DR.

BABASAHEB AMBEDKAR MARTHWADA

UNIVERSITY, AURANGABAD

PROJECT REPORT ON
FUNDAMENTAL ANALYSIS OF LIFE INSURANCE INDUSTRY

SUBMITED BY
ROHIT VIJAY BORUDE
BBA III YEAR (VI SEMESTER)

UNDER THE GUIDANCE OF

DR. V. U. PANCHAL SIR

SUBMITTED TO,
DEPARTMENT OF COMMERCE AND MANAGEMENT SCIENCE

S.B.E.S COLLEGE OF ARTS & COMMERCE

ACADEMIC YEAR
(2022- 2023)

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 DECLARATION

I undersigned hereby declare that the project report entitled, “Fundamental

Analysis of Life Insurance Industry” is my own work carried out during the
course of study under the supervision of Dr. V.U. Panchal. I assert the statement
made and conclusions drawn are on outcome of my project work. I further
declare that,
• The work contained in the report is original and has been done by me under
the general supervision of my supervisor.
• The work has not been submitted to any other institution for any other degree
diploma/ certificate in this university or any other university.
• We have followed the guideline provided by the university in writing the
report.
Whenever we have used materials (data, theoretical analysis and text) from other
sources, we have given credit to them in the text of the report and giving their
details in the references.

Sign:
Name: Rohit Vijay Borude
Roll No: 04
PRN: 2020015200464287

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 CERTIFICATE

This to certify that the report of the project submitted is the outcome of the
project work entitled “Fundamental Analysis of Life Insurance Industry”
carried out by Rohit Vijay Borude bearing Roll No. 04 and PRN No.
2020015200464287 carried by under the guidance and supervision of Dr. V.U.
PANCHAL for the Award of Degree of BACHELOR OF BUSINESS
ADMINISTRATION of S.B.E.S. COLLEGE OF ARTS & COMMERCE under DR.
BABASAHEB AMBEDKER MARATHWADA UNIVERSITY AURANGABAD in
Academic year 2022-2023.

Sign:
Name: Dr. V.U. PANCHAL
Department of Commerce and Management Science
S. B. E. S. College of Arts & Commerce, Aurangabad

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 ACKNOWLEDGEMENT
First of all, I wish to express my deep sense of gratitude of my guide Dr. V.U.
PANCHAL for their valuable guidance and kind co-operation during period of
project work. I also want to express my sincere thanks to the Head of Department,
for their co-operation and support. I am also thankful to the other senior staff
member of the department. I am thankful to the non- teaching staff of the
department. At last, but not the least, I am thankful to my parents, classmates and
to those who helped me directly or indirectly for carrying out this work.

Rohit Vijay Borude

(BBA 3rd Year)

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 INDEX

Page
Sr. No TITLE
No.
1 Introduction 6

2 Objectives of the Study 7

3 Need of the study 8

4 Scope of the study 9

5 Research Methodology 10

6 Review of the literature 11

7 Limitation 12

8 Indian Insurance Industry Overview & Market Size 13

9 Global Scenario of Insurance Industry 15

10 Presentation of Data Analysis and Findings 16

11 Evaluation of Life Insurance Companies 21

12 Financial Ratio Analysis 25

13 Conclusion 35

14 The Future of Insurance Sector in India 39

15 Bibliography 40

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 INTRODUCTION
The life insurance industry in India has been rapidly growing and evolving over the
past few decades. Life insurance companies in India offer a range of policies to
individuals and families to protect their financial interests in the event of
unforeseen circumstances such as death, disability, or critical illness. The Indian life
insurance market is highly competitive and includes both public and private sector
insurers. The Insurance Regulatory and Development Authority of India (IRDAI) is
the regulatory body that oversees the functioning of the life insurance industry in
India. The industry has undergone significant reforms in recent years to enhance
customer protection and promote transparency. Overall, the life insurance industry
plays a critical role in the financial stability of individuals and the broader economy
in India.

The Indian life insurance industry is one of the largest in the world, with total assets
under management of over USD 450 billion as of 2021.

The industry has seen significant growth in recent years, with total premium
income increasing at a compound annual growth rate of 11.7% between 2015 and
2020.

The penetration of life insurance in India remains low, with a life insurance
penetration rate of around 2.82% in 2020, indicating significant growth potential
for the industry.

The COVID-19 pandemic has had a significant impact on the life insurance industry
in India, with insurers adapting to the new reality by offering COVID-specific
products and leveraging digital channels to reach customers.

The Indian government has also launched several initiatives to increase insurance
penetration and promote financial inclusion, such as the Pradhan Mantri Jeevan
Jyoti Bima Yojana (PMJJBY) and the Pradhan Mantri Suraksha Bima Yojana
(PMSBY).

The life insurance industry in India is expected to continue to grow and evolve in
the coming years, driven by factors such as increasing awareness of the importance
of insurance, growing demand for retirement solutions, and the continued focus on
digital transformation.

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OBJECTIVES OF THE STUDY
The objective of this project is to deeply analyze four companies from life
insurance industry for investment purpose by monitoring the growth rate and
performance on the basis of historical data.

✓ The main objectives of the Project study are:

➢ To do detailed analysis of selected companies which are gearing towards

performance of equity.

➢ To analyze the fundamental ratios of the life insurance companies like LIC
India, SBI Life, HDFC Life and ICICI Prudential Life from 2018 – 2022.

➢ To do comparative analysis between four insurance companies by using

fundamental analysis.

➢ To study about economy and industrial analysis of selected companies.

➢ To suggest the best stock to invest among the four listed stocks with the
present market conditions.

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NEED OF THE STUDY

➢ To analyze current growth trend of scripts of in equity market.

➢ To evaluate Securities using fundamental analysis ratios.

➢ To study the factors affecting Equity share price behaviour.

➢ To study about performance of stock using fundamental factors.

➢ Equity Analysis or investment helps investors in effective and efficient

management of their investment to achieve this goal.

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SCOPE OF THE STUDY

The scope of the study is identified after and during the study is conducted. The
project is based on tools like fundamental analysis and ratio analysis. Further, the
study is based on information of last five years.
• The analysis is made by taking into consideration four companies.
• The scope of the study is limited for a period of five years.
• The scope is limited to only the fundamental analysis of the chosen stocks.
To start any business capital plays major role. Capital can be acquired in two ways
by issuing shares or by taking debt from financial institutions or borrowing
money from financial institutions. The owners of the company have to pay
regular interest and principal amount at the end.
Stock is ownership in a company, with each share of stock representing a tiny
piece of ownership. The more shares you own, the more of the company you own.
The more shares you own, the more dividends you earn when the company
makes a profit. In the financial world, ownership is called “Equity.”
Advantages of selling stock:
• A company can raise more capital than it could borrow.
• A company does not have to make periodic interest payments to creditors.
• A company does not have to make principal payments.

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RESEARCH METHODOLOGY

The study on the Life Insurance Industry of India was done on the basis of
SECONDARY DATA. Secondary data has contributed in a significant way to
understand the scope as well as it helped in developing the conceptual framework.
Chapter 3 has been devoted to secondary data analysis.
Basically, the analysis of data is done through comparative study between the public
and private life insurance sector, on the basis of market share, in terms different
types of premiums, number of policies / schemes, channel mix (Individual New
Business Premiums), premium CAGR of insurance companies, and expense ratios.
On the second phase of the report project, the comparative study is done between
the valuation of life insurance companies based on embedded value, value of new
business margin, persistency ratio, claims settlement ratio and solvency ratio.
On the third phase of the project, the comparison study is done on financial ratios
of the life insurance companies on the based on per share ratios, margin ratios,
return ratios, liquidity ratios, leveraged ratios, turnover ratios, current share price
comparison on 1 year return, growth ratios and valuation ratios.
At last, we have the conclusion of our study based on above parameters.
For this study some secondary data sources are collected from publications of IRDAI
and LIC, SBI Life, HDFC Life and ICICI Prudential annual reports, journals and
articles regarding to the Indian life insurance sector.

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 Review of the Literature on the Insurance Industry of India
1. Global Index Insurance Facility (2016) in its report “When and How Should Agricultural
Insurance be Subsidized? Issues And Good Practices” discussed how to avoid the
problems regarding agriculture, any insurance subsidy needs to be carefully designed to
be “smart”, in the sense that it is cost effective in achieving its underlying purpose,
minimizes disincentive problems, and does not become a growing financial burden on
the government. At the end they have proposed some best practice guidelines for the
design and implementation of subsidized agricultural insurance.
(Source: World Bank Group)

2. Indian Chamber of Commerce (ICC) and Pricewaterhouse Coopers (PwC) (2017) in its
report “India insurance perspective” stated that India’s robust economy is expected to
keep pace with the growth in insurance premiums written. Higher personal disposable
incomes will result in higher household savings that will be channelled into different
financial savings instruments like insurance and pension policies.
(Source: India Insurance Perspective - PwC)

3. Rudra P. Pradhan, Mak B. Arvin, Mahendhiran Nair, John H. Hall, Atul Gupta (2017) in
their article “Is there a link between economic growth and insurance and banking sector
activities in the G-20 countries?” discussed about by using the vector auto-regression
model and the Granger causality test, the study shows that in the long run, developments
in the banking sector and insurance industry have had a significant impact on the
economic growth of the G-20 countries. In the short term, the inter-relationships between
the three factors prove to be more complex in that they differ by countries in different
stages of development.
(Source: Review of Financial Economics)

4. Prasanna Rajesh (2019) in his book “Valuation of Indian Life Insurance Companies”
bridges the gap between the accounting and the actuarial sides of Indian life insurance
companies, by exploring the relationships between the embedded value calculated by
actuaries and the revenue account and balance sheet prepared by the accountants.
(Source: Orilley)

5. J. D. Chandrapal (2019) in his article “Impact of liberalisation on Indian life insurance

industry: A truly multivariate approach” discussed that with the passage of the Insurance
Regulatory and Development Authority (IRDA) Bill, The Government of India has
liberalized the insurance sector in March 2000. Thus, entry restrictions lifted and foreign
players were allowed to enter in the Indian insurance industry with their domestic
partners with FDI Capital of 26 per cent. Deregulation and liberalization have
revolutionized insurance sector in India.
(Source: IIMB Management report)

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 LIMITATIONS
• This study has been conducted purely to understand fundamental analysis for
investors.
• The study is restricted to eight companies based on Fundamental analysis.
• The study is limited to the companies having equities.

• Detailed study of the topic was not possible due to limited size of the project.
• There was a constraint with regard to time allocation for the research study i.e.,
for a period of 45 days.
• Suggestions and conclusions are based on the limited data of 3-5 years.

• Lack of detailed study on the sector due to secondary source perspective.

• Preparation of such detailed project work within limited pages.

• Preparation of such detailed project within short span of time.

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Indian Insurance Industry Overview & Market Size
India ranked 10th in life insurance 14th in non-life insurance in the world.

India’s Insurance industry is one of the premium sectors experiencing upward

growth. This upward growth of the insurance industry can be attributed to growing
incomes and increasing awareness in the industry. India is the fifth largest life
insurance market in the world's emerging insurance markets, growing at a rate of
32-34% each year. In recent years the industry has been experiencing fierce
competition among its peers which has led to new and innovative products within
the industry. Foreign Direct Investment (FDI) in the industry under the automatic
method is allowed up to 26% and licensing of the industry is monitored by the
insurance regulator the Insurance Regulatory and Development Authority of India
(IRDAI).

The insurance industry of India has 57 insurance companies - 24 are in the life
insurance business, while 34 are non-life insurers. Among the life insurers, Life
Insurance Corporation (LIC) is the sole public sector company. There are six public
sector insurers in the non-life insurance segment. In addition to these, there is a sole
national re-insurer, namely General Insurance Corporation of India (GIC Re). Other
stakeholders in the Indian Insurance market include agents (individual and
corporate), brokers, surveyors and third-party administrators servicing health
insurance claims.

MARKET SIZE

The life insurance industry is expected to increase at a CAGR of 5.3% between 2019
and 2023. India’s insurance penetration was pegged at 4.2% in FY21, with life
insurance penetration at 3.2% and non-life insurance penetration at 1.0%. In terms
of insurance density, India’s overall density stood at US$ 78 in FY21.

Premiums from India’s life insurance industry is expected to reach Rs. 24 lakh crore
(US$ 317.98 billion) by FY31. In FY23 (Until October 2022), premiums from new
businesses of life insurance companies in India stood at US$ 25.3 billion. In October
2022, life insurers’ new business premiums grew to Rs. 15,920.13 crores (US$ 1.94
billion), according to Life Insurance Council data. The gross first-year premium of
life insurers increased by 12.93% in 2021-22 to Rs. 314,262.42 crore (US$ 40.06
billion).

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Between April 2021-March 2022, gross premiums written off by non-life insurers
reached Rs. 220,772.07 crore (US$ 28.14 billion), an increase of 11.1% over the
same period in FY21. In May 2022, the total premium earned by the non-life
insurance segment stood at Rs. 36,680.73 crore (US$ 4.61 billion), a 24.15%
increase as compared to the same period in the previous year. The market share of
private sector companies in the general and health insurance market increased
from 48.03% in FY20 to 49.31% in FY21. Six standalone private sector health
insurance companies registered a jump of 66.6% in their gross premium at Rs
1,406.64 crore (US$ 191.84 million) in May 2021, as against Rs. 844.13 crore (US$
115.12 million) earlier.

According to S&P Global Market Intelligence data, India is the second-largest

insurance technology market in Asia-Pacific, accounting for 35% of the US$ 3.66
billion insurtech-focused venture investments made in the country.

Government Support:
A) Tax incentives for insurance products with the exempt model of taxation.
B) IRDA provides a robust and reliable regulatory platform for the insurance
industry.
C) IRDA recently allowed life insurance companies that have completed 10 years of
operations to raise capital through Initial Public Offerings (IPOs). Companies will
be able to raise capital if they have embedded value of twice the paid-up equity
capital.

Market share of leading life & non-life direct premium writing globally in 2021

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 Global Scenario of Insurance Industry
The insurance industry is a critical component of the global financial sector and
plays a vital role in providing protection to individuals and businesses against
various types of risks. Here are some key points on the global scenario of the
insurance industry:
Size and growth: The global insurance industry is a massive industry, with
estimated total premiums of around USD 6 trillion in 2020. The industry has been
growing steadily over the past few years, driven by factors such as increasing
demand for insurance products, rising disposable incomes, and regulatory reforms.
Market trends: The insurance industry is undergoing significant transformation,
driven by trends such as digitalization, data analytics, and changing consumer
preferences. Insurtech companies are disrupting the industry by offering innovative
products and services, while traditional insurance companies are adapting by
investing in technology and enhancing their customer experience.
Regional variations: The insurance industry is highly regionalized, with significant
variations in market size and growth across different regions. North America and
Europe are the largest insurance markets in terms of premiums, while Asia-Pacific
is the fastest-growing region.
Product diversification: Insurance companies are increasingly diversifying their
product offerings beyond traditional life and non-life insurance products. This
includes products such as cyber insurance, travel insurance, and pet insurance,
among others.
Regulatory environment: The insurance industry is subject to a complex
regulatory environment, with different regulations and regulatory bodies across
different regions. The regulatory landscape is also evolving, with regulators
focusing on areas such as consumer protection, risk management, and
sustainability.
Overall, the insurance industry is a critical component of the global economy,
providing protection to individuals and businesses against various types of risks.
The industry is undergoing significant transformation, driven by digitalization and
changing consumer preferences, and is expected to continue to grow and evolve in
the coming years.

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 Presentation of Data Analysis and Findings
❖ Life Insurance Companies:
From the past 2 decades Privatisation in the Insurance sector took place and till now
this sector continuously increasing its market share in terms of both premium and
no. of policies at a steady pace. In the life insurance sector, private companies had a
market share of 35.29 % in FY 23 (as of Jan ‘23). Apart from LIC which is still holding
the top position in terms of market share on both the aspects.
We have taken some top performing Public and Private companies providing Life
Insurance facilities to the people and made a comparative study by analysing the
Market share of Premium and No. of policies made during the year.

✓ Public Sector:
LIC of India: Life Insurance Corporation of India (LICI) is a statutory corporation
established in 1956. It came into existence on 1st September, 1956 with the
objectives of spreading life insurance more widely and in particular to the rural
areas with a view to reach all insurable persons in the country, providing them
adequate financial cover at a reasonable cost.

✓ Private Sector:
HDFC Life: It is a joint venture between Housing Development Finance Corporation
Ltd (HDFC) and Standard Life Aberdeen of United Kingdom. HDFC Life was
established in 2000 becoming the first private sector life insurance company in
India.

SBI Life: SBI Life Insurance is a joint venture life insurance company between State
Bank of India (SBI), the largest state-owned banking and financial services company
in India, and BNP Paribas Cardif a French multinational bank and financial services.

ICICI Prudential Life Insurance: ICICI Prudential Life Insurance Company Limited
(ICICI Prudential Life) is promoted by ICICI Bank Limited and Prudential
Corporation Holdings Limited. ICICI Prudential Life began its operations in fiscal
year 2001 and has consistently been amongst the top players in the Indian life
insurance sector. The first insurance company in India to be listed on NSE and BSE.

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 The data helps to study about the Market share of Insurance companies in terms of
Market share of: (a) Insurance premium and, (b) No. of policies, and to compare it
between the Private and Public Insurance companies.

Market Share of Life Insurance Companies

MARKET SHARE OF INSURANCE PREMIUMS MARKET SHARE OF NO. OF POLICIES

OTHERS, OTHERS,
ICICI ICICI 15.28%
7.40% PRUDENTIAL,
PRUDENTIAL,
4.31% 2.18%

SBI LIFE, HDFC LIFE,

8.15% 3.50%
SBI LIFE,
HDFC LIFE, 8.36%
9.12%
LICI LICI, 70.68%
64.71%

(Source: IRDAI)

❖ Non-Life Insurance Companies:

The market share of private sector players has increased over the years. In the non-
life insurance sector, private companies had a market share of 61.05 % in FY 23 (as
of Jan ‘23).
We have taken some top performing Public and Private companies providing Life
Insurance facilities to the people and made a comparative study by analysing the
Market share of Premium and No. of policies made during the year.

Market Share of Non-Life Insurance Companies

Market Share of Non-Life Insurance Companies as of Nov 2022
Sr. No. Companies Market Share
1. The New India Assurance 13.63%
2. ICICI Lombard General Insurance 8.71%
Other General Insurers Total 62.36%
3. Star Health & Allied Insurance 4.59%
Other Stand-alone Pvt Health Insurers 4.86%
Specialized PSU Insurers 5.85%
GRAND TOTAL 100.00
(Source: IRDAI)

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❖ Channel Mix (Individual New Business Premium)
New business premium is the premium acquired from new policies for a particular
year. A premium is a regular periodic payment to be made by the policyholder to
the insurance provider. The premium earned from the new contracts in a given
financial year is referred as the new business premium for an insurance company.
Channel Mix Individual Corporate Corporate Direct Web Others
(Individual Agents Agents - Agents - Business Aggregators
NBP) FY21 Banks Others
LICI 93.8% 3.1% 0.1% 2.2% NA 0.8%
SBI Life 27.7% 65.4% 2.8% 4.1% NA 0.0%
HDFC Life 12.3% 45.8% 3.8% 32.9% 0.5% 4.7%
ICICI Prudential 24.7% 46.8% 5.0% 17.1% 0.7% 5.6%
(Source: RHP)

Interpretation:
Here, we can see that LICI almost 94% of new business premium acquired from
new policies for the year 2022 is directly comes from Individual agents while
compare to the private players most of the new business premium is came from
corporate agents – banks, that’s due to their banking network channels.

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❖ Premium CAGR of Insurance Companies
Value of new business is used to measure the profitability of the new business
written in a period. It is the present value of all future profits to shareholders
measured at the time of writing the new business contract.

The New Business Premium for Life Insurers has grown at a CAGR of 14% over
FY14-20 led by the financialization of savings and new product launches, and the
insurance industry size in India is expected to grow at 12.5% CAGR over the next
decade 2020-30 led by specialized products such as protection and annuities.

Year on Year Growth of Life Insurance Companies in India as of 31st Jan 2023
Companies Premium No. of Policies / Schemes
LICI 37.68 -0.17
SBI Life 16.11 17.06
HDFC Life 9.12 2.53
ICICI Prudential Life 10.62 -10.24
(Source: Company Public Disclosure, IRDAI Handbook, CRISIL Research)

Year on Year Growth of Non-Life Insurance Companies in India as of Nov 2022

Companies ''Gross direct premium (Nov, 2022)
The New India Assurance 3.16
ICICI Lombard General Insurance 22.03
Star Health & Allied Insurance 12.10
(Source: Company Public Disclosure, IRDAI Handbook, CRISIL Research)

Interpretation:
LICI has highest growth in year on year in premiums about 37%, however have
some negative growth in number of policies / schemes. Whereas SBI Life and HDFC
Life has grown around 16% and 9% in premium and 17% & 2.5% in number of
policies. ICICI prudential have -10% growth in no. of policies as compare to the
other private players.

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❖ Expense Ratio
The expense ratio in the insurance industry is a measure of profitability calculated
by dividing the expenses associated with acquiring, underwriting, and servicing
premiums by the net premiums earned by the insurance company.

The expenses can include advertising, employee wages, and commissions for the
sales force. The expense ratio signifies an insurance company's efficiency before
factoring in claims on its policies and investment gains or losses.

The expense ratio is combined in practice with the loss ratio to give an insurance
company's combined ratio.

Expense Ratio (as % of Operating Total Cost

Commission Ratio
total premium) – FY22 Expense Ratio Ratio
LIC of India 5% 8.5% 13.5%
SBI Life 3.5% 4.5% 8%
HDFC Life 4.4% 11.5% 15.9%
ICICI Prudential Life 4.2% 10.8% 15%
(Source: Company Public Disclosure)

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 Evaluation of Life Insurance Companies
Investing in Life insurance companies may appear risky as these businesses consist
of long-term products and services, and also require high initial acquisition costs.
Therefore, a financial statement that provides the current year’s realized income,
with the entire acquisition cost charged upfront, provides an incomplete picture of
value creation and profitability is what one should look at on investing in these
companies.
So, we will discuss some key financial parameters that you can use to analyze Life
Insurance (LIC) companies before investing in them.

❖ Embedded Value (EV)

Embedded Value is a measure of the value of the Life insurance Company. This is
an important metric, which reflects the expected profitability from the current
underwritten policies plus current net worth.

EV is computed as the sum of the adjusted net worth (ANW) and the discounted
value of profits from in-force policies (VIF).

Consistent performance in the growth of Embedded Value indicates stability.

Companies that experience huge dips or spikes are required to be tracked closely as
any change in product strategy, distribution model, expense performance, persistency
gets reflected in the EV. An investor should track the EV Year on year.

Companies Total Premium RoNW IEV Market Cap/IEV

LICI 405,805.00 45.65% 5,39,686.00 0.7
SBI Life 50,250.00 14.00% 30,200.00 3.7
HDFC Life 38,580.00 15.75% 29,540.00 3.5
ICICI Prudential Life 35,730.00 10.48% 30,200.00 1.9

(Source: CRISIL Research)

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❖ Value of New Business (VNB) Margin
VNB margin is the most important metric that a shareholder must track.
VNB margin indicates the profit margin of Life Insurance Company.
VBN margin is calculated by dividing the Value of New Business by Annualized
Premium Equivalent (Regular Premium +10% of Single Premium).
Forex: - A VBN margin of 20% would mean that if the insurer underwrote a new
business premium for a particular mix of products of Rs. 100 in a year, the
expected profit over the lifetime of that business is Rs.20.

Companies with high VNB margins are good from a profitability point of view.
Insurers derive higher VNB margins from their protection business. If a company
wants to improve its margins, they must focus more on the protection business.
VNB Margin = Value of New Business
APE
Annualised Premium Equivalent (APE) = 10% of New Single Premiums + Annualised First Year Premiums

Value of New Business Margin (%) FY19 FY20 FY21 FY22

LICI NA NA 9.9% 15.1%
SBI Life 17.7% 18.7% 20.4% 24.0%
HDFC Life 24.6% 25.9% 26.1% 27.4%
ICICI Prudential 17.0% 21.7% 25.1% 28.0%
(Source: Company Public Disclosure)

Value of New Business Margin (%)

28

26.1
25.9 27.4
24.6 25.1
21.7 24
17.7 20.4
18.7

15.1
17

9.9

FY19 FY20 FY21 FY22

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❖ Persistency Ratio
Persistency ratio measures how long customer persists with their policies. This is
an important metric to track as persistency is a key driver of the profitability for an
insurer.

The global average of 13th-month persistency (a policy that renews after a year) is
close to 90% whereas the 61st-month persistency (a policy that renews after 5
years) is about 65%.

For example: - If the 61ST-month Persistency ratio of a company is 50%, it means

half of the company customers are not paying a premium after five years.

Persistency is an important metric to consider while evaluating stocks of a life

insurance company and should compare with global benchmarks. The higher the
number of years the policy continues, higher is the profitability.

Persistency Ratio - In Months

2021 13th 25th 37th 49th 61st
LICI 79.0% 70.0% 67.0% 63.0% 59.0%
SBI Life 87.9% 79.4% 74.1% 68.1% 61.6%
HDFC Life 91.7% 84.2% 74.7% 69.6% 54.4%
ICICI Prudential 87.1% 76.1% 69.2% 65.4% 59.8%
(Source: RHP)

❖ Claims Settlement Ratio:

Claims ratio is also something an investor should check. It is the compensation

asked for by the insurance holder for a covered loss or policy event. A lower claims
ratio is beneficial for an insurance company.

Insurance Claims Claims settlement Claims rejection Claims rejection

Company settlement ratio ratio as % of the ratio as % of ratio as % of the
as % of policies amount policies amount
LIC India 98.62% 95.76% 0.69% 1.45%
SBI Life 93.09% 86.22% 3.80% 6.41%
HDFC Life 98.01% 80.06% 0.49% 3.09%
ICICI Pru Life 97.90% 89.20% 1.95% 10.32%

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❖ Solvency Ratio
The solvency ratio defines how good or bad an insurance company’s financial
situation is on defined solvency norms.
According to Insurance Regulatory and Development Authority of India (IRDAI)
guidelines, all companies are required to maintain a solvency ratio of 150% to
minimize bankruptcy risk.

The solvency ratio is calculated as the amount of Available solvency margin (AMS)
in relation to the amount of Required Solvency Margin (RSM).

(The ASM is the value of the company’s assets over liabilities, and RSM is based on
net premiums and defined as per IRDAI guidelines.)

The solvency ratio helps investors in identifying whether the company has enough
buffers to settle all claims in an extreme situations. It is a good indicator of an
insurance company’s financial capacity to meet both its short-term and long-term
liabilities.

(Source: RHP)

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 Financial Ratio Analysis
➢ Financial ratio
A financial ratio is a representation of numbers that show the state of a company's
finances. Ratios are comparison points between different figures in a business'
financial statements. If one number goes up and another goes down, this means that
something has changed. Changes in financial ratios can signify that it is time to
revaluate a business or investment strategy.
You can use a variety of ratios to look at company growth, sales, profits, efficiency,
and leverage. Using trend analysis, you can compare a company's financial ratios
with others in its industry and past results. You can also track ratios over time to
monitor the business' growth and development.
Let see those ratios to analyse

❖ Per Share Ratios

Earnings per share (EPS) is calculated as a company's profit divided by the
outstanding shares of its common stock. The resulting number serves as an
indicator of a company's profitability. It is common for a company to report EPS
that is adjusted for extraordinary items and potential share dilution.

The higher a company's EPS, the more profitable it is.

Earnings per Share = Net income

Number of Shares Outstanding

Book value per share (BVPS) is the ratio of equity available to common
shareholders divided by the number of outstanding shares. This figure represents
the minimum value of a company's equity and measures the book value of a firm
on a per-share basis.

BVPS = Total Shares Outstanding

Total Equity − Preferred Equity

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A dividend is the distribution of a company's earnings to its shareholders and is
determined by the company's board of directors. Dividends are often distributed
quarterly and may be paid out as cash or in the form of reinvestment in additional
stock.

The dividend yield is the dividend per share and is expressed as dividend/price as
a percentage of a company's share price.

Face value is a financial term used to describe the nominal or dollar value of a
security, as stated by its issuer. For stocks, the face value is the original cost of the
stock, as listed on the certificate.

Companies EPS BV/Share Dividend/share Rs Face Value

LICI 15.36 51.23 1.50 10
SBI Life 16.14 125.68 2.00 10
HDFC Life 6.35 58.91 1.70 10
ICICI Prudential 5.29 69.93 0.55 10

(Source: ticker, moneycontrol)

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❖ Margin Ratios

Gross Profit Margin is a metric analysts use to assess a company's financial

health by calculating the amount of money left over from product sales after
subtracting the cost of goods sold (COGS). Sometimes referred to as the gross
margin ratio, gross profit margin is frequently expressed as a percentage of sales.

Gross Profit Margin = Net Sales

Net Sales – COGS

Operating margin measures how much profit a company makes on a dollar of

sales after paying for variable costs of production, such as wages and raw
materials, but before paying interest or tax. It is calculated by dividing a company’s
operating income by its net sales. Higher ratios are generally better, illustrating the
company is efficient in its operations and is good at turning sales into profits.

Operating Margin = Revenue

Operating Earnings
Net profit margin, or simply net margin, measures how much net income or profit
is generated as a percentage of revenue. It is the ratio of net profits to revenues for
a company or business segment.

Net profit margin is typically expressed as a percentage but can also be represented
in decimal form. The net profit margin illustrates how much of each dollar in
revenue collected by a company translates into profit.

Net profit margin = Net Profit * 100

Total Revenue

Companies Gross Profit Operating Net Profit

Margin Margin Margin
LICI 1.98 1.92 0.56
SBI Life 3.12 3.12 1.81
HDFC Life 2.12 2.04 1.84
ICICI Prudential 1.82 1.71 1.21

(Source: ticker, moneycontrol)

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❖ Return Ratios
Return on Net Worth is a profitability ratio developed from the perspective of the
investor and not the company. By looking at this, the investor sees whether the
entire net profit is coming to him or how much return he would get. It explains the
efficiency of the shareholders’ capital to generate profit.
RONW = Net Income / Shareholder Equity

Return on Capital Employed (ROCE) refers to a financial ratio that can be used to
assess a company's profitability and capital efficiency. In other words, this ratio can
help to understand how well a company is generating profits from its capital as it
is use. ROCE is one of several profitability ratios financial managers, stakeholders,
and potential investors may use when analyzing a company for investment.
ROCE = EBIT / Capital Employed
Where: EBIT = Earnings before interest and tax
Capital Employed=Total assets − Current liabilities

Return on Assets (ROA) refers to a financial ratio that indicates how profitable a
company is in relation to its total assets. Corporate management, analysts, and
investors can use ROA to determine how efficiently a company uses its assets to
generate a profit.

The metric is commonly expressed as a percentage by using a company's net

income and its average assets. A higher ROA means a company is more efficient and
productive at managing its balance sheet to generate profits while a lower ROA
indicates there is room for improvement.

Return on Assets = Total Assets / Net Income

Companies RONW/Equity ROCE ROA

LICI 38.84 0.33 0.09
SBI Life 12.95 0.96 0.55
HDFC Life 7.80 0.65 0.57
ICICI Prudential 8.25 0.44 0.30

(Source: ticker, moneycontrol)

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❖ Liquidity Ratio
Current ratio is a liquidity ratio that measures a company’s ability to pay short-
term obligations or those due within one year. It tells investors and analysts how a
company can maximize the current assets on its balance sheet to satisfy its current
debt and other payables.
The current ratio is called current because, unlike some other liquidity ratios, it
incorporates all current assets and current liabilities. The current ratio is
sometimes called the working capital ratio.
Current Ratio=Current liabilities / Current assets

Quick Ratio is an indicator of a company short-term liquidity position & measures

a company’s ability to meet its short-term obligations with its most liquid assets.
Since it indicates the company’s ability to instantly use its near-cash assets (assets
that can be converted quickly to cash) to pay down its current liabilities, it is also
called the acid test ratio. An "acid test" is a slang term for a quick test designed to
produce instant results.

Quick Ratio= Current Liabilities / Quick Assets

Companies Current Ratio Quick Ratio
LICI 2.68 2.68
SBI Life 1.36 1.36
HDFC Life 0.84 0.84
ICICI Prudential 0.93 0.93

(Source: ticker, moneycontrol)

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❖ Leverage Ratio
Debt to equity (D/E) ratio is used to evaluate a company’s financial leverage and
is calculated by dividing a company’s total liabilities by its shareholder equity. D/E
ratio is an important metric in corporate finance. It is a measure of the degree to
which a company is financing its operations with debt rather than its own
resources.
Debt/Equity = Total Liabilities
Total Shareholder’s Equity Total Liabilities

Interest coverage ratio is a debt and profitability ratio used to determine how
easily a company can pay interest on its outstanding debt. The interest coverage
ratio is calculated by dividing a company's earnings before interest and taxes
(EBIT) by its interest expense during a given period.

Interest Coverage Ratio = EBIT / Interest Expense

Where: EBIT=Earnings before interest and taxes

Companies Debt to Equity Interest Coverage Ratio

LICI 0.00 167.58
SBI Life 0.00 258.66
HDFC Life 0.04 58.91
ICICI Prudential 0.13 13.82

(Source: ticker, moneycontrol)

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❖ Turnover Ratio
Asset Turnover Ratio measures the value of a company sales or revenues relative
to the value of its assets. The asset turnover ratio can be used as an indicator of the
efficiency with which a company is using its assets to generate revenue.

The higher the asset turnover ratio, the more efficient a company is at generating
revenue from its assets. Conversely, if a company has a low asset turnover ratio, it
indicates it is not efficiently using its assets to generate sales

Asset Turnover Ratio = Net Sales / Average Total Asset

Companies Asset Turnover Ratio

LICI 0.18
SBI Life 0.33
HDFC Life 0.34
ICICI Prudential 0.27
(Source: ticker, moneycontrol)

❖ Current Share Price Comparison:

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❖ Growth Ratio
Sales growth rate measures the rate at which a business can increase revenue
from sales during a fixed period of time. Understanding the sales growth rate is a
critical metric that empowers companies to make data-informed decisions.
Profit Growth is the amount of money a company makes after deducting expenses.
From year to year, or even month to month, profits will change. Companies
normally want profits to grow. To calculate profit growth, analysts use a percent-
change formula. This shows the percentage the profit grew from one period to
another.

LICI Growth Ratio

SBI Life Growth Ratio

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 HDFC Life Growth Ratio

ICICI Prudential Growth Ratio

Interpretation:
Here, we see that the sales and profit growth of LIC is very high as compare to its
peers, the sales growth is 12% CAGR for 5-years, 13% CAGR for 3-years and 34%
CAGR for last year whereas profit growth is 13%, 14%, & 40% CAGR from last 5, 3,
and last year. SBI Life also has given positive profit and sales growth from last year
3.5% and 3% respectively. Whereas, HDFC Life has negative profit growth from last
3 year with -2% and last year with -11%. And ICICI Prudential is still having
negative growth from last 5 year with -15%, and last year with -22%.

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❖ Valuation Ratios
Price to Earnings ratio is the ratio for valuing a company that measures its current
share price relative to its earnings per share (EPS). The price-to-earnings ratio is
also sometimes known as the price multiple or the earnings multiple.

P/E ratios are used by investors and analysts to determine the relative value of a
company's shares in an apples-to-apples comparison. It can also be used to
compare a company against its own historical record or to compare aggregate
markets against one another or over time

P/E Ratio = Market Share Price / Earnings Per Share (EPS)

Price to Book ratio (P/B ratio) is used to compare a firm's market capitalization
to its book value and locate undervalued companies. This ratio is calculated by
dividing the company's current stock price per share by its book value per share
(BVPS).

P/B Ratio = Market Share Price

Book Value per Share

Price to Sales (P/S) ratio is a valuation ratio that compares a company’s stock
price to its revenues. It is an indicator of the value that financial markets have
placed on each dollar of a company’s sales or revenues.
P/S Ratio = Market Value per Share
Sales Per Share

Companies P/E P/B P/S

LICI 11.73 11.73 99.39
SBI Life 68.14 8.75 63.56
HDFC Life 82.93 7.28 103.34
ICICI Prudential 75.74 5.73 26.66

(Source: ticker, moneycontrol)

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 Conclusion
SBI Life and HDFC Life have comparatively performed better than peers and are
currently leading the private life insurance space.

SBI Life
SBI Life, a joint venture between SBI and BNP Paribas Cardif, is one of the largest
life insurance players in India. It has an unrivalled distribution strength of over 1.8
lakh trained personnel with 15+ lakh policies issued. With an AUM of Rs. 2.5Tn, SBI
Life has delivered a strong CAGR of 7.6% APE from FY17-22 mainly because of a 7%
CAGR by ULIPs and a CAGR of 86% in the individual protection segment for the
same period. Its NBP performance has also been robust with a CAGR of 17%. SBI
Life’s strategy is to eventually increase its proportion of protection business and
decrease dependence on ULIPs (currently 45.6% of NBP) as protection helps to gain
the highest margin of 100%. With a lower allocation of human resource per branch
and high productivity, it is the most cost-efficient player with the lowest
commission ratio of 3.6%. All these measures translate to healthy margins. The
company has maintained a good 13th month and 61st month persistency ratio of
85.2% & 52.5%. Further, it maintains healthy solvency margins which is one of the
highest at 219% providing a strong cushion in these testing times. Currently,
SBILife is trading almost at par with industry average valuations at around 3.2x
P/EV which makes it a good pick for your portfolio.
Going forward too, SBI life is likely to battle these tough times by leveraging its wide
banca distribution network and stronger agency channels to expand its rural reach.
Its AUM continues to be debt heavy (70% of total) which will support persistency
ratios during volatile equity markets. However, there are several challenges as it
has a very high proportion of ULIPs in its APE mix which could affect its VNB
margins. With economy slowing and change in tax slabs, its savings segment could
also take a hit. Very low presence in the digital space is a big con amidst social
distancing rules.
Key triggers for life insurance players could be price hikes as these players pass on
the reinsurance rate hikes, shift to online channels to steer growth amidst social
distancing, strong demand from Protection segment (past 3 years portrayed strong
demand of 45-50%), faster recovery from non-banca channels and growth in
insurance premiums. However, a key challenge for the life insurance space would
be if the persistency ratio softens as people focus on conserving cash and more
individuals move towards the new tax slabs.
Rating:
Ownership- Stable, Valuation- Expensive, Efficiency- Optimal, Financial- Stable

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HDFC Life
HDFC Life is the 3rd largest player by AUM and it is the leader by market cap in the
private life insurance space. With 372 branches and a presence in 980+ cities and
towns, HDFC Life has dominated the private insurance industry since inception. It
leveraged its first mover advantage to gain presence in the online channel through
a market share of 21.7% in its total new business and 15.2% share in standalone
protection business. This has enabled it to gain robust VNB margins and a top spot
in the private space. Additionally, it has witnessed strong traction in par products
on the back of Sanchay Par Advantage. It has also delivered a sturdy top line APE
CAGR of 27% from FY2021-22. The balance sheet is well placed to tide through the
crises with a solvency margin of 209%, well above regulatory requirements. Going
forward, HDFC Life could emerge stronger because of its diversified product mix
and well-established digital presence which will boost margins. An approval by
IRDAI for a regulatory sandbox initiative to experiment on various innovative
approaches will also aid HDFC Life to strengthen its product mix strategy. It is
currently trading at higher valuations P/EV of 3.40x than peer average of 2.57/EV
hence if you already own this stock, you should continue holding it in your portfolio
for the long term.
Going ahead, one challenge for HDFC Life could be its cost ratio which is higher,
given the push towards protection business. Hence, it would be prudent to keep
track that rising costs do not impact its VNB margins in the future. Additionally, the
open architecture model recently adopted by HDFC Bank has caused a deterioration
in sales through its Bancassurance channel and there could be further declines as
competition increases. Meanwhile, the company is shifting its focus towards scaling
up its traditional partners and agents which could help cushion this decline.

Rating:
Ownership- Stable, Valuation- Expensive, Efficiency- Optimal, Financial- Stable

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Life Insurance Corporation of India

LIC is the oldest and the largest insurance company of India, it is the most trusted
insurance brand which cannot be replicated. LIC has a presence across India
through its omnichannel distribution of agents. The Issuer is also the largest asset
manager in India with an established track record of financial performance and
profitable growth.

However, entry of private players into the insurance sector has resulted in market
share being distributed across all the players. Private players have begun using
technologies like blockchain that may radically transform operations by providing
benefits in the form of reduced costs, enhanced customer experiences, improved
productivity, increased transparency, fraud prevention and more. The corporation
in the long run would have to introduce these changes along with innovation in its
product mix to enhance its profitability and VNB margins to compete effectively.
The management highlighted that there are good margins on non-par products
(LIC's margin on non-par products is quite high at 80%) and if their strategy to bring
more non pan products goes well, VNB margins would also improve.

One can refer the key financial measures from the table. Other than those above,
new business premium is also an important factor that would determine the
prospects. LIC continues to dominate the group NBP segment with 78% market
share for FY21. However, market share for individual NBP for private players has
been increasing over the years to 57% against 43% for LIC during 9MFY22.

VNB (Value of new Business) Margin for LIC is low being 15% for FY22 while VNB
margin was 27.4%for HDFC Life for FY22.

The Issuer is likely to grow at 15-20% for the next two three years in terms of
premium and 10-12% in terms of policies as per the management. LIC has tied up
with Policybazar as a step towards pushing the products through digital channel as
well.

Rating:
Ownership- Stable, Valuation- Attractive, Efficiency- Excellent, Financial-Weak

Considering all the factors and reasonable valuations, one might Apply for Long
Term.

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ICICI Prudential Life Insurance

ICICI Prudential Life Insurance Company Ltd. (ICICI Prudential Life) is promoted by
ICICI Bank Limited and Prudential Corporation Holdings Limited. ICICI Prudential
Life began its operations in the fiscal year 2001 and has consistently been amongst
the top companies in the Indian life insurance sector.

In FY 2015 ICICI Prudential Life became the first private life insurer to attain assets
under management of `1 trillion. ICICI Prudential Life is also the first insurance
company in India to be listed on National Stock Exchange (NSE) and Bombay Stock
Exchange (BSE). At ICICI Prudential Life, it operates on the core philosophy of
customer-centricity. It offers long term savings and protection products to meet
different life stage requirements of its customers. It has developed and
implemented various initiatives to provide cost-effective products, superior quality
services, consistent fund performance and a hassle-free claim settlement
experience to its customers. ICICI Prudential Life Insurance Company is a Mumbai
based largest private sector life insurer in India
The market share ICICI prudential is 14.6% in FY22 from 12.7% in nine months of
period in FY22 The new business sum assured grew by 34.9 per cent year-on-year
to Rs 6.9 lakh crore, the highest among private life sector players. Additionally, the
company reported a 23.2 per cent growth in the value of the new business (VNB) to
Rs 1,710 crore for the first nine months of this fiscal, up from Rs 1,388 crore on-year.
In FY19, the company had set a target to grow at 22.5 per cent annually to double
its VNB to Rs 2,650 crore from Rs 1,325 crore. It is currently trading at higher
valuations P/E of 76.2 than peer average. The profit growth is negative from last 5-
year CAGR.
Rating:
Ownership- Stable, Valuation- Expensive, Efficiency- Optimal, Financial-Weak

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 The Future of Insurance Sector in India
Though LIC continues to dominate the Insurance sector in India, the introduction of
the new private insurers will see a vibrant expansion and growth of both life and
non-life sectors in 2017. The demands for new insurance policies with pocket-
friendly premiums are sky high. Since the domestic economy cannot grow
drastically, the insurance sector in India is controlled for a strong growth.
With the increase in income and exponential growth of purchasing power as well as
household savings, the insurance sector in India would introduce emerging trends
like product innovation, multi-distribution, better claims management and
regulatory trends in the Indian market.
The government also strives hard to provide insurance to individuals in a below
poverty line by introducing schemes like the
• Pradhan Mantri Suraksha Bima Yojana (PMSBY),
• Rashtriya Swasthya Bima Yojana (RSBY) and
• Pradhan Mantri Jeevan Jyoti Bima Yojana (PMJJBY).
Introduction of these schemes would help the lower and lower-middle income
categories to utilize the new policies with lower premiums in India.
With several regulatory changes in the insurance sector in India, the future looks
pretty awesome and promising for the life insurance industry. This would further
lead to a change in the way insurers take care of the business and engage proactively
with its genuine buyers.
Some demographic factors like the growing insurance awareness of the insurance,
retirement planning, growing middle class and young insurable crowd will
substantially increase the growth of the Insurance sector in India.

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 BIBLIOGRAPHY
• References and links:
Annual Reports:
1. IRDAI Annual Report
2. LIC of India Annual Report
3. SBI Life Annual Report
4. HDFC Life Annual Report
5. ICICI Prudential Annual Report

Websites and weblinks:

1. www.ibef.org
2. www.investindia.gov.in
3. www.licindia.in
4. www.irdai.gov.in.
5. https://data.gov.in/
6. https://economictimes.indiatimes.com/
7. www.moneycontrol.com
8. ticker.finology.in

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