# Life Insurance Companies - Comparison

@rupeshtatiya

First congratulation in excellent work in the sector. I would request you revert on following points at your convenience.
A) In Cell C68 of ICICI Prudential, how you calculate cost of float as -3.9%? (Cell C67/C43)
B) In Cell 44 of ICICI Pru sheet, how you got Return on float of Rs 2599 Cr? Income for Shareholder investment for ICICI Pru is Rs 694 Cr (Cell C27) while Income from policyholder investment is Rs 14977 Cr (Cell C22). That shall make total of Rs 15671 Cr v/s Rs 1905 Cr in Cell C70. Please let me know in case have make some wrong calculation.

HI Dhiraj Bhai,

For the cost of float, I have used following formula ->
Cost of Float = Non-linked (Premiums - Commission - Operating Expenses - Misc Expenses - Actuarial Liabilities) / Float

Float = Shareholder’s investment + Non-linked policyholder’s investments

In excel terms,
Numerator = C3 - C14 - C15 - C16
where
C14 = C10 + C12 = C3 + C5 + C7 + C9 + C12

Denominator = C40 + C41

The return on float only considers income from investments for non-linked portion + shareholders investments.
The non-linked investment income is in cell C70 = 1905Cr. The shareholders investment income = 694Cr. Total return on float = 1905 + 694 = 2599Cr.

I actually created a google sheet first on drive & then copied data into Microsoft excel sheet. In this translation, I actually lost all the formulas & without formulas it is very difficult to understand the data. Thanks Dhiraj bhai for bringing this to attention.

Please let me know if you have more questions.

Regards,
Rupesh

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Am wondering where you got the claims number for SBI Life in cell C87 ?

I got most of the data from annual reports ->
You can search for “Segmental Revenue” or “Benefits Paid” & get to the correct table.

Annuity would be a huge opportunity for Life Insurance Companies in the coming years. I’d writen about it here: HDFC Life Insurance Company

Another good and simple article to understand Annuities:

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Indian life insurers’ stock prices out of line against Asian peers: Milliman report

The article compares insurance companies across Asia and argues that Indian life insurers are costly.

Indeed, they are cost if we only look at Embedded value. We also need to look at growth and growth of life insurance companies is measured by Value of New Business Growth. ICICI Pru reported at VNB growth of 71% on h1fy17 in h1fy18. The author need to report VNB growth of other Asian Life insurers to make fair comparison and argument.

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Yes and also firms like China Life are very old companies and are de/slow growing in nature, so doesn’t look like a fair comparison…

ICICI prudential brand value increases significantly

Yes it’s costly, but if we look at the history, HDFC Bank traded at around 5.7 PBV in 2002. It’s now trading at 4.88 PBV.But since last 15 years shareholder return is 27.4%

Some companies always remain expensive but still deliver in a strong growth economy like ours. Thanks…

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PARTICIPATING & NON PARTICIPATING PRODUCTS

We have already established that non-linked portfolio has better spread compared to linked portfolio & also more risk. The non-linked portfolio can be of two types - non-participating (e.g. protection) & participating (e.g. endowment) plans.

Lets look at the premium split across participating vs. non-participating products ->

• As we already know, non-linked premiums of ICICI Pru is smaller compared to HDFC Life/SBI Life.
• SBI Life has highest non-par premiums while HDFC life has highest participating premiums.
• Non Par premiums of HDFC Life have grown at highest rate from FY14 compared to other two players.

PARTICIPATING PRODUCTS

For participating products, the policyholder is entitled for any surplus that remains after taking care of expenses + claims + actuarial liabilities. Currently, IRDAI mandates that 90% of the surplus has to be shared with policyholders. This portion can be thought of as ownership model - where people have pooled money to have insurance & any excess is shared back to the pool.

First lets see the accounting treatment of the participating portfolio ->

Above image is from SBI Life FY17 AR. The columns correspond to - Individual Life/Individual Pension/Group Pension/Variable Insurance/Total for participating products. Some things to note are -

• Row (b) is the bonus announced by the insurer to the policyholders. Corresponding to this amount - there is a transfer to shareholders account which ~10% of total = transfer to shareholders + bonus for policyholders.
• Interim & terminal bonuses correspond to maturity or surrender or death or annuity related payments.
• The bonus allocation happens only in accounting & actual bonus payments are linked to some events like above - death/surrender/maturity/annuity. For most of the insurers, the payments are not done on demand for non-annuity products.
• Logically, this bonus allocation shall be accounted in actuarial liability row line for these products.

With above background, I though the spread of participating products will be very minimal & even lesser than ULIPs. Lets look at the data ->

• As expected, participating portfolio has lesser spread compared to non-participating portfolio. Non participating products seems to have highest spread.
• I was expecting the spread of participating portfolio to be very low (e.g. assuming 3% as total spread, shareholders spread shall come to 0.30%). But that is NOT the case, the spreads are pretty decent.
• I think this is because the ratio of sum assured/premium is pretty low compared to non-participating products. e.g. take a look at whole life participating plan from Max Life.
https://www.myinsuranceclub.com/life-insurance/companies/max-life/whole-participating
With premium of Rs. 21590 for 30 year, the sum assured is only around 10L. With similar premiums, once can get sum assured of ~1Cr in pure protection plans.

So participating plans also have decent profitability for insurers.

DISCOUNT RATE ASSUMPTIONS

Next I wanted to observe the discount rate assumptions for different insurers across a cycle & try to see if higher spread was a result of aggressive assumptions. Since assumptions are different for different products, I have chosen Par Life & Non-Par Life to check this. These two categories contribute highest to the profitability. Lets look at the data ->

• One of the important things to note is, highest assumption for discount rate is ~6.5% across last cycle. I would like to take it as a good sign that despite Fixed Deposit rates of 9%+, insurers (correctly) did not assume higher long term discounting rates for policies written in this period. It would be interesting to check if IRDAI has some regulation/guidelines in this matter.
• For Par Life portfolio, SBI Life has highest discounting rate assumption and still have lower spread. ICICI Pru has been conservatively using lower & lower discounting rate over last 4-5 years and still has pretty decent spread. HDFC Life’s discount rate assumptions are closer to SBI Life than that of ICICI Pru for Par portfolio.
• For Non Par portfolio, HDFC Life has highest discounting assumptions compared to other two. HDFC life increased discount rate (& hence spread) despite other two insurers reducing the rates (getting ready for IPO?). Again ICICI Pru has been most conservative comparatively & still has decent spreads. HDFC Life’s spreads are absolutely amazing (6%+) for last 3 years.

Even though comparatively, discount rates are higher/lower than one another, one needs to think if insurers can achieve absolute discounting rate over a long horizon of 20-30 years.

One of the interesting question to ponder here is - a lot of benefits/claims will be made 10-20 years later. As India becomes a middle income country, interest rates would go down & shall settle to lower average compared to today with more rating upgrades, more business friendly climate etc. Can we foresee what happens to insurers in these cases (huge asset-liability mismatch?)? It would be worthwhile to study insurance Industry of some country (US?) across 40-50 years.

INTEREST RATE FUTURES

One of the interesting thing I noticed in HDFC Life’s DRHP is - interest rate futures. They have ~3500Cr worth of interest rate futures as a part of their hedging policy.

I do not understand interest rate futures & I encourage people with skills & background in this to help analyze this part.

RENEWAL COMMISSION

We all know that higher persistency ratio leads to higher profitability. But I had not fully appreciated the commission outgo on renewal premiums. Look at data below for HDFC Life ->

The renewal commission is at 1% compared to 18% for new premiums. In the degrowth years on the basis of new premiums, all that additional commission shall flow into PAT & consequently as dividend.

VNB MARGIN

HDFC Life claims to have highest VNB margins multiple times in their DRHP. So I spent some time thinking about what VNB Margin means. VNB Margin = VNB/ APE.

As we already know that spread is much lower for linked portfolio vs. non-linked portfolio. So for an insurer with dominant linked portfolio, numerator is small & denominator is greater. So basically, higher VNB margin means higher proportion of non-linked products (or high margin products). I think VNB margin shall not be used in isolation & growth in various products segments is equally important.

BOOK VALUE
In one of the discussion with VP seniors, it was said that why book value is not used to value insurance companies similar to banks. I have given it some thought ->

• For banks to grow, they need to raise capital from time to time & hence book value becomes pretty important factor e.g. RBI allows debt to equity ratio of upto 16 for banks. For insurance companies, their is no need to raise capital if solvency ratio is satisfied.
• Also for banks, profit generated can be used to fund new growth. But in case of insurance companies, investment yield is at 8% for last few years. It hardly makes sense to reinvest the profits at such an yield on the behalf of shareholders. It totally makes sense to return that capital to shareholders (unless investment yields are 12%+) and hence book value will grow slowly.
• Further book value does not capture the earnings power of the insurers.
• In case of most insurers, book value = solvency margin (to satisfy solvency ratio of 1.5) + some additional buffer for future growth. Look at data below ->

ASM = Actual Solvency Margin. RSM = Required Solvency Margin. Solvency Ratio = ASM/RSM.

I am inclined to say that P/E is not a bad ratio to value insurance business as they represent real earning/earning power if actuarial liability assumptions are acceptable. (e.g. 60-70% of profits flow out as dividend)

TODO

• Study insurance industry of some country which went from low income to middle income to high income & particularly interest rate movements.
• Split of business across group vs. individual businesses & understand more. (HDFC/SBI Life have much bigger group business compared to ICICI Pru).

Disc - I am invested in ICICI Pru Life & my stake has gone up in last 30 days. My views are biased towards ICICI Pru due to my investment. It forms 5%+ of my portfolio. This is not a buy/sell recommendation. I am not a SEBI registered analyst. Please do your own due diligence before investing.

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On INTEREST RATE FUTURES
Good article (2014)

If your view is that interest rates are going up, “Short” Interest rate futures (you profit because when interest rates go up, Bond prices come down).

If your view is that interest rates are going down, “Buy” Interest rate futures (you profit because when interest rates go down, Bond prices go up).
Thanks
Ashit

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G1

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I have been reading several things to understand more on life insurance & following is potpourri of notes.

THE AIG STORY
I read the book titled “The AIG Story” by Larry Cunningham/Hank Greenberg (CEO of AIG till 2005) to understand the story of AIG (World’s largest insurer followed by bankruptcy). Quite frankly, I found the book to be average & I did not get exactly what I was looking for. But still, following are some interesting points.

• Product Innovation - it is important to keep looking at new products & when one comes across a new area where risk is low & potential for underwriting profits - one has to act. This is particularly true for general insurers but also appliable to life insurers as well. Some examples of product innovations from AIG - 1) Open enrollments for health insurance for limited time frame - due to limited time, one gets good mix of high/low risk candidates. But if you increase time frame, your risk tends go up. 2) Insurance for airline passengers for delays etc. 3) Insurance against kidnapping 4) Collaborating with yellow hat manufacturers in Japan for accidental insurance.

• Reinsurance - Sometimes it is better to pay reinsurance premium than to maintain capital for some upcoming losses. Reinsurance remains one of the most important tool in risk management for insurers and using it smartly (getting good deals, offloading concentrated risks) is a very good trait to have in managements.

• Life vs. General Insurance - In general insurance, years of profit can be wiped out by natural calamity etc. & hence general insurance is not exactly capital light business. Due to this reason, at some point, life insurance business became very important for AIG. This is more stable business with longer term premiums and less concentration risks.

• Profit Center Models - The book claims in other insurance companies, departments blamed each other in case of bad financial results e.g. underwriting team blamed investment team for bad investments or sales team for bringing in bad clients/bad pricing etc. AIG adopted a profit center model, where head of this center was responsible for all functions of insurance & eventually underwriting profit.

• Bankruptcy - so why did AIG go bust? I think this is a very big topic in itself & there are several documentaries/books on the matter. To put it succinctly - The investment department of AIG went crazy & management did not understand/care for risks. Till the day of bankruptcy, the book claims that - insurance divisions were still making underwriting profits and were sufficiently capitalized. Two things happened - 1) Assuming people will never default on housing loan, AIG wrote large portion of credit default swaps (where AIG will have to pay money in case of default). There was no hedging and quality/risk of underlying asset was not looked into in depth. When housing crash really came, AIG had to pay large sums of money that it became question of survival. 2) There were several contracts written by AIG with other big financial institutions that they were required to pay money in case of change of value of these swaps - something called as collateral calls. As housing market started going down, a large number of collateral calls were made by these institutions (mainly Goldman Sachs).

So, mota mota, we get following list of qualitative aspects to look for in management of insurance company -

• One can look for whether management is doing products innovations, prima facie, HDFC Life seems to be doing better job than others.
• Does management understand underwriting risk & are there some clues of smart usage of reinsurance (ICICI Lombard seems an interesting case).
• How is asset side book of insurance company & are they going crazy? In India, with many restrictions from IRDAI, this is probably not risk in short term but have to keep tracking for long horizons of 15-20-30-40 years.
• Can profit center model be applicable in India & do regional managers understand things like - actuarial liabilities, high/low risk clients etc.?

ASSET-LIABILITY MISMATCH
If one wants to be a long term investor (10 years+) in life insurance business, then I am absolutely convinced that asset-liability mismatch is the biggest risk one has to look at. In life insurance, one commits to long term liabilities today & there is no repricing or variable repricing e.g. when one writes term protection plan, one commits to a liability which will grow at 5-6% for 30-40 years but it is very difficult to find such a long term assets. Most of the bonds, as I understand, are of smaller duration than these. This is unlike general insurance products where short term rates are well known & there is annual repricing of insurance contract based on developments e.g. motor insurance or health insurance.

Following is the interview of Sanjeev Pujari, actuary at SBI Life -

He very clearly says that finding long term asset for non-par products is hard.

TODO - I would like to spend sometime going through investment books of insurance companies and get some sense of kind of assets they have.

UNDERWRITING PROFITS
I have been absolutely obsessed with this question as to why - life insurance companies are not focusing on underwriting profit. As I am reading more stuff, my sense is that - underwriting profit concept is not strictly applicable to life insurance companies as it is an absolute holy grail for general insurance companies.

This is primarily due to longer term contracts of life insurance products, lesser concentration risk & uncertainty as to long term rate of return for assets. In general insurance companies, short term rate of return on asset is well known & there is large concentration risk. For life insurance companies, one can move actuarial discount rate to 8-10% from 5-6% and there might be profit the P&L statement but that is probably meaningless.

I think getting to HDFC bank kind of numbers, 1.5%-2.5% of RoA & NIM/Spread of 4% with prudent actuarial assumptions, is probably best than can happen.
I can be wrong in above thought process.

LIC
The discussion of life insurance companies is incomplete without LIC. I am going through their annual reports. Following little bit dated report from Edelweiss gives some data on LIC.

https://www.edelresearch.com/showreportpdf-34033/LIFE_INSURANCE_-_SECTOR_UPDATE-SEP-16-EDEL

From Page 8 ->

• LIC has < 1% of ULIP business as of FY16 & this space is completely catered by private insurers.
• LIC has negligible contribution from banca channel and 90%+ of its new premium comes from agency channel.
• LIC has pays ~5.8% of premium as commission compared to 4-5% range for private insurers.
• LIC’s opex ratio still lowest in all insurance players (8.5% vs. 9.2% for SBI Life & ~11% for ICICI Pru/HDFC Life)

What do things imply? ->

• If LIC decides to enter ULIP business, then growth for private insurers might moderate given LIC’s reach & brand. Why it discontinued ULIP business in FY13 is an interesting question to research.
• if LIC manages to get good banca deal (a la Axis or Yes or India Post - if it gets license in future), given its brand & reputation, it will give tough competition to private players.

Private players taking market share from public players is a trend we have seen play out in several industries but one can not completely write off LIC yet.

For HDFC Life, proportion of group & single premiums has been rising & one of the key components of growth.
From above report,

For SBI Life, the proportion has come down but still remains high.

Logically, group business shall be a low margin business but we need to understand if HDFC Life has some edge in this business where they can make more profit than others.

SBI Life Q2 conf call said some interesting things on this matter ->

• They have been consciously de-growing the group saving business. SBI Life’s quarterly results have to be looked in this context.
• SBI Life claims that this is a very volatile business which is given to the party which offers highest interest rate on annual basis. e.g. a company having a gratuity corpus of 1000Cr. might select SBI Life to manage that asset as it offered 6.8% interest rate.

DIFFERENCE IN HEALTH PRODUCTS OF LIFE VS. GENERAL INSURERS

In summary, health products by life insurers are long term contracts with premiums fixed upfront for entire duration & payout is fixed lump sum amount unrelated to hospitalization cost. Whereas health products offered by general insurers are annual contracts where premiums vary at each renewal & payout is based on hospitalization cost.

MISCELLANEOUS

• HDFC Life has almost 3-4x credit protect business compared to ICICI Life/SBI Life (17bn Rs. vs. 3-4bn Rs.). In this product, HDFC life offers insurance against the loan in case of death/disability of personal who has taken the loan. The lender pays single premium to HDFC Life & gets premiums from person over multiple years. This is reported in group/single premiums.
• As established before, SBI Life has lowest non-claim expenses compared to ICICI Life/HDFC Life. There seems to be two reasons for this - 1) SBI, parent bank, seem to be less demanding in terms of commission than other private bank parents. 2) SBI Life follows model where selling is driven by SBI employees rather than SBI Life employees sitting in these branches (BNP Paribas, partner in SBI Life, follows this model). SBI Life has 2500 employees sitting in SBI bank branches of 25,000 vs. 4000-4500 employees for ICICI Life/HDFC Life against branch network of 4000-4500.
• HDFC Bank is no longer exclusive partner for HDFC Life. Due to open architecture, bank has signed up two other insurers, namely - Birla Sun Life Insurance & Tata AIA Insurance.
• SBI Life’s geographical concentration is less compared to HDFC/ICICI Life. Top 5 states contribute 38% in NBP for SBI Life compared to 50% for ICICI/HDFC Life. SBI’s premium per branch is quite low compared to other two and there is significant scope to move that number up for SBI Life.

Views invited.

Disc - same as last post

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