3 Life Insurance Stocks Made Simple for Smart Investors

They are tough.

Such sectors – even if promising – are my blind spots. But there’s no reason you can’t make them simple.

Here’s an attempt to do so:

A. Life Insurance Sector

1. Time line

  • 1956: The sector was nationalised. Only LIC.1HDFC Life, IPO Prospectus, P 168
  • 2000: Opened up for private players.
  • 2015: FDI limit was increased to 49%

2. Classification

BasisClass 1Class 2
MarketLinkedNon-linked
ProfitParticipatingNon-participating
CustomerGroupIndividual
  • Linked: Returns linked to stock and debt markets
  • Non-linked: Traditional, pure protection
  • Participating: Returns linked to insurance company

3. Performance Measures

Who is selling more?

  • APE: Some insurance policies have regular annual premiums. Others have a single lump-sum premium. To bring both to the same page, a blended measure is needed. And that’s annual premium equivalent (APE).2Article on Investopedia: Annual Premium Equivalent (APE)

It is calculated by adding 100% of 1st annual premium + 10% of single premium (i.e. a policy is assumed to last 10 years).

Whose sales is better?

  • Persistence: How long do customers renew their policies. 13th month persistence measures renewal after 1 year. 61st month persistence measures renewal after 5 years. That’s important for ULIPs, because surrender penalties lift.

Who is more valuable?

  • EV: Policies already sold till now, will bring a stream of premiums in the future. After matching costs, that will in turn, lead to a stream of profits in the future. When you discount those profits to the present, it is called embedded value (EV).3Article in Mint: 5 Metrics to Evaluate Life Insurance Business

Important: EV is about the policies sold till now. It does not take into account any future polices that will be sold.

  • VNB: EV is about policies sold in all the past years. Value of new business (VNB) is the same concept, but for policies sold in the last year only.

Note: APE measures the flow of value. EV and VNB measure the stock of value.

Who is more profitable?

  • VNB Margin: It is VNB/APE. It indicates product mix. Protection plans have the best margins, then ULIPs.

4. Drivers

  • Growth rate: Life insurance is growing much faster in the emerging economies than in the advanced economies.

B. HDFC Life

C. ICICI Pru Life

D. SBI Life

References

References
1HDFC Life, IPO Prospectus, P 168
2Article on Investopedia: Annual Premium Equivalent (APE)
3Article in Mint: 5 Metrics to Evaluate Life Insurance Business
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