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
  • 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


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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