covered, thus defeating the very purpose of buying health cover. So buy covers for your parents at the earliest.

NRIs who plan to take up a job in India shouldn’t rely on their employer’s group health cover for their parents. Remember that it gets harder to get a health cover as people get older. Also, more and more conditions begin to fall under the category of pre-existing diseases that will not be covered, thus defeating the very purpose of buying health cover. So buy covers for your parents at the earliest.

The sum assured should be at least Rs. 10 lakh for each parent, so that the treatment cost of most major ailments gets covered. It is prudent to buy the maximum that you can afford, since insurers are reluctant to hike the cover for older people.

The sum assured should be at least Rs. 10 lakh for each parent, so that the treatment cost of most major ailments gets covered.

Image Source: http://www.tapovan.org.in

 Choosing the right cover for parents

Many health covers for senior citizens (those aged above 60) are now available. In addition to the variables mentioned above, watch out in particular for the co-payment clause. This is the portion of the medical bill that the customer has to foot himself. Look at the percentage of the bill that has to be paid by you and the conditions under which this clause applies. Go with a policy where the percentage is low and the conditions most favourable to you.

Waiting period is another important consideration for senior citizens’ cover.

In the financial planning that precedes an NRI’s relocation to India, a lot of forethought must go into getting adequate health cover for their family.

Many health covers for senior citizens (those aged above 60) are now available. Watch out in particular for the co-payment clause. This is the portion of the medical bill that the customer has to foot himself. Waiting period is another important consideration for senior citizens’ cover.

 

 

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Financial Planning lessons for a joyous Diwali

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Make a FINANCIAL CONSTITUTION – Article by Vishal Dhawan in Khaleej Times, Dubai

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Applying Mahatma Gandhi’s Principles to your Investment Portfolio

“Seek not greater wealth, but simpler pleasure; not higher fortune, but deeper felicity.”

It will be 100 years next year since the return of Mohandas Karamchand Gandhi from South Africa, and the start of the freedom movement in India. Whilst the story of his Experiments with Truth is well known, a lot of his principles have great value today in everyday life, and also when applied to your investment portfolio. Here are few of our favorites:

Faith & Patience: According to Gandhiji, one should have complete faith in himself in order to achieve something in life. Faith is also largely associated with patience. He famously said –  ‘If patience is worth anything, it must endure to the end of time. And a living faith will last in the midst of the blackest storm.’ For someone investing in equities, patience is the key. Stock markets are not a place where one should enter to make quick money, but should stay invested for the long term to get the best out of it.

Learning from your errors: “Freedom is not worth having if it does not include the freedom to make mistakes.” – M K Gandhi.So if you are doing something, in all possibility you will fail or make mistakes. But the beauty of mistakes is that we get to learn from them. While investing also you will make mistakes, you will take wrong decisions, but without getting discouraged about your past fallacies you should follow a properly laid down path of action and reach your goals. Seek professional help if necessary and learn from your mistakes.

Discipline: Discipline is a virtue which applies everywhere and in all streams. If you are following a disciplined investment strategy, you would not only be able to achieve your goals but also be able to experience what is called financial well being for you and your family.

Live as if you were to die tomorrow: We live in a world where everything is uncertain. Therefore, making provisions for unforeseen events is a necessity. Plan for contingencies, have a will, and always ensure that you have enough insurance so that you and your loved ones are not left in the lurch due to a serious illness or in your absence.

Live in the present: It is often observed that we ponder too much about our past losses and worry about our future. Trials and tribulations are a part of our lives. Instead of cursing your past and losing sleep over your future, you should invest for a better future by clearly articulating your goals and then working towards them, so that you lead a serene financial life.

Adhere to your values: There might be many instances when an investor is tempted by greed of short term returns or fear of the unknown. Targeted Asset Allocation should be the guiding light for all your investment related decisions as it is arrived at after optimizing an investor’s risk tolerance, goals and investment time frame.

Rebalancing is the Key: One of Gandhiji’s quotes goes – ‘It is Ego we cannot forgo. But what ego does is parts us from our own selves, our loved ones.’ It is a deviation from what we should be doing. Similarly, when our portfolio deviates from its original desired level of target asset allocation, we should make requisite changes. We should rebalance the portfolio at regular intervals and make it adhere to its values.

Some of these values and principles are applicable and guide us in all walks of life. Same is the case with Gandhiji’s principles, simple yet applicable to each and every thing. Follow these simple principles to lead a more efficient and fulfilling financial life.

Happiness is when what you think, what you say and what you do are in harmony.

 

 

 

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Manage Cash Flows Well

Meeting deadlines, adding value, juggling priorities, wearing different hats are a part and parcel of every entrepreneur’s life. Whilst there is a certain high that comes with all of this, it is also crucial for an entrepreneur to critically manage money, both for the business and himself/herself and dependents. Whilst efficient use of capital is one of the most crucial elements along the entire entrepreneurial journey, we believe there are two phases where managing money is absolutely critical. Money management during these two phases can go a long way in ensuring that the business can reach a stage where it is robust enough to survive, grow and flourish over longer periods.

Phase 1: Whilst you are planning to set up

Phase 2: In the first 18 -24 months of the business

Money management during both these phases can be fairly similar. Entrepreneurs still need to lead their personal lives, even as they go about building the blueprint for the business that is closest to their heart. With a significant number of entrepreneurs today quitting jobs to find their true calling, planning the capital requirements for their business, as well as to sustain their personal lives whilst positive cash flows from the businesses are yet, to happen are crucial. We would recommend that entrepreneurs focus differently on their personal and business finances.

Personal finances

1  Create a large contingency fund – Have 12 to 18 months of personal expenses ( including personal EMIs ) in financial instruments, wherein they can be accessed immediately, as well as have no significant risks of capital loss. Instruments like PPF and EPF accounts are not great friends of early entrepreneurs as access to funds in these accounts tend to be rather difficult and time consuming. Instruments like bank deposits and debt mutual funds without a lock-in are superior options during this phase. You may need to start drawing a small compensation during the latter part of this phase, so seek tax efficiency as well.

 2  Ensure that you are covered against risks in your personal life – Have adequate life insurance (buy term insurance as it is the most cost efficient) so that debts and living expenses of your family are adequately covered. Ensure that you have health insurance cover for your family and dependents in place for an adequate amount.

Business finances

1  Avoid risky investments with your business finances – Remember, the best returns over a period tend to come from your business so avoid other risky investments in this stage with funds which are needed for your business. For example, do not temporarily park funds into equity markets or real estate. At the same time, optimize your returns depending on your cash flow requirements, by building a tiered investment strategy. In case you cannot do this yourself, use the services of a financial planner. Liquid and debt funds can be very useful tools to consider.

 2  Focus on good costs, eliminate the bad costs -With a large number of businesses, getting started without external funding and needing to sustain using internally generated cashflows, it is crucial to keep costs under control. Look at costs as good costs and bad costs. Good costs are those that have a high probability of a success outcome, whereas bad costs are those with a low or no probability. This definition may vary from business to business, for example a swanky office may be a good cost in a consumer business, and a bad cost in a B2B model.

3  Use technology tools to the maximum – Through the use of mobile technology and the internet, it is now possible to manage your cash flows efficiently, with minimal commitment of your most precious resource during this phase i.e. entrepreneur’s time. Understand how you can use technology to manage cash flows and get superior returns on your temporarily idle cash in this phase.

Remember, whilst all rupees are equal, but some are more equal than others. More so, when you are a new entrepreneur.

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