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ICICI Pru Life Insurance – Demystifying the life insurance sector


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Understanding the Insurance business has been an Achilles heel for many investors. The reasons are many.

  • We can’t analyse them using our traditional methods like PE, EPS, EBITDA Margins etc.
  • They are not lenders like Banks & NBFCs. But the policy holders are nothing less than Depositors.
  • They have long gestation periods. It takes almost 10 years for a Life insurance company to report accounting profit.
  • Because of stringent regulations, the costs are front loaded & the profits are back ended.
  • The P&L hides more than it reveals.

In this post, let’s try to crack this nut and understand life insurers in detail.

The history of life insurance in India dates back to 1819 with the establishment of Oriental Life Insurance Company in Calcutta. It was started by Europeans with the purpose of looking after the needs of European community. Indians were treated as substandard lives and heavy premiums were charged on them.

ICICI Pru Life Insurance - Demystifying the life insurance sector

As of now, there are 59 insurance companies in India (24 life insurance, 34 non-life, 1 re-insurer).

About the Industry

The size of the Indian life insurance sector was approx. $ 80 Billion on a total premium basis in FY2020. India is the tenth-largest life insurance market in the world & fifth largest in Asia. As per Goldman Sachs Report, March 2019 – Only 1 out of 40 people (2.5%) who can afford it is buying a policy every year.

The total premium in the Indian life insurance sector grew at a CAGR of 15% between FY2002 and FY2019. Over the period of FY2016 to FY2020, the new business premium for the industry registered a CAGR of 17%. During the same period private insurers the grew by a CAGR of 19%. 

ICICI Pru Life Insurance - Demystifying the life insurance sector

Understanding the Products

Broadly life insurance products are either pure protection products or savings products. 

Protection products: These products offer a plain vanilla life cover at a low cost for the period of time the customer continues to pay the premium. Term plans is an example of a pure protection product.

Savings products: These products are a combination of Insurance & Investment. The savings products can be further classified based on their structure into Participating (Par) and Non-Participating (Non-Par).

ICICI Pru Life Insurance - Demystifying the life insurance sector

Linked Insurance Plans: These products provide returns which are linked to performance of an approved index or value of the underlying assets. The investment risk in these products is borne by the policyholder.

Non-Linked Insurance Plans: These are traditional plans that are not linked to the market. It provides low-risk returns and a defined maturity amount. 

Endowment assurance: It is a combination of Insurance & Investment. The policy covers the life of the insured over a specific period of time and pays a lump sum on maturity. It pays full sum to the beneficiaries if the insured dies during the policy term.

Annuity: It provide for a series of payments at regular intervals in return for a certain sum paid upfront till the death of the life assured.

Variable insurance products: The benefits are dependent on the performance of an approved external index / benchmark which is linked to the product.

ICICI Pru Life Insurance - Demystifying the life insurance sector

Demystifying the business metrics

Life insurance products are long term and generate profits over a period of time. It is quite unlike other businesses, it uses different terms and metrics to manage, monitor and measure performance.

Insurance companies have to pump in huge sums of money initially and also need more capital as their business grows. Hence regulators have stringent capital requirements for the companies to make sure they honour future liabilities. However this capital requirement is not in terms of Capex or new plant & machinery, but in the form of net worth. 

Revenue Stream:

  • Premium Income
  • Investment Income (Capital gains, Dividend, Interest etc)
  • Fee Income


  • Commissions
  • Operating Expenses
  • Benefits paid to policy holders

Insurance business by nature has uneven cash flows. The premiums they receive will be small & predictable and payouts will be large & unpredictable.

How is income measured?

Gross Written Premium (GWP): Total premium collected during the fiscal year. It comprises premium from new customers (new business premium) and existing customers (renewal premium).

Annualised Premium Equivalent (APE): Sum of annualised first year premiums on regular premium plus 10% of single premium policies.

Retail Weighted Received Premium (RWRP): 100% of the first year premiums on retail regular policies plus 10% of single premiums. It is a metric used for calculating the market share.

How is profitability measured?

For life insurance business, the expenses are higher in initial years leading to accounting losses, while profits start accruing towards the later stages. Hence PAT is not a correct way to measure the profitability. Instead we use VNB.

Value of New Business (VNB): VNB is the present value of expected future earnings from new policies written during the year. Future profits are computed on the basis of actuarial methods and assumptions.

VNB Margin: VNB Margin is the ratio of VNB to New Business APE for a specified period. It is similar to PAT margin for any other business.

New Business Strain: The accounting loss associated with the initial years of a life insurance contract is referred to as Strain. 

How to value a life insurance company?

The value of a life insurance company is measured using Embedded Value. It is the sum of net worth & present value of all future profits to share holders from existing book. Future profits are computed on the basis of assumptions such as persistency, mortality, interest rates and equity market performance. It is similar to Book value of any other business.

Given the importance of this metric, let us spend some time in understanding it in detail.

  • Embedded value is ONLY calculated on the policies that are already sold. They DO NOT consider future sales.
  • In other words, the policies that are in force & the committed future payments are part of EV calculation. But any new policies that will be sold in future are not part of EV.

Here is the snapshot of how EV is calculated for ICICI Prudential Life:

ICICI Pru Life Insurance - Demystifying the life insurance sector

Following are the parameters used in the EV calculation:

  • ANW: Adjusted Net Worth of the company.
  • VIF: Value of In-force business. These are the policies that are in force.
  • Unwind: It refers to the unwinding of the discount rate. The rate at which future cashflows are discounted. To put it in other words, these is the expected return on existing business.
  • Operating Assumption Changes: Impact of change in the operating assumption on the EV.
  • VNB: Value from the new business underwritten in the reporting period.
  • Variance: Change in the performance of mortality claims, persistency, expenses compared to the estimates at the start of the year.
  • Economic Assumption Changes and Investment Variance: The impact of macros like Interest rates, yield curves etc.
  • Net Capital Injection: Cashflow from Free surplus to Shareholders or vice-versa.

Life insurers has to do something called Sensitivity Analysis. They analyse the impact on Embedded value by changing each variable at a time. 

For example, ICICI Pru expects a 10% increase in mortality rates will decrease the EV by 1.6%. This helps them to predict their future liabilities.

ICICI Pru Life Insurance - Demystifying the life insurance sector

*Snippet from ICICI Pru Life Q2FY21 Investors Presentation

How is quality of the business measured?

Quality of business of a life insurance company can be determined by understanding the ability to retain customers.

Persistency: It indicates the ability of the company to retain customers. Maintaining a high level of persistency is critical as it provides scope of regular revenues through renewal premiums. The 13th month & 61st month persistency ratio typically reflects the quality of sales performance.

How to measure capital adequacy?

The solvency ratio measures how financially sound an insurer is and its ability to pay claims. In India, insurers are required to maintain a minimum ratio of 1.5. A high solvency ratio instils confidence in customers and investors in the ability of the Company to pay claims.

Difference between Shareholder’s funds & Policyholders funds

Now you are familiar with the business metrics, let’s try to understand some numbers.

Shareholders funds: The equity of the company which belongs to the shareholders. The excess of the assets over the liabilities belongs to share holders. 

  • Shareholders Funds = Share Capital + All retained profits

Policyholders funds: These are like the Deposits for a bank. The primary objective of Insurance companies is to protect them. They need to maintain adequate level of solvency at all time. During the initial years of the business, the companies needs to transfer funds from Shareholders funds to Policyholders funds. And this transfer is irreversible.

ICICI Pru Life Insurance - Demystifying the life insurance sector

The IRDA specifies that no bonus can be declared if the company is in deficit. Hence the transfer from Shareholders’ Fund is necessary. Transfer of such funds are shown in ‘Contribution from the shareholders‘ in Revenue Account. Even the investments made by the insurance companies are categorised as Shareholders & Policyholders.

ICICI Pru Life Insurance - Demystifying the life insurance sector

*Snippet from ICICI Pru Life Annual Report 2020

The segregation of P&L Accounts

Just like Investments, the P&L is also categorised into 2 accounts for the insurance companies.

  • Revenue Account (Technical account)
  • Shareholders Account (Non-technical account)

Revenue Account

It represents all income & expenses relating to Policy holders. The Income of Revenue account comprises of:

  • Premiums earned
  • Income from investments

The Expenses of Revenue account includes:

  • Commissions
  • Operating Expenses
  • Provisions & Bad debts
  • Benefits paid
  • Bonuses
  • Gross

ICICI Pru Life Insurance - Demystifying the life insurance sector

*Snippet from ICICI Pru Life Annual Report 2020

The Gross line item represents the reserves kept aside for future liabilities. These are based on actuarial assumptionsAnd here is where the things gets interesting.

  • If they are conservative & provide more for future payouts – Profits will fall dramatically.
  • If they are liberal & do not provide much – their profits will raise but carries tail risk event.

A Catch 22 situation.

Shareholders Account

This account represents Income & Expenses that are NOT related to the Insurance business but belongs to shareholders funds.

The Income of Shareholders account comprises Income from investments & Expenses includes management compensations, contribution to policyholders’ account etc. The PAT reported in this section belongs to shareholders.

ICICI Pru Life Insurance - Demystifying the life insurance sector

About the Company

Incorporated in 2001, ICICI Prudential Life Insurance is a JV between ICICI Bank & Prudential Plc (UK). 

ICICI Pru Life Insurance - Demystifying the life insurance sector

ICICI Pru is the 4th largest Life insurer with a New Business Premium market share of 7.1%. The company has a diversified portfolio of Non-linked insurance, ULIPs, Protection plans, Term plans, Pension plans etc. The company has 517 branches, 1.9L agents and 25,182 partner branches. It has the second largest agency channel after SBI Life in private insurance space. ICICI Pru was the first private sector life insurer to cross the 1L Cr AUM.

Numbers at a glance

The company has an AUM of 1.81L Cr. The Value of New Business (VNB) grew at a CAGR of 42.8% in the last 5 years to 1605 Cr. VNB Margin stands at 21.7%. The Annualised Premium Equivalent (APE) grew at at a 5Y CAGR of 9.2% to 7,381 Cr as of March 2020.

  • Savings APE : 6,625 Cr
  • Protection APE: 1,116 Cr

Total sum assured of the company stands at 14.8L Cr. The company is having strong balance sheet with a Solvency ratio of 2.05. It maintained Zero NPA since inception. 

ICICI Pru Life Insurance - Demystifying the life insurance sector

ICICI Pru Life Insurance - Demystifying the life insurance sector

ICICI Pru Life Insurance - Demystifying the life insurance sector

*Click to enlarge

ICICI Pru has a scale advantage which helps them to keep the costs low. Operating expenses as % of AUM is at 1.7%. 

The company is showing strong growth in traditional savings and Annuity products. Indian allows a higher mix of savings products vis-a-vis protection compared to other countries. In the last 2 years most of the VNB margins expansion happened because of Protection products.

The management is looking to maintain VNB margins by pushing Savings (unit linked & non linked) followed by protection products.

As per the management there is a risk aversion in consumer behaviour. Any product showing some assurance  in maturity value is very popular as of now. Company is capitalising on that & grew the Non linked business by 34% in Q2FY21.

ICICI Pru Life Insurance - Demystifying the life insurance sector

*click to enlarge

Key Risks

  • ULIPs are prone to stock market returns. The company is having 65% (down from 80% in 2016) of the product mix in ULIPs.
  • Bancassurance channel contributes almost 51% of APE. The industry average stands at 27%.
  • Any significant changes in actuarial methods and assumptions will impact the net worth of the company.
  • The company holds 93.9% of assets in the fixed income portfolio (including money market instruments). With the reducing interest, the company carries a Re-investment risk.

View & Valuation

The management is targeting to double the VNB in the next 3-4 years by maintaining the VNB margin. Persistency ratios will remain range bound as per the management. 

The return ratios (ROEV & ROE) are less than other insurers, but ICICI Pru has the highest VNB margin across private insurers of 21.7%. The company has a strong solvency ratio of 2.05 and an industry best persistency ratio of 67.3% for 61st month.

The company trades at an EV of 2.9 times, which in our view is fairly valued. With strong parentage, large distribution network and healthy balance sheet, ICICI Pru Life is well positioned to gain market share from PSUs and grow for the next 5-10 years.

NOTE: As a disclosure, some Capitalmind authors & the company may be invested in the mentioned stock in their portfolios. Please do not consider this article as a recommendation, It is for informational purposes only.

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