This is the sole and exclusive property of HDFC Life HDFC Standard Life Insurance Company Limited Financial Year ended March 2013
This is the sole and exclusive property of HDFC Life
HDFC Standard Life Insurance Company Limited
Financial Year ended March 2013
Economic overview
Overview of Indian life insurance industry
HDFC Life performance
2
Agenda
The demographic dividend would fuel middle class consumption with significant contribution from India
Source: WEF future of manufacturing report, 2012 3
By 2050 India is expected to be contributing about 30% to global middle class consumption
Savings and investment that drive economic growth are higher in India compared to other emerging
economies
Favourable demographics with improving human development would translate into higher life expectancy & greater demand
Increase in average life expectancy would fuel need for pension and health products.
Emergence of nuclear families has resulted in reduction in average household size and would increase need for protection products
Sufficient headroom exists to sell insurance as penetration remains lower than advanced economies
Improving life expectancy (Years)
4 Source : Census of India, Ministry of Health & Welfare, IRDA annual report 2012, # penetration for FY12
Lower penetration compared to developed nations
6.2
10.2
8.7
3.6 3.4
8.8
1.8
7.0
France South
Africa
United
Kingdom
United
States
India # Japan China South
Korea
60.3
61.7 62.7
63.4
67.0
68.5
70.0 71.1
1991-95 1995-98 1999-02 2002-06 2006-10 2011-15 2016-20 2021-25
Increase in the working age population would ensure demand for long term savings and protection plans offered by life insurance
1. Population between 20-59 years old
Source: BCG report 5
80+
70-79
60-69
50-59
40-49
30-39
20-29
10-19
0-9
Working-age population1
23
30 20 10 0
2001
1
2
5
6
10
14
17
22
30 20 10 0
2011
1
3
5
8
12
15
17
20
20
10
12
17
17
16
19
30 20 10 0
2020
1
3
6
47% 52% 56%
xx% Share of working-age population
in total population
1,029 1,184 1,364 +155 +180 Total pop. (Mn)
Economic overview
Overview of Indian life insurance industry
HDFC Life performance
6
Agenda
Number of private life insurance entrants
2,000
4,000
6,000
8,000
10,000
12,000
14,000
16,000
18,000
20,000
22,000
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Entry of Private Life Insurers
Start of Equity Bull Market
Post-Lehman World
Riding the wave (ULIPs1) 1st wave of private
insurers 2nd wave of entrants
Increase in Regulatory
change, 3rd wave
BSE S
EN
SEX
Source : BSE Sensex Performance Jan 1, 2000 – March 31, 2013, Google Finance, HDFC Life Analysis.
Graph not as per scale
Life Insurance in India has seen 3 distinct phases post the year 2000 – the market has 24 life
insurers present today
The development of life insurance industry in India
1 Unit Linked Insurance Plans are products where the investor bears the investment risk
13 7 3
7
97
196160 173
207
285
562600
532
715
864815
762
0 3 1024
56103
194
337 342384 394
327 308
1%
6%
12%
21%
26%
26%
36%
39%
35%
31%29% 29%
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
0
100
200
300
400
500
600
700
800
900
1000
FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13
Pri
vate
Mar
ket
Shar
e %
Ne
w B
usi
ne
ss P
rem
ium
in R
s. B
n
LIC Private Players Private Market Share
Industry new business premium trends
Source: IRDA data, HDFC Life Analysis
New business includes individual and group
Insurance industry was opened to private sector in 2000 and was able to garner 39% market share in
new business premium by FY09
Between FY09 and FY13, private sector slowed down with de-growth of 3%, while LIC continued to
grow at 9% CAGR resulting in a slide in the private sector’s market share
Note: New Business Premium numbers are based on first year premium including single premium
ULIP
Regulations in
Sept 10
8
The industry had to reinvent to stay relevant to customers and distributors due to the pace & magnitude of change
Various guidelines issued by IRDA since 2010
ULIP - September 2010
Pension products - November 2011
Banca tie-ups (draft guidelines) - October 2012
Product guidelines - February 2013
In traditional products, these regulations relate to commission structures, surrender charges, minimum term of
policy and premium payment, death benefits.
In ULIP products, the regulations relate to reduction in yield from 5th policy year onwards, cap on guarantee
charge, ban on ‘highest NAV guaranteed’ product
Cap on surrender charges along with minimum surrender value forcing companies now to focus on
persistency, customer service and brand building
There is a clear shift in product mix for the industry with the contribution of ULIPs declining and that
of traditional (conventional) platform products growing, with participating plans leading the growth.
Bancassurance has very quickly emerged as an important distribution channel, contributing more
than 1/3rd to industry’s new business. However, with regard to insurance sales, large parts of the
banking system are still underpenetrated.
9
Economic overview
Overview of Indian life insurance industry
HDFC Life performance
10
Agenda
11
Reven
ue
• First Year premium higher by 16% (PY de-growth of 7%)
• Total premium growth* of 13% (PY 13%)
• Conservation ratio* at 78% (PY 80%)
• Ranked^ # 2 in private market share for FY13 (PY #2)
• Individual business market share at 17.5% (PY 15.5%) I
nd
ian
GA
AP
Fin
an
cia
ls
• Overall surplus of ` 5.1 bn (PY ` 3.8 bn)
• Expense ratio* at 10.8% (PY 11.7%) of total premium
• Solvency Ratio 217% as against a regulatory requirement of 150%
AU
M,
NB
M a
nd
MC
EV
• Assets under management increased 24.4% on YoY basis
• Pre-overrun NBM stood at 17.8%, post overrun NBM at 13.2%, for individual business
• Embedded value as on 31st March 2013 at ` 58.7 bn (YoY growth of 22%)
Performance Snapshot
* Since Q1-FY13, we stopped making an accrual for premium due but not received on unit-linked policies, based on directive from the regulator. Total premium growth, Conservation ratio and Expense ratio assume that this change has been done for previous years. Conservation ratio is for individual business. ^ Ranking is based on individual business WRP
29.0 26.9 31.1
5.9 9.5 11.4
49.2
63.4
68.9
5.9
2.1
1.8
FY11 FY12 FY13
90.0
102.0
113.2
29%
120%
36%
-5%
17%
13%
-65%
29%
61%
-7%
11%
-13%
9%
20%
16%
Premium Income
12
` Bn
Robust growth in new business continues for last six consecutive quarters
(Q3 FY12: 3%, Q4 FY12: 15%, Q1 FY13: 17%, Q2 FY13: 7%, Q3 FY13: 22%, Q4 FY13: 16%)
In tough regulatory environment, growth in first year regular (16%) & renewal (12%)
premium leading to overall growth of 13%
First Year Regular Premium (Individual)
Total Premium Single Premium (Individual) Renewal Premium (Individual)
Group Premium
{13%}
{12%}
Note:1) Since Q1-FY13, we stopped making an accrual for premium due but not received on unit-linked policies, based on directive from the regulator. Figures in flower bracket represent growth numbers had this change been done for previous years. 2) After adjusting for change in accounting policy for unit-linked business, total reported premium growth would be 13.0% (FY13), 13.1% (FY12) and 29.3% (FY 11).
28.6 27.9 32.8
12%-2%
17%
-200%
-150%
-100%
-50%
0%
50%
-
5.0
10.0
15.0
20.0
25.0
30.0
35.0
40.0
45.0
FY11 FY12 FY13
APE Growth
Annualised Premium Equivalent(APE)
Rebound in APE growth in an uncertain and challenging macro and regulatory environment
Fuelled new business growth through a mix of channel, operational and product led initiatives
H2 showed a better performance compared to H1 growing at 21% in FY13
` Bn YOY Performance Half Yearly Performance
13 Note: APE is for individual business
10.6
17.4
27.9
11.8
20.9
32.8
12%
21%17%
-70%
-50%
-30%
-10%
10%
30%
-
5.0
10.0
15.0
20.0
25.0
30.0
35.0
40.0
45.0
50.0
H1 H2 12 M
10.6
17.4
27.9
11.8
20.9
12%
21%17%
-70%
-50%
-30%
-10%
10%
30%
-
5.0
10.0
15.0
20.0
25.0
30.0
H1 H2 12 M
FY12 FY13 Growth
18%
-8%
15%
-20%
-24%
2%
-8%
-5%
-2%
FY11 FY12 FY13
Weighted Received Premia(WRP) Individual Growth
Delivered more than three times the growth rate in FY13 vs top 6 peer companies who
collectively grew by 4%
Consistently outpaced the private industry over the last 3 years by adapting well to the new
economic order
14 Source :IRDA
25%
-18%
15%
-9%
-34%
1%4%
-16%
8%
9M FY11 9M FY12 9M FY13
HDFC Life Growth Private Industry Growth Total Industry Growth
12.9%
15.5%
17.5%
5.9% 5.7%
6.7%
FY11 FY12 FY13
12.9%
15.5%
5.9% 5.7%
FY11 FY12
Private Industry Total Industry
Market Share (WRP Individual)
Only player to have doubled market share (private industry) since FY10
Ranked #2 in FY13 amongst private insurance companies (Individual business)
Shift in momentum towards private players in the second half of the current year
Source :IRDA 15
31%19% 16%
1%
4% 7%
65%73% 72%
3% 4% 5%
FY11 FY12 FY13
Agency Broker Bancassurance Direct
86%
56% 61%
13%
43% 36%
1% 1% 3%
FY11 FY12 FY13
Unit Linked Participating Non Participating
Distribution & Product Mix
16
While Direct and Broker channel continue to increase their share in total APE, Agency faces
challenges in difficult business conditions in line with industry. However it has been able to maintain
its share amongst peer group.
The company operates out of 450 offices across the country serving over 961 cities in India and a
liaison office in Dubai
Maintaining a balanced product mix, with Non-par segment picking up well and online term
products continuing to show potential
• The percentages are with reference to APE for individual business
Product Mix Distribution Mix
Commission Ratio
17
• After adjusting for change in accounting policy for unit-linked business, total Commission as a percentage to Premium Income for previous years would be 5.8% (FY12) and 5.4% (FY 11)
Maintained overall commission ratio as last year
Change in product mix with larger share of conventional products is reflected in the increase
in first year commission.
Commission (% of Premium Income) FY11 FY12 FY13
- First year premiums 12.7% 17.6% 17.7%
- Renewal premiums 2.0% 1.6% 1.3%
- Single premiums 1.0% 0.3% 0.3%
Total 5.3% 5.7% 5.7%
14.4
11.7 12.2
16.0%11.5% 10.8%
-50.0%
-40.0%
-30.0%
-20.0%
-10.0%
0.0%
10.0%
20.0%
30.0%
-
2.0
4.0
6.0
8.0
10.0
12.0
14.0
16.0
18.0
20.0
FY11 FY12 FY13
Operating Expenses Operating Expenses/Total premium Ratio
Operating Expenses
18
- After adjusting for change in accounting policy for unit-linked business, operating expenses/total reported premium ratio for previous years would be 11.7% (FY12) and 16.3% (FY 11)
- Operating expenses exclude service tax
Operating expense ratio was kept under control, despite significant investments being made
in new channels, technology, branch refurbishments and international business
Operating expenses increased by 4% but at a lower rate than inflation
Tangible decline in our expense ratio to 10.8%, one of the best in the private sector
` Bn
{16.3%}
{11.7%}
79%84%
78%
0%
10%
20%
30%
40%
50%
60%
70%
80%
FY11 FY12 FY13
80% 80% 78%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
FY11 FY12 FY13
Conservation Ratio
Focus on channels, products and customer oriented initiatives along with well defined premium
reminder process helping stem decline in persistency and conservation ratios
19 * Conservation ratio for previous years has been reworked after adjusting for change in accounting policy for unit-linked business
Conservation Ratio (Individual Business)* 13th Month Persistency Ratio
(1.7)
1.1 0.6 0.4
2.5 3.9
(1.4)
0.2
0.6
(4.0)
(2.0)
-
2.0
4.0
6.0
FY11 FY12 FY13
(2.7)
3.8
5.1
Indian GAAP Results
20
` Bn
Declared a net profit of ` 4.5 bn in the current year, yielding a total surplus of ` 5.1 bn
(Deficit in Revenue account as of 31st March 2012 of ` 0.6 bn has been completely off-set in the current year)
Back book generating sufficient profits to offset the new business strain incurred on writing of
new policies
(1.4)
0.2 0.6 0.4
2.5
4.6
(1.7)
1.1
(4.0)
(3.0)
(2.0)
(1.0)
-
1.0
2.0
3.0
4.0
5.0
FY11 FY12 FY13
Shareholder A/C surplus Policyholders' A/C surplus Deficit (created)/reversed in Rev A/c
21.6 21.6 21.6
1.92
0.0 0.0
-9.00
-7.00
-5.00
-3.00
-1.00
1.00
3.00
0.0
5.0
10.0
15.0
20.0
25.0
30.0
FY11 FY12 FY13
Total Share Capital
21
No additional capital introduced in the last 2 financial years
Solvency Ratio as at 31st Mar 2013 was 217% as against a regulatory requirement of 150%
` Bn
19.721.6 21.6
0.03 0.0 0.0
-9.00
-7.00
-5.00
-3.00
-1.00
1.00
3.00
0.0
5.0
10.0
15.0
20.0
25.0
30.0
H1 FY11 H1 FY12 H1 FY13
Closing Capital Capital Infused during the period
Capital Shareholding Pattern
72.4%
1.6%
26.0%
HDFC Limited Individuals / ESOP Trust Standard Life
72.4%
1.6%
26.0%
HDFC Limited Individuals / ESOP Trust Standard Life
Assets Under Management
22
AUM has grown at a CAGR of 23% (FY 2011–13) outpacing total industry growth
Percentage of debt portfolio increased due to shift in product mix and surrenders in the
equity oriented funds
46% 48%55%
54% 52%45%
31st Mar 2011 31st Mar 2012 31st Mar 2013
Debt Equity
265
323
401
19,445
17,404
18,836
15,000
17,000
19,000
21,000
23,000
25,000
27,000
29,000
31,000
33,000
35,000
150
200
250
300
350
400
450
500
31st Mar 2011 31st Mar 2012 31st Mar 2013
AUM in Rs bn Sensex
24.4%29.8%
21.7%
Growth in AUM vs LY
14.8%
11.9%
6.9%
2.5%
12.7%
8.7%
5.5%
-0.5%
Growth Balanced Secured Opportunities
HDFCSL Returns Benchmark Returns
Fund Performance (Since Inception)
The company has beaten benchmarks in all the major fund categories over a long term horizon
Inception Dates: Growth Fund: January 02,2004 Balanced Fund: January 02,2004 Secured Fund: January 02,2004 Opportunities Fund: January 04,2010. Fund performance represented in Compounded Annual Growth Rate (CAGR)
Benchmarks: BSE 100 45% BSE-100 & 55% Crisil Composite Bond Index
CRISIL Composite Bond Index
CNX MIDCAP Index
23
4.2%
7.8%
11.0%
-5.8%
6.8%
8.2%
9.3%
-4.0%
Growth Balanced Secured Opportunities
HDFCSL Returns Benchmark Returns
Fund Performance (Last 1 year)
Benchmarks: BSE 100 45% BSE-100 & 55% Crisil Composite Bond Index
CRISIL Composite Bond Index
CNX MIDCAP Index
24
Company’s long term oriented investment approach is designed to yield medium to long
term returns and benefit policyholders
Claim Repudiation Ratio
25
Shown a decline in claim repudiation ratio due to various customer initiatives driven by the
company
One of the lowest claim repudiation ratio amongst the private players in the industry
7.2%
8.4%
6.2%
4.0%3.6%
2.6%
FY11 FY12 FY13
% by Amount % by No. of Policies
MCEV as at 31st Mar 2013
Market Consistent Embedded Value (MCEV) results are unaudited 26
16.9
46.8
-0.7
-4.3
58.7
Shareholders Adjusted Networth
Present Value of Future profits
Frictional Cost of Required Capital
Cost of Non Hedgeable Risks
Shareholders Adjusted Net worth
16.9+ Value of Inforce
41.8
= MCEV 58.7
Cost of Non Hedgeable Risks
Present Value of Future Profits
Frictional Cost of Required Capital
` Bn
48.2
0.6 6.0 -1.5
3.9
0.6 0.9
58.7
MCEV at 31st Mar 12
Opening modeling, assumption and methodology changes
New business profits (before expense over-run)*
Acquisition expense overrun
Expected return on inforce
Operating Variances
Investment variances and change in economic assumptions
MCEV at 31st Mar 13
Analysis of Change MCEV
9.6
Notes to analysis of change: Opening modeling, assumptions and methodology changes: The models, assumptions and methodology are continuously refined and improved and the impact of these refinements is reflected in the opening changes. Expected return on inforce: This item reflects expected investment income on shareholder assets during the period, and reflects that future shareholder profits are now 1 year closer than at the start of the period. This positive item will occur in each MCEV period. Operating Variances: The Operating Variances capture the impact of the deviations of the actual claims, persistency and maintenance expense experience during the period from that assumed in the opening MCEV calculation. Investment variances and change in economic assumptions: This reflects the impact due to the actual investment return being different from the expected returns and the impact from the change in the yield curve at the end of the period compared to the yield curve at the start of the period.
Embedded value operating profit
10.5
EV profit ` Bn
27 * New business profits pertain to Overall (Individual + Group) business
28 * FY11 had first 5 months of margins under product portfolio that existed in the pre charge cap regime.
New Business Profits
FY11 FY12 FY13
New business profits1,2 5.4 4.8 5.8
New business APE2 28.6 27.9 32.8
New business margin1,2 18.8% 17.2% 17.8%
1Based on loaded acquisition expenses2Margins and APE are shown for individual business only
New business margin (after impact of
acquisition expenses overrun) 2 14.2% 13.2%10.5%
` Bn
Organization agenda continues to be driven through five strategic themes
Leader in providing long term insurance solutions
Fortify & Diversify distribution channel mix
Own select customer segments and product categories
Deliver unique customer experience
Cost leadership across the delivery chain
Set the industry standards by driving changes that encourage long term behaviour by all stakeholders & yield sustainable benefits
Retain and grow existing distribution partners and win new relationships to de-risk business in the face of increasing competitive intensity
Select attractive customer segments, develop products based on needs of the segments and drive efforts & investments to these segments
Improve customer experience & loyalty through offering best-in-class service standards across touch points
Run a profitable business through driving cost & productivity efficiencies across the value chain
29
Progress on Strategic Themes
Number of policies grew by 19%
Policy term enhanced to 13 years
Traditional products contributed 39%
Conservation ratio at 78%
APE growth in channels except agency
Direct sales & broker at 12%
Dedicated sales & support structure
Added new partners – banks, MFIs
~ 7 times increase in online term sales
Pension & annuity plans for wisdom investor
Integrated product & marketing teams
Product files in line with new regulations
‘Servesresht’ & TEBT programs
POS underwriting engine – ‘Click2Buy’
Increased margins, no capital infusion
1. Long Term Player 2. Fortification & Diversification
3. Owning Customer Segments 4. Unique Customer Experiences
5. Cost Leadership
30
Market
Customer
Channel
Product
Process & Technology
People
Polarization of market share in favour of large players with access to existing distribution continues
Higher alignment to brands that evoke trust
Ready with offerings with banks willing to offer in an open architecture / broker mode once regulations emerge
Filed revised products that would meet the new product guidelines to replace existing ones
Investing in a technology enabled business transformation program and has engaged TCS for the same
Ability to attract talent likely to be restricted to select few insurers who deliver profitable, sustainable growth
HDFC Life is well positioned to align and take advantage of the potential changes expected in the near future
31
Awards and Accolades
32
CIO 100 Award for Enterprise Excellence
Underwriting initiative of the year award by Asian
Leadership Awards
For more details about our Awards & Accolades, kindly refer our website at www.hdfclife.com
FAME – Fabulous Achievement in Marketing Excellence
BestPrax Benchmark Award for Leadership Governance
Brand Slam Leadership Award by CMO Asia
Best Private Life Insurer’ at CNBC TV18 Best Bank and Financial Institution Awards
2012
ASTD – Citation for improving sales productivity
33
Best Product Innovation Award 2012 for second consecutive year
Best Companies to Work for 3rd consecutive year
CISO –Best Information Security practices
World HRD Congress – Thought Leader Award 2012
Award for CEO with HR orientation & Talent Management
For more details about our Awards & Accolades, kindly refer our website at www.hdfclife.com
Quality Excellence Award 2012
Awards and Accolades
Award for Innovative Service (Click 2 Buy)
Celent Model Insurer Asia Award
Award for Innovation in Finance
Porter Prize for Strategy & Product Innovation
34 For more details about our Awards & Accolades, kindly refer our website at www.hdfclife.com
Outlook Money Award 2012 - Runners Up in the
'Best Life Insurer' Category
Product of the year 2013 for Smart Woman Plan
Awards and Accolades
Appendix & Glossary
35
Appendix 1 : MCEV methodology and approach
MCEV methodology
The calculations of embedded value and new business profits have been performed using a market consistent embedded value (“MCEV”) approach. This approach differs from a traditional EV approach primarily in respect of the way in which allowance for risk is made.
Within the traditional EV approach allowance is made for risk through an increase in the risk discount rate used to value future shareholder cash flows, whilst within the MCEV calculation explicit separate allowances are made for risk.
Components of MCEV
There are two components to the MCEV:
1. Shareholders’ adjusted net worth –this component represents the market value of assets attributable to shareholders. This amount is derived from the Indian GAAP balance sheet adjusted to allow for assets on a market value basis, elimination of intangible assets and to allow for shareholder attributable assets or liabilities residing within the unit-linked and non Par policyholder funds.
2. Value of in-force –this component represents the discounted value of after tax shareholder attributable cashflows expected on the business as at the valuation date. No allowance is made for future new business. This amount has been adjusted to deduct allowances for non hedgeable risk, frictional costs of required capital and the time value of financial options and guarantees.
36
Appendix 2 : Components of value of in force (“VIF”)
Present value of future profits (“PVFP”)
This component has been calculated by discounting the projected future after tax shareholder attributable cash-flows expected to arise on in-force business at the valuation date. The cash-flows have been projected on a deterministic basis using the company’s best estimate view of future persistency, mortality and expenses. Future investment returns and the risk discount rate have been set equal to the returns from the risk free (government bond) yield curve at the closing balance sheet date.
Time Value of Financial Options and Guarantees ("TVFOG")
During FY11, the company carried out an extensive analysis of the profile of guarantees in its Par funds to identify the level of guaranteed benefits occurring at future time periods. The investment strategy of the Par funds was re-set to enable, where possible, hedging of these guaranteed benefits through cashflow matching of the guarantees with fixed interest assets. As a result, the company is of the view that there is no residual TVFOG associated with the Par funds.
The cost associated with the investment guarantees in the unit linked funds has been allowed for in the PVFP calculation.
Frictional Costs of Required Capital (“FCRC”)
The VIF allows for a deduction in respect of the frictional costs of holding required capital (“FCRC”). Required capital has been set equal to the amount of shareholder attributable assets required to back local regulatory
solvency requirements. The FCRC has been calculated as the discounted value of investment costs and taxes on shareholder attributable assets backing the required capital over the lifetime of the in-force business.
Cost of non hedgeable risk (“CNHR”)
The VIF incorporates an explicit deduction to allow for non hedgeable and non economic risks. The CNHR has been derived using a cost of capital approach and is calculated as the discounted value of an annual charge applied to projected risk bearing capital.
The initial risk bearing capital has been calculated based on 99.5th percentile stress events for non economic assumptions over a 1-year time horizon. This initial risk bearing capital has been updated based on the portfolio of business as at 31st March 2013.
Projected risk bearing capital has been determined by running-off the initial risk bearing capital in line with the expected movement in the regulatory solvency margin requirement.
99.5th Percentile stress events have been taken from the EU Solvency II, QIS 5 framework (previously QIS 4 framework). In order to allow for the greater risks associated with emerging markets, the risk bearing capital has been uplifted by 50%.
The annual charge applied to the projected risk bearing capital is 4% p.a.
The stress events, uplifts to NHR, run-off pattern for projected risk bearing capital and annual charge, are reviewed and modified if necessary on an annual basis.
37
Expenses
Maintenance expenses have been based on the latest expense analysis done in FY13 and are inflated at 7.5% per annum. These assumptions do not incorporate any allowance for future productivity improvements.
Given the substantial changes in regulations, the Company has reviewed its cost structure, as a result of which the long-term acquisition expense levels have been calibrated at a level lower than that used earlier. These new long-term acquisition expense levels, as approved by the committee of Board in March 2012, have been incorporated into the pre-overrun margins disclosed for FY12 and FY13.
Economic assumptions
The closing MCEV is calculated assuming projected earned and risk discount rates are both set equal to the risk free (government bond) yield curve at the closing balance sheet date.
The new business profitability is calculated with similar assumptions, except that the yield curve at the opening balance sheet date is used.
No allowance for any illiquidity premia is made within the earned rates, except for group credit spread products.
Mortality and morbidity
Mortality and morbidity assumptions are set by product line and are based on past experience.
Persistency
Persistency assumptions are set by product line, payment mode and duration in-force, based on past experience and expectations of future experience. Separate decrements are modeled for lapses, surrenders, paid-ups and partial withdrawals.
Tax assumptions
Tax assumptions are based on interpretation of existing tax legislation, where appropriate supported by legal opinion.
Profits attributable to shareholders are assumed to be taxed at 14.16% for Life business and 0% for Pensions business.
Allowance is made within the tax computation for dividend offsets permitted under Section 2A of the Income Tax Act and for losses incurred within the Shareholder Fund.
No allowance is made for future changes to taxation such as the Direct Tax Code. These changes will be incorporated only once materially enacted. It is expected that implementation of DTC in its current form will result in a material negative impact to the MCEV and new business profitability.
Appendix 3 : Key assumptions underlying MCEV
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Glossary Commission ratio – Ratio of total commissions paid out on first year, single and renewal premiums to total premiums. Conservation ratio – Ratio of current year renewal premiums to previous year’s renewal premium and first year premium. APE (Annualized Premium Equivalent) – The sum of annualized first year regular premiums and 10% weighted single premiums and single premium top-ups. First year premiums – Regular premiums received during the year for all modes of payments chosen by the customer which are still in the first year. For example, for a monthly mode policy sold in March 2012, the first installment would fall into first year premiums for 2011-12 and the remaining 11 installments in the first year would be first year premiums in 2012-13. New business received premium – The sum of first year premium and single premium. Operating expense – All expenses of management excluding service tax. It does not include commission. Operating expense ratio – Ratio of operating expenses (excluding service tax) to total premiums. Renewal premiums – Regular recurring premiums received after the first year. Solvency ratio – Ratio of available solvency margin to required solvency margins. Total premiums – Total received premiums during the year including first year, single and renewal premiums for individual and group business. Weighted received premium (WRP) – The sum of first year premium and 10% weighted single premiums and single premium top-ups. 13th month persistency – Percentage of contracts, measured by premium, still in force 13 months after they have been issued.
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Disclaimer
This release is a compilation of published financial results, other information and is not a statutory release. This may also contain statements that are forward looking. These statements are based on current expectations and assumptions that are subject to risks and uncertainties. Actual results could differ from our expectations and assumptions. We do not undertake any responsibility to update any forward looking statements nor should this be constituted as a guidance of future performance. This release is a privilege copy intended for reference of selected group. These disclosures are subject to the prevailing regulatory and policy framework as on March 31, 2013 and do not reflect any subsequent changes.
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