Valuation of a Life Insurance Company

Vikas Singh is a seasoned actuary and insurance tech consultant with over 15 years of experience in the industry. He specializes in insurance solutions and employee benefits, offering deep insights and innovative strategies. With his expertise, Vikas bridges the gap between complex actuarial concepts and practical applications, making him a trusted voice in the insurance and employee benefits domain.

Valuation of a Life Insurance Company

The valuation of a life insurance company requires a nuanced understanding of both its financial and operational performance. This article delves into the key components of valuation using market case studies to illustrate the concepts.

Components of Valuation

1.Indian Embedded Value (IEV):

IEV combines the Value of In-force Business (VIF) and Adjusted Net Worth (ANW) to measure a company’s intrinsic worth.

1. Value of In-force Business (VIF): This represents the present value of future profits from policies already sold. VIF is influenced by key assumptions such as mortality, morbidity, lapse rates, expenses, investment returns, and discount rates.

   • Adjusted Net Worth (ANW): The sum of capital and accumulated surplus after adjustments for management expenses

     and debit balances. Assets are valued at their current market value.

IEV acts as a baseline valuation metric and is widely accepted by investors. It is calculated using a combination of ANW and VIF. Year-on-year changes in VIF are influenced by the following factors:

• New policies added or existing policies removed.

• Changes in assumptions.

• Variances between actual performance and prior assumptions.

Similarly, changes in ANW occur due to variations in capital structure, surplus, dividends, unrealized gains, or losses.

2.Projected Value of New Business (Projected VNB):

Projected VNB measures the profitability of the anticipated future business. It reflects the expected profits from new policies, heavily influenced by the product mix and market trends. The product mix is often adjusted to reflect evolving consumer demands, such as the increased focus on term plans post-COVID-19.

Key Definitions:

• VNB: Present value of all future profits from new business at inception.

• VIF: Present value of all future profits at the time of valuation.

What is profit?

Profit is calculated as:

1. Income (premiums and investment returns) minus

2. Expenses (commissions, fixed costs, and claim cost) minus

3. Expected Benefits (death, surrender, and survival pay-outs) minus

4. Transfer to Reserves minus

5. Transfers for solvency and taxes.

If we divide the VNB or VIF by annual premiums, we get the relative VNB or VIF percentages.

Key Assumptions

Valuation relies on the following assumptions:

1. Mortality and morbidity rates.

2. Policy lapse and surrender rates.

3. Expense projections.

4. Investment returns and discount rates.

5. Tax rates.

6. Participating product bonuses.

The Institute of Actuaries of India (IAI) provides guidance through Actuarial Practice Standards (APS) to ensure consistent and reliable assumptions.

Market Case Study

The valuation of companies like HDFC Life and SBI Life provides insight into the practical application of these metrics.

Metrics	HDFC Life (Listing)	SBI Life (Listing)
Market Cap	₹58,290 Cr	₹70,000 Cr
Indian Embedded Value	₹12,390 Cr	₹16,540 Cr
EV Multiple	4.7	4.23

Over time, higher Projected VNB contributes to increased goodwill and elevated EV multiples, as evident in both HDFC Life and SBI Life’s subsequent valuations.

Conclusion

The valuation of life insurance companies is a complex but critical process. Metrics such as EV, VNB, and their associated multiples provide a comprehensive view of a company’s financial health and future potential. The strategic management of product mix, market demands, and operational efficiency drives growth, goodwill, and higher valuation multiples.

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