LIC IPO: Embedded Value To Persistency Decoded — BQ Explains

Financials of a life insurance company can be tricky. BloombergQuint takes you through some of the key terms.

<div class="paragraphs"><p>Customers look at books inside the Eslite Co. store in the Tsim Sha Tsui district of Hong Kong, China. (Photographer: Xaume Olleros/Bloomberg)</p></div>
Customers look at books inside the Eslite Co. store in the Tsim Sha Tsui district of Hong Kong, China. (Photographer: Xaume Olleros/Bloomberg)

As India's largest life insurer prepares to go public after trimming its offer size, Life Insurance Corp.'s business faces investor scrutiny. Alongside large institutional investors and the wealthy who have access to expert advice, millions of retail investors, policyholders and employees may consider to buy in India's largest IPO.

But financials of a life insurance company can be tricky and the business is analysed based on complex, technical parameters.

BloombergQuint takes you through some of the key terms that pop up every time LIC's financial metrics are analysed.

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A life insurance company accounts for acquisition costs including commission, sales and marketing costs of policies sold upfront. So its accounting statements may not reflect the true picture of its profitability since the profits may accrue over a period of time.

The value of new business or VNB is the present value of the future profits of the new policies underwritten during a particular period. It is equivalent to the profit after tax or net profit for non-insurance companies, and is calculated at a risk-free rate.

VNB is computed after making assumptions on persistency or proportion of policyholders who continue to pay premium, mortality and maintenance costs.

The VNB can show that while an insurer may have reported low profits or even losses during a period, the value of the business underwritten may be profitable. A growth in VNB indicates an improved ability to generate profitable business.


Annualised premium equivalent is nothing but revenue for an insurance company.

Insurers sell policies that either earn premium regularly over years or in a single lump-sum payment. APE smoothens out the differences between the two types of premium income.

It is calculated using the first-year premium numbers and 10% of the premium earned from single-payment policies.

VNB Margin

The VNB margin is analogous to the net profit margin. It measures VNB or profit generated as a percentage or APE or revenue.

Embedded Value

LIC disclosed its embedded value for the first time at about Rs 5.4 lakh crore.

It's the sum of present value of future profits and adjusted net asset value. It could be considered similar to book value but adjusted for future provisions and cash flows.

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Market Cap/EV

Since the embedded value also takes into account the reserves created against the business underwritten, market capitalisation as a multiple of embedded value is a better valuation yardstick for an insurance company.

It's equivalent to the price/book ratio.


Return on embedded value shows the after-tax profit as a percentage of embedded value. Like return on equity, it's a measure of profitability for investors.


Assets under management is the total value of shareholders’ and policyholders’ investments managed by the insurance company.


New business premium is what an insurer earns from new policies in a given period.

Par Policies

Participating policies are those that entitle buyers to a share in the profits of an insurance company in the form of dividends or bonus. This is in addition to regular maturity benefits guaranteed under a insurance plan.

All premium earned from participating polices goes into a pool called participating fund. Any profit or surplus generated—by investing in equities, debt and other assets—from this pool is shared in the ratio of 90:10 with policyholders and shareholders.

Some examples of par policies include endowment (risk cover and savings), whole life (life risk cover and periodical survival benefits) and money-back plans (risk cover with payment at specified durations).

Non-Par Policies

Holders of non-participating plans have no share in the surplus or profits of the non-participating fund—or a pool of premium earned from such policies.

Such profits are entirely distributed to shareholders.

Policyholders, however, may get guaranteed benefits on maturity.

Non-par policies include endowment, pure risk, pension, annuity, unit-linked and health plans, term plans with return on premium (micro insurance), group savings and protection plans.


Persistency indicates the period through which buyers continue to pay premium on term policies. Some policyholders abandon their plans.

A fall in persistency ratio indicates that the proportion of policyholders paying the premium has fallen, and that would hurt future profits.

That's why, the persistency ratio or customer retention is closely monitored at 13 (after one year) and 61 (after five years) months.

Expense Ratio

The expense ratio is measure of money spent in acquiring business. It's a percentage of net premium that is paid for acquiring (advertising, commissions), underwriting and servicing premium (salaries and other direct expenses).