HDFC Life and ICICI Prudential : Financial analysis and Portfolio Comparison

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HDFC Life and ICICI Prudential : Financial analysis and Portfolio Comparison

  1. 1. EPGP-09 Comparison of HDFC Life and ICICI Prudential Financial Analysis and Portfolio Comparison 1/26/2010 Krishnakumar U 0910033 Mohammad Suheb Khan 0910034 Nilesh K Dattani 0910040 Vasim Khan 0910070
  2. 2. TABLE OF CONTENTS TABLE OF CONTENTS........................................................................................................................................ 2 1. INTRODUCTION............................................................................................................................................ 3 OBJECTIVE ............................................................................................................................................................. 3 METHODOLOGY ...................................................................................................................................................... 3 ABOUT HDFC STANDARD LIFE INSURANCE................................................................................................................... 3 ABOUT ICICI PRUDENTIAL LIFE INSURANCE .................................................................................................................. 4 2. FINANCIAL ANALYSIS ................................................................................................................................... 5 SOLVENCY ANALYSIS ................................................................................................................................................ 5 HDFC Standard Life Insurance ........................................................................................................................ 5 ICICI Prudential Life Insurance ....................................................................................................................... 7 OPERATING EXPENSES .............................................................................................................................................. 8 EQUITY SHARE CAPITAL ............................................................................................................................................ 8 ASSETS UNDER MANAGEMENT ................................................................................................................................... 9 UNIT LINKED FUND.................................................................................................................................................. 9 3. PORTFOLIO COMPARISON: ICICI AND HDFC ............................................................................................... 10 ICICI .................................................................................................................................................................. 10 Life Insurance ............................................................................................................................................... 10 HDFC ................................................................................................................................................................. 11 Protection Plans ........................................................................................................................................... 12 4. PRODUCT COMPARISON – TERM ASSURANCE PLAN .................................................................................. 13 COMPARISON DATA SHEET ...................................................................................................................................... 13 INFERENCES ......................................................................................................................................................... 14 REFERENCES................................................................................................................................................... 15
  3. 3. 1. Introduction Objective This study attempts to compare two private sector insurance firms, HDFC Standard Life Insurance and ICICI Prudential Life Insurance. The analysis will be conducted on the following dimensions: Financial Analysis : This includes solvency analysis, assets, ULIP funds etc Portfolio Analysis: The portfolio of products offered by each insurer will be analysed, and a specific category will be taken for detailed feature comparison. Methodology The methodology adopted for the analysis is as depicted below: Objective Solvency Operating Equity share Assets under Unit linked Portfolio Analysis expense capital management fund Comparison Collection of Data Corporate websites Financial results IRDA publications Business databases Analysis of Data Solvency Analysis Portfolio Analysis Price comparison The study is conducted using data and information from secondary sources. The data is obtained from corporate websites of the two firms, published financial results, publications of IRDA and other business databases. The analysis of the data collected above is then conducted, using the frameworks learned in the course ‘Insurance and Pension Funds’. These concepts are utilized to study the solvency position of the firms from the financial data available. The portfolio of offerings is compiled from the corporate websites of the two firms, as on date of publication of this report. The compile data is then analyzed at the portfolio level and at the level of a selected product category. About HDFC Standard Life Insurance HDFC Standard Life Insurance Company Limited is a joint venture between Housing Development Finance Corporation Limited (HDFC Limited), India's leading housing finance institution and a Group Company of the Standard Life Plc, UK. As on February 28, 2009 HDFC Ltd. holds 72.43% and Standard Life (Mauritius Holding) 2006, Ltd. holds 26.00% of equity in the joint venture.
  4. 4. About ICICI Prudential Life Insurance ICICI Prudential Life Insurance Company is a joint venture between ICICI Bank - one of India's foremost financial services companies-and Prudential plc - a leading international financial services group headquartered in the United Kingdom. Total capital infusion stands at Rs. 47.80 billion, with ICICI Bank holding a stake of 74% and Prudential plc holding 26%.
  5. 5. 2. Financial Analysis Solvency Analysis The solvency ratio is the ratio of the amount of Available Solvency Margin to the amount of Required Solvency Margin. It is the key indicator of financial health of the insurance company. The stipulated solvency ratio according to IRDA for life insurance companies is 1.5. The solvency margin is designed to take care of problems that are usually not anticipated. It also provides elbow room to the managers of insurers to rectify problems and take precautionary measures. In this section, we present the analysis of the solvency ratios of the two firms. HDFC Standard Life Insurance Balance sheet The balance sheets dated March-09 is as produced below: Balance Sheet of HDFC Balance Sheet Mar-09 Assets Cash on Hand and at Bank Rs. 41,08,660 Time Deposits Rs. 4,17,70,826 Premiums Receivable Rs. 25,50,016 Interest Accrual Rs. 8,05,636 Prepaid Expenses & Other Assets Rs. 29,84,953 Fixed Assets net of Depreciation Rs. 13,31,800 Total assets Rs. 5,35,51,891 Liabilities Policyholder Reserves - Individual Business Rs. 1,34,54,228 Policyholder Reserves - Unexpired Premium Reserve Rs. 2,78,748 Policyholder Account Balances Rs. 16,66,398 Claims Payable Rs. 1,98,361 Reinsurance Payables Rs. 6,02,796 Accrued Expenses Rs. 1,76,00,683 Proposal Deposits Rs. 68,22,202 Other Liabilities Rs. 74 Total Liabilities Rs. 4,06,23,342 Equity Paid-in Capital Rs. 1,79,58,180 Retained Earnings Rs. 50,29,631 Share Premium Rs. 0 Total Equity Rs. 1,29,28,549 Liabilities and Equity Rs. 5,35,51,891
  6. 6. Solvency Ratio Computation The table for computing the solvency is as illustrated below: Non-Linked Business - Individual RSM Mathematical Reserves Rs. 13,454,228 Rs. 538,169 Sum at Risk Rs. 565,077,576 Rs. 1,695,233 Inforce Premiums Rs. 2,233,402 Non-Linked Business - Group Mathematical Reserves Rs. 278,748 Rs. 2,787 Sum at Risk Rs. 334,497,600 Rs. 668,995 Inforce Premiums Rs. 671,783 Linked Business - Individual Mathematical Reserves Rs. 1,666,398 Rs. 33,328 Sum at Risk Rs. 39,993,552 Rs. 79,987 Inforce Premiums Rs. 113,315 Total RSM based on Formula Requirement Rs. 3,018,500 RSM Floor Rs. 500,000 RSM Requirement for the Company Rs. 3,018,500 Available Solvency Margin [or Statutory Surplus] Rs. 12,928,549 Solvency Ratio 4.2831 Inference HDFC Standard life’s solvency ratio of 4.28 is well above the stipulated requirement. Hence according to our observation the company is well capitalized and will be able to meet unanticipated claims. In comparison, solvency ratio of LIC, India’s largest life insurance company is 1.54 as reported by IRDA.
  7. 7. ICICI Prudential Life Insurance Balance Sheet Balance sheet for ICICI Prudential, dated March-09, is as depicted below: Balance Sheet of ICICI Prudential life insurance Balance Sheet Mar-09 Assets Cash on Hand and at Bank Rs. 35,58,761 Time Deposits Rs. 115416134 Premiums Receivable Rs. 2,66,465 Interest Accrual Rs. 8,61,068 Prepaid Expenses & Other Assets Rs. 33,49,039 Fixed Assets net of Depreciation Rs. 33,12,117 Total assets Rs. 12,67,63,584 Liabilities Policyholder Reserves - Individual Business Rs. 4,24,21,916 Policyholder Reserves - Unexpired Premium Reserve Rs. 7,73,272 Policyholder Account Balances Rs. 32,51,153 Claims Payable Rs. 1,92,459 Reinsurance Payables Rs. 57,389 Accrued Expenses Rs. 2,55,11,692 Proposal Deposits Rs. 1,01,56,419 Other Liabilities Rs. 43,94,522 Total Liabilities Rs. 8,67,58,822 Equity Paid-in Capital Rs. 1,42,72,573 Retained Earnings Rs. 77,96,996 Share Premium Rs. 3,35,29,185 Total Equity Rs. 4,00,04,762 Liabilities and Equity Rs. 12,67,63,584 Solvency Ratio Computation Solvency ratio computation, based on the above information, is as depicted below: Non-Linked Business - Individual RSM Mathematical Reserves Rs. 42,421,916 Rs. 1,696,877 Sum at Risk Rs. 1,781,720,472 Rs. 5,345,161 Rs. 7,042,038 Non-Linked Business - Group Mathematical Reserves Rs. 773,272 Rs. 7,733 Sum at Risk Rs. 927,926,400 Rs. 1,855,853 Rs. 1,863,586 Linked Business – Individual Mathematical Reserves Rs. 3,251,153 Rs. 65,023
  8. 8. Sum at Risk Rs. 78,027,672 Rs. 156,055 Rs. 221,078 Total RSM based on Formula Requirement Rs. 9,126,702 RSM Floor Rs. 500,000 RSM Requirement for the Company Rs. 9,126,702 Available Solvency Margin [or Statutory Surplus] Rs. 40,004,762 Solvency Ratio 4.3833 Inference ICICI Prudential life insurance has a solvency ratio of 4.38, which is well above the stipulated requirement. Hence according to our observation the company is financially very healthy and will be easily able to pay its claims. Again, in comparison the solvency ratio of LIC, India’s largest life insurance company is 1.54 as reported by IRDA. Observations Our analysis indicated that both firms are well capitalized and are in a good position to meet any unforeseen exigencies. Operating expenses In this section, we present the relevant data and findings with respect to the expenses as a percentage of the premium received for both firms Policy holders account (08-09): Item HDFC ICICI Premiums 556469 1356106 Operating expenses 176007 273873 Operating expense as % of premium 32% 20% * - figures in lakhs As can be inferred, ICICI has a lower expense as a percentage of the premium earned, in the period 2008-09. Equity Share Capital Insurer As on 31st Infusion As on 31st Foreign Indian FDI March-08 during 08-09 March-09 Promoter Promoter HDFC 1271 525 1796 467 1329 26% ICICI 1401 26 1427 371 1057 26% * - figures in crores In the case of HDFC Life, there was a substantial infusion in this year, with both having the same FDI percentage.
  9. 9. Assets under management The assets under management as of 2008-09 for the two firms reveal some significance differences. The data is as presented below: Insurer C-Govt State govt. and Infrastructure Approved Other Total securities Others securities investments Investments investments HDFC 1248 76 497 681 35 2537 ICICI 1187 491 526 762 143 3110 * - amount in crores HDFC ICICI 1% C-Govt securities C-Govt securities 5% 27% State govt. and Others 24% 38% State govt. and Others 49% securities securities Infrastructure Infrastructure 20% investments 17% investments 3% Approved Investments 16% Approved Investments Other investments Other investments HDFC has a higher proportion (48%) in C-govt securities than ICICI (38%), while it has only 3% in State govt securities, in contrast to a higher proportion of 16% in the case of ICICI. Unit Linked Fund The data for the ULIPs places both firms at the same level: Insurer Approved investments Other investments Total (ULIP Funds) HDFC 6658 526 7184 ICICI 25956 2658 28614 HDFC ICICI 46% 45% 50% Approved investments 50% Approved investments Other investments Other investments 4% Total (ULIP Funds) 5% Total (ULIP Funds) In the next section, we compare the two firms from the perspective of their respective portfolio offerings.
  10. 10. 3. Portfolio comparison: ICICI and HDFC In this section, we present the portfolio of products offered by the two firms, and take up one category (term assurance) for detailed analysis. It is to be noted that we have chosen to primarily use the nomenclature as used by the individual firms, and wherever possible we would use the ‘generic’ technical names for the purpose of comparison. ICICI The overall product mix offered by ICICI can be depicted by the illustration below: Life Insurance Pension & Retirement Health Product Suite • Education Insurance Plans Solutions • Hospitalisation Plans • Wealth Creation Plans • ICICI Pru LifeTime Pension • MediAssure • Protection Plans Maxima • Hospital Care • ICICI Pru LifeStage Pension • Critical Illnessl Pans Advantage • Crisis Cover • ICICI Pru Elite Pension II • ICICI Pru Assure Pension • ICICI Pru ForeverLife • ICICI Pru Immediate Annuity The offerings are designed in three categories – Life Insurances, Retirement/ Pension and Health Insurance. In the next section, we expand the life insurance category in order to inspect it in detail. Life Insurance On the basis of the particular stage of life and the needs thereon, ICICI offers three types of plans under the Life Insurance category Education Insurance Plans These plans ensure that money is made available at the crucial junctures in a child's education - Class X, Class XII, graduation and post-graduation - to fund crucial commitments for the child's future. This plans ensures that in the unfortunate event of the death of a parent, the child's education continues unhampered. The offerings in this category include the traditional and unit-linked forms: Plan Name Type ICICI Pru SmartKid Maxima Unit linked ICICI Pru SmartKid Regular Premium Traditional
  11. 11. Wealth Creation Plans These are designed along the lines of protection plans, using the unit linked approach. The offerings in this category include the following unit-linked plans: Plan Name Type ICICI Pru Premier Wealth Unit linked ICICI Pru Assure Wealth Unit linked ICICI Pru LifeTime Maxima Unit linked ICICI Pru Pinnacle Unit linked Protection Plans Several protection plans have been bundled under this category, as listed below: Plan Name Type Pure Protect Traditional LifeGuard Traditional Save'n'Protect Traditional CashBak Traditional Home Assure Traditional HDFC The overall product mix offered by HDFC is as depicted below: Protection Plans Children’s Plans Retirement Plans Savings & Health Plans • HDFC Term Assurance • HDFC Children's Plan • HDFC Personal Investment Plans • HDFC Critical Care Plan • HDFC YoungStar Pension Plan • HDFC Endowment Super Plan • HDFC Loan Cover Super • HDFC Pension Super • HDFC SimpliLife • HDFC SurgiCare Plan Term Assurance Plan • HDFC Endowment Super • HDFC YoungStar • HDFC Pension Suvidha • HDFC Home Loan Super Suvidha Supreme • HDFC Endowment Supreme Protection Plan • HDFC YoungStar • HDFC Immediate Suvidha Supreme Suvidha Annuity • HDFC Wealth Builder • HDFC Endowment Assurance Plan • HDFC Money Back Plan • HDFC Single Premium Whole of Life Insurance Plan • HDFC Assurance Plan • HDFC Savings Assurance Plan HDFC has organised the products in the five categories of Protection, Children’s plans, Retirement plans, Savings/ Investment Plans and Health Plans. The maximum varieties seem to be on offer under the Savings and Investment category.
  12. 12. In the next section, we inspect the Protection category. Protection Plans HDFC provides protection plans which assure a sum assured that can be choose by the insured. These plans are further subdivided into term assurance plans, and loan protection plans. Term Assurance Plans As with the standard protection plan design, there are no maturity benefits. The age band that can be covered is 18-60. Additional riders such as Critical Illness benefit, Accidental benefit and Accelerated Sum Assured can also be optionally included. Loan Cover Term Assurance Plan This provides the beneficiary with a lump sum amount, which is a decreasing percentage of the initial Sum Assured. The additional benefit that can be incorporated is the Accelerated Sum Assured. The age band is 18-55, with the minimum term being 18 and maximum being 30 years. Home Loan Protection Plan This plan provides for a sum of money that will be made available towards the repayment of house loans. The age band is 18-50, with a maximum sum assured of 30 lakhs. The premium can be paid at one time, or can be added on to the house loan EMI.
  13. 13. 4. Product Comparison – Term Assurance Plan In this section we compare the term assurance plans provided by the two firms. Our focus would incorporate the perspectives of the firm as well as the target customer. The two specific products chosen for the comparison are the ‘HDFC Term Assurance Plan’ and the ‘ICICI Pru Pure Protect Classic’. Comparison Data sheet Parameter HDFC Term Assurance Plan ICICI Pru Pure Protect Classic Minimum Term (yrs) 10 10 Maximum Term (yrs) 30 30 Minimum Entry age( yrs) 18 18 Maximum Entry age( yrs) 55 65 Maximum age at Expiry ( yrs) 65 75 Surrender benefits None None Minimum sum assured (Rs) 8,00,000 None, subject to min premium of 2,400 Additional Feature Critical Illness Benefit Accidental Death and Accidental Death Benefit Disability Benefit Rider Accelerated sum assured (ASA) Waiver of Premium Rider The comparison of indicative premiums for a male life assured paying annual premiums for 25 years, for a sum assured of Rs 10,000, basic policy, is as below: Age Policy Annual premium (rs) 25 HDFC 2280 ICICI 2558 30 HDFC 2580 ICICI 3092 35 HDFC 3310 ICICI 4206 The chart plotted from the above shows that ICICI charges more premium for the same age group, and sum assured. Annual premium (rs) 4500 4000 3500 3000 2500 2000 1500 1000 500 0 HDFC ICICI HDFC ICICI HDFC ICICI 25 30 35
  14. 14. Inferences Mortality Risk HDFC has a lower cap on the maximum entry age (55) in contrast to ICICI (65). Similarly, the expiry age for HDFC is 65, as against 75 for ICICI. In order to analyze the mortality risk inherent in the two product designs, we refer to the information from the ‘MORTALITY RATES OF ANNUITANTS IN LIC OF INDIA, LIC A (96-98) ULTIMATE’, as reproduced below. Age Mortality Rate Life Expectation 25 0.001090 52.72 55 0.007401 25.17 65 0.013889 17.33 75 0.043272 10.56 As seen from the above, the mortality rate for age 65 is nearly double than that for age 55. Thus, the increase in exposure to mortality risk due to the policy on maximum entry on age and expiry age is significant in the case of ICICI. Customer base However, by having a relaxed entry age and a higher point of expiry, the ICICI plan does make it more attractive to the customer. This will be more for the case of customers who are willing to part with the higher premium amount that ICICI requires. Ignoring the effect of the premium, the ICICI policy will certainly make it more competitive to the customers. However, there are other considerations such as the minimum sum assured levels which would also need to be considered, as discussed below. Minimum sum assured The lower limit for sum assured for HDFC is Rs 8,00,000. For ICICI this limit is not set at the sum assured level, rather it is dictated by the minimum mandated premium level of Rs 2400. This minimum premium requirement, for e.g., does not allow for a policy such as in the price table above (sum assured = Rs 10,00,00), but for a period of 15 years. By extension, the minimum amount for a 25-year old male with a 15 year term works out to Rs 12,00,000. In the case of HDFC, any amount above rs 8,00,000 lakh will be covered Thus, there appears to be a certain focus on the premium collection in the case of ICICI, as against a combination of premium, minimum sum assured in the case of HDFC. Also a certain segment of the population whose requirement for sum assured is on the lower side is excluded by the policy design. Thus in contrast to HDFC, it could be hypothesized that, ICICI attracts customers with higher sum assured, increasing the overall guarantee risk in the aggregate.
  15. 15. 5. References HDFC Standard Life Website, http://www.hdfcinsurance.com/index.aspx ICICI Prudential Life Website, http://www.iciciprulife.com/public/default.htm IRDA Website, http://www.irdaindia.org/ IRDA Annual Report 2008-09, http://www.irdaindia.org/anualreport.html o Assets under management o Unit linked funds o Operating expense o Equity share capital

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