Drivers of valuation January 15, 2016
Life insurance industry in India FY2002 FY2010 FY2015 New business premium 1 (Rs bn) Total premium (Rs bn) 116 501 21.5% 23.2% 550 2,655-5.8% 4.3% 408 3,277 Penetration (as a % to GDP) 2.1% 4.1% 2.6% In-force sum assured 2 (Rs bn) In-force sum assured (as % to GDP) 11,812* 15.5% 37,505 16.0% 78,786 50.1% 57.9% 62.8% Life Insurance predominately savings oriented Pure protection 1-2% of new business premium 2 1. Retail weighted received premium 2. Individual and Group in-force sum assured Source: IRDAI, CSO, Life insurance council * Company estimate
Savings Characteristics Sources of profit Transparent; low charges; Asset management fees Linked choice of asset class; no Allocation and admin charges lapse risk for customers Mortality profit Par Product and sources of profit Non-Par savings 90% of surplus shared with customers as bonus Guaranteed returns; high lapse risk for customers Share of surplus; including mortality, investment and persistency Spread income Mortality Lapsation Protection Business environment Sources of profit Term Low penetration Mortality profit Health Regulatory changes likely to create level playing field vis-a-vis P&C players Morbidity profit 21
Value drivers Asset under management New business growth Persistency and renewal premium Surrender control Fund management performance Mortality/ morbidity profit Risk calibrated pricing Appropriate underwriting and claims management Cost efficiency Spread income from guaranteed products Appropriate asset liability management Lapse profit from non linked saving plans 4
Profits & Realisation of Profit Net cash flow Y1 Y3 Y5 Y7 Y9 Y11 Y13 Y15 Y17 Y19 New Business Strain Exp Stat Profit - loaded exp Life insurance products have high initial expenses Under Indian GAAP acquisition expenses are not amortised Hence most products incur loss in the first year i.e. new business strain New business strain is offset by positive cash flows in subsequent years 5
Profits & Realisation of Profit Net cash flow Y1 Y3 Y5 Y7 Y9 Y11 Y13 Y15 Y17 Y19 New Business Strain Exp Stat Profit - loaded exp NBP Measure of profitability is new business profit (NBP) PV of all future profits to shareholders measured at the point of sale as % of APE Based on long term assumptions Most companies in India disclose margin based on long term assumptions and at current cost 6
Profit profile: ULIP and par Yr1 Yr2 Yr3 Yr4 Yr5 Yr6 Yr7 Yr8 Yr9 Yr10 Yr11 Yr12 Yr13 Yr14 Yr15 Yr16 Yr17 Yr18 Yr19 Yr20 Ulip Par 7
Measurement of profit Life insurance products have high initial expenses Under Indian GAAP acquisition expenses are not amortized Hence most products incur loss in the first year i.e. new business strain New business strain is offset by positive cash flows in subsequent years Measure of profitability is new business profit (NBP) PV of all future profits to shareholders measured at the point of sale as % of APE Based on long term assumptions Most companies in India disclose margin based on long term assumptions and at current cost 8
Value of a Company Appraisal Value Embedded Value Value of future NB: Goodwill 9
Embedded Value EV is a measure of value of shareholder interest in the existing business 10
Embedded Value EV is a measure of value of shareholder interest in the existing business 11
Embedded Value EV is a measure of value of shareholder interest in the existing business 12
Embedded Value EV is a measure of value of shareholder interest in the existing business Assumptions Persistency Renewal expense Mortality Investment returns 13
Embedded Value EV is a measure of value of shareholder interest in the existing business 14
Embedded Value EV is a measure of value of shareholder interest in the existing business 15
Embedded Value EV is a measure of value of shareholder interest in the existing business 16
Difference between TEV and IEV Element TEV IEV Risk discount rate ( RDR )- Risk free rate plus a spread - Implicit allowance for risk Risk free rate (reference rates used as proxy) Returns on different asset classes (FER) Expenses Time Value of Financial options and Guarantees ( TVFOG ) Risk free plus expected risk premium based on asset allocation Target initial expenses and a glide path from actual to target renewal expenses No allowance is required. Discount rate is expected to allow for all the risk Returns across asset classes assumed to be the risk free rate Actual expenses for both initial and renewal Explicit allowance is required 17
Analysis of movement in IEV All figures in Rs billion -9.77 117.75 11.70 41.20 41.20 EVOP 1 76.55-2.70 1.60-2.12 11.11 137.21-54.33 44.33 = 18.12 (15.4% of opening IEV) 82.88 82.88 - IEV (March 31,2014) Unwind NBP Operating assumption changes Variance in operating experience Economic assumption change and investment variance Net capital injection IEV (March 31, 2015) Value of in-force business Adjusted net worth 1: Embedded value of operating profit net of tax 18
Summary Appraisal value of life insurance companies usually estimated as Multiple of EV EV plus multiple of NBP Stat profits Free cash flow-dividend paying capacity Key parameters for insurance companies New business and AUM growth Persistency Mortality profits Cost efficiency 19
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