icici prudential life insurance company ltd Management discussions

Macroeconomic outlook

Even with the headwinds on account of the higher oil prices, from a longer term perspective, India seems poised towards a sustained growth trajectory fuelled by favourable demographics, rising per capita income, digitalisation, moderate inflation and higher savings rates.

Macroeconomic outlook

Even with the headwinds on account of the higher oil prices, from a longer term perspective, India seems poised towards a sustained growth trajectory fuelled by favourable demographics, rising per capita income, digitalisation, moderate inflation, higher savings rates, various Government initiatives and a calibrated approach by RBI.

Insurance industry structure and developments

The size of the Indian life insurance sector was Rs 6.3 trillion11 on a total premium basis in FY2021, making it the tenth largest life insurance market in the world and the fifth largest in Asia12. The total premium in the Indian life insurance sector grew at a CAGR of approximately 14% between FY2002 and FY2021 outpacing the GDP CAGR of 12% during the same period. Based on retail weighted received premium (RWRP), new business premium of the industry has grown at a CAGR of 11% during FY2002 to FY2022.

The Indian Life Insurance industry has 24 companies including the Life Insurance Corporation of India (LIC). The top five private sector companies contribute to 43% of the market.

Product Mix:

There has been a significant change in the product mix of the private sector for FY2021 as compared to FY2020. The share of non-linked products has increased from 56% to 61% for the private sector and for the industry has decreased from 82% to 80%.

Distribution Trends:

The agency channel continues to be the predominant channel for the industry, mainly driven by LIC. There has been no significant change in the channel mix of the industry as well as the private sector from FY2020 to FY2021. Increasingly, direct sales through proprietary sales force and the internet are becoming more relevant.

Contribution of the life insurance industry

Within Indian financial services, the life insurance industry is uniquely positioned to cover a range of customer needs. The industry offers a variety of savings products across fixed income and equity platforms. It also offers annuity, term plans and defined benefit health plans. The life insurance industry acts as a risk manager by providing cover against mortality and morbidity risks. Life insurance products ensure that the financial goals of an individual are met, irrespective of the occurrence of mortality or morbidity events. The industry had covered 257 million lives through individual policies and 336 million lives through group policies, providing a total insurance cover (sum assured) of Rs 236 trillion at March 2021. The total death benefit paid to policyholders in FY2021 was Rs 405.03 billion for the industry.

Source: Life Insurance Council

Source: Life Insurance Council

Regulatory updates and developments

The key regulatory updates during FY2022 are as detailed below:

1. Indian Insurance Companies (Foreign Investment) Amendment Rules, 2021

The limit for total foreign investment in Indian insurance companies was increased from 49% to 74%. For insurance companies with foreign investment, the requirement for ‘Indian owned and controlled was substituted with the requirement that "a majority of the directors, a majority of its Key Management Personnel (KMPs), and at least one among the Chairperson, Managing Director and Chief Executive Officer shall be Resident Indian citizens".

For a company with foreign investment exceeding 49%, it has been prescribed that:

• For the financial year, if dividend is paid on equity shares and the solvency margin is below 1.2 times the control level of solvency, the insurer shall retain in its general reserve not less than fifty percent of the net profit.

• Not less than fifty percent of its directors shall be independent directors. In case the Chairperson of the Board is independent, then 1/3rd of the Board shall comprise independent directors.

2. Regulatory guidance during COVID-19

IRDAI had instructed insurers to ensure safety and well-being of employees and policyholders. IRDAI further instructed insurers to ensure that policyholders were well-informed about the functioning of offices and of the alternate channels available for their servicing needs. Insurers were asked to ensure that COVID-19 claims were settled expeditiously. IRDAI further directed insurance companies to ensure that COVID-19 vaccination is not made a mandatory criteria for policy issuance. Further, IRDAI extended the timelines for filing regulatory returns and public disclosure forms for the period ended March 31, 2021 by a period of 30 days.

3. IRDAI guidance on revised public disclosures

IRDAI amended the public disclosure formats pertaining to website and newspaper disclosures for insurance companies. Insurers were advised to publish these disclosures from the period ending September 30, 2021. The key changes pertained to persistency and financial statements related disclosures. Further, the listed life insurers were asked to disclose the Embedded Value (EV) as a part of their annual public disclosure.

• Insurance under-penetration

Indias life insurance penetration13 (premium as % of GDP) increased from 2.8% in FY2020 to 3.2% in FY2021. At USD 59 in FY2021, the insurance density13 (premium per capita) in India remains very low as compared to global average of USD 360. The macroeconomic factors such as growth in GDP and rise in per capita income, coupled with Indias young and working population, higher financial saving as a percentage of GDP, increasing urbanisation and increase in digitalisation would continue to aid the growth of the Indian life insurance sector.

• Favorable demographics

According to United Nations estimates, the working population is expected to increase by 15% by the year 2030. With a median age of 28 years, India has a very young population. Both these factors are likely to increase demand for life insurance products.

1 • Increasing urbanisation

According to United Nations Population division estimates, Indias urban population is expected to increase by 26% by the year 2030. Increased urbanisation can lead to an improvement in the standard of living and better access to financial products such as life insurance.

• Financial savings

India has a large pool of household savings and in FY2021, the ratio of household savings to GDP was 22.2%. The share of gross financial savings as a proportion of household savings was 70.8% in FY2021. The share of life insurance as a proportion of financial savings (including currency) in India was 16.8% in FY2021, aided by the improving customer value proposition of insurance products.

• High protection gap

According to Swiss Re, Mortality Protection Gap for India is at USD 16.50 trillion which is high compared to the rest of the world. Protection coverage ratio which is the ratio between protection gap and protection needs is also very high for India. Sum assured to GDP ratio is significantly lower in India compared to the rest of the world. This provides a significant opportunity for Indian life insurance companies to expand their protection business.

Retail credit has been growing at a CAGR of 12% from FY2014 to FY2021. This provides an additional opportunity for the industry for the credit cover business. This product provides mortality/morbidity cover to borrowers.

• Pension opportunity

India has one of the lowest pension assets to GDP ratio, estimated at 5.8% at 2021, as compared to various other countries. Also, India has one of the largest working population in the world, but only about 10% of the work force is covered under various pension schemes. As per UN population estimate, Indias average household size has decreased from 4.6 in 2001 to 3.9 in 2018. With increase in life expectancy, the post retirement period has increased from 17 years during 2000-2005 to 19 years in 2011-2012 and is further expected to increase to 20 years in 2030 for males. A similar trend in life expectancy for females is seen as well. Given that the annuity product can be offered only by life insurance companies, it offers a significant opportunity to the industry.

Strategy and performance of the Company

In the context of this overall opportunity, the Companys primary focus continues to be to grow the absolute Value of New Business (VNB) through the 4P strategy of Premium growth, Protection business growth, Persistency improvement and Productivity enhancement, while ensuring focus on customer-centricity and imbibing sustainable practices within our business processes. We believe that this 4P strategy is appropriate in the context of the large insurance opportunity in the country, coupled with our objective to grow the VNB.

Premium growth: We would endeavor to grow premium through our customer centric product portfolio and simplified on-boarding process. We would continue to focus on broadening the customer base through initiatives spanning both distribution and products. From a distribution perspective, we are focused on expanding the network and strengthening our reach through a closer mapping of distribution segments with customer segments and products. During the year, we have added 24,607 individual agents and 112 partnerships. Given the emerging opportunities in the environment, we launched an income plan, ‘GIFT Long Term which provides customers a guaranteed income for up to 30 years along with life cover. We also launched a return of premium term plan with innovative features such as auto-adjustable insurance cover and one of the most comprehensive and widest financial cover against critical illnesses.

1 Source: Life Insurance Council

• Persistency improvement: Maintaining a high level of persistency is critical to drive value for both customers as well as shareholders. We seek to achieve persistency improvements across all cohorts by encouraging long term customer behaviour. For FY2022, our persistency ratios for 13th month remained stable at 84.6% and our

Calculations are in accordance with the IRDAI circular IRDA/ACT/CIR/ GEN/21/02/2010 dated February 11, 2010

Value of New Business (VNB)

Our VNB increased from Rs 16.21 billion in FY2021 to Rs 21.63 billion in FY2022 showing a growth of 33.4%. VNB margin improved from 25.1% in FY2021 to 28.0% in FY2022. The shares of VNB for protection, non-linked savings and linked savings businesses were 42.7%, 41.0% and 16.3% respectively in FY2022 as compared to 53.4%, 24.2% and 22.3% respectively in FY2021.

Embedded Value

The Embedded Value (EV) is a measure of the consolidated value of the shareholders interest in the life insurance business. It is calculated as the sum of the Companys adjusted net worth (ANW) and the value of in-force business (VIF). The VIF includes the present value of future profits attributable to shareholders from the in-force business of the Company (which includes the new business written during the previous year). The calculation of VIF also reflects adjustments for various risks within the business. Our EV increased from Rs 291.06 billion at March 31, 2021 to

Rs 316.25 billion at March 31, 2022, representing a growth of 8.7%. VIF grew by 18.8% from Rs 195.84 billion at March 31, 2021 to Rs 232.66 billion at March 31, 2022.

Embedded Value Operating Profit (EVOP) for the year was Rs 31.92 billion as compared to Rs 35.05 billion in FY2021. The operating assumption change impact was Rs (0.91) billion primarily due to strengthening of the mortality basis for certain segments. Persistency variance improved from Rs 1.10 billion for FY2021 to Rs 1.51 billon for FY2022 on the back an improved persistency across most cohorts. Mortality variance for FY2022 was Rs (11.87) billion. Mortality variance includes an impact of Rs 10.17 billion from COVID-19 claims on the non-micro insurance portfolio. Further, we observed a spike in non-COVID-19 claims during second wave of COVID-19 in Q1-FY2023. The above spike was a meaningful proportion of the aggregate non-COVID-19 claims, especially in the Group Protection portfolio. The true underlying mortality patterns are expected to emerge over FY2023, provided there is no further spike in COVID-19 cases. Excluding mortality variance, the Return on Embedded Value (ROEV) was 15.0% for FY2022.

Besides EVOP, there was a Rs (4.37) billion impact on EV through economic assumption change and investment variance, primarily due to the mark-to-market impact on debt instruments held in the shareholders funds arising out of a shift in the yield curve.

Solvency

Our solvency ratio at March 31, 2022 was at 204.5%, well above the regulatory minimum required level of 150%.

Company outlook

We expect favourable demographics, rise in the working population, improving per capita income, increasing urbanization, increasing digitilisation and shift towards household financial savings to continue to provide strong potential for growth in premium.

The large protection gap in India coupled with a low sum assured to GDP ratio suggests significant opportunities for the protection business. Retail credit growth provides further opportunity for the credit protect business. We expect to be able to leverage both these trends to grow our protection business at a rate higher than our savings business growth rate over a medium term to long term. Through various customer awareness initiatives, we expect to drive continued improvement in persistency and quality parameters that will ultimately help customers get the intended benefits from their policies. We will continue to leverage technology for process re-engineering and to provide best in class service to our customers. We expect these initiatives to result in improving productivity.

Risks and concerns

Indian life insurance industry is highly competitive with 24 companies operating in the market. Indian customer demands are changing continuously which requires companies to modify their offerings in alignment with customer needs. This poses an opportunity as well as risk to the industry as inability to meet the customer demand would hamper the growth. Some of the macroeconomic and policy factors which could be risks for the industry are:

1) Slowdown in the GDP and GDP per capita growth rates

2) Geo-political conflict worsening the global economic and financial environment, exacerbating inflationary pressures globally

3) Global slowdown of the financial market and economies contributing to weakness in the Indian financial and economic environment

4) Weak credit environment and economic challenges leading to increased credit risk within fixed income portfolio

5) Impact of ongoing COVID-19 pandemic on household income and long term savings

6) Superior return on physical savings

7) Inferior fund performance in comparison to other savings instruments

8) Impact of COVID-19 pandemic on mortality/morbidity claim experience as well as on New business in case of a prolonged continuation of the pandemic

9) Changes in tax rate structure for the industry and its products

The Company recognizes that risk is an integral element of the business and managed acceptance of risk is essential for generation of shareholder value. The Company has instituted an enterprise risk management framework which details the governance and management of all aspects of risks.

II. DISCUSSION ON FINANCIAL PERFORMANCE AND ANALYSIS OF FINANCIAL STATEMENTS A. Overview of Lines of Business (LOB)

1. Participating (Par) products - These are products where the policyholder is entitled to at least 90% share of the surplus emerging in the participating funds and the remaining belongs to the shareholders. The participating fund is managed by the Company and the surplus emerging in the fund is added back to the policies in the form of bonuses. The shareholders profits arising on the participating business depend on the total bonuses declared to policyholders on an annual basis. Currently, shareholders share of profit is one-ninth of the bonus declared to the policyholders. The level of bonuses declared to policyholders is influenced by the actual returns on investments and the expectation of future rates of return. The Company has par life and par pension lines of business.

2. Non-participating (non-par) non-linked products - These products offer the pre-defined benefit at inception for specified events. Further, the policyholder is not entitled to any share in surplus arising from the investment fund. Surplus arising in case of non-participating business is transferred to shareholders accounts based on the recommendation of the Appointed Actuary. Non-par non-linked products include non-par life, non-par pension, non-par variable (life and pension), annuity, protection, health, etc.

a. Non-par life:

Non-par savings - An endowment assurance is a contract to pay a benefit on the life assured surviving the stipulated date or on the death of the life assured before maturity. These plans meet the long-term savings needs of customers and the life cover component ensures that the customers family is financially secured.

Non-par protection - A contract to pay an assured amount on occurrence of certain events viz. death, disability or critical illness of the insured during the term of the policy. These cost-effective protection plans provide a 360-degree financial safety net to customers and their families. These plans pay a lump sum amount in the case of occurrence of an event which is covered under the product.

b. Non-par pension – Products that help to build a retirement corpus which pay an assured benefit or interest as specified from time to time.

c. Non-par variable (Life & Pension) - Products where the benefits are partially or wholly dependent on the performance of an approved external index/benchmark.

d. Annuity - Annuities provide for a series of guaranteed payout to the annuitant at regular intervals in return for a certain sum paid upfront or option to pay premium for certain period. A deferred annuity is a contract to pay out regular amounts of benefit to the annuity holder at the end of the deferred period (the vesting date) when annuity payment commences for a specified period of time such as number of years or for life. An immediate annuity is a contract to pay out regular amounts of benefit wherein the contract commences payments, immediately after the contract is commenced.

e. Health - It provides fixed benefit on specified health events like diagnosis of specified illness.

Of the above, protection business includes term assurance and health line of business for both retail and group.

3. Non-participating (non-par) linked products - These products provide returns which are directly linked to the performance of an approved index or value of the underlying assets. The investment risk in these products is borne by the policyholder. The products have a transparent charge structure, including the charge for either life cover or health cover. Surplus arising in case of non-participating linked business is transferred to shareholders accounts based on the recommendation of the Appointed Actuary. The Company has linked life, pension, health, and group line of business.

B. Standalone financial statements a. Results from operations:

The Companys financial statements include the Revenue account (also known as policyholders account) and Profit and loss account (also known as shareholders account). The Revenue account contains income and expenses relating to policyholders, and the surplus generated in this account is appropriated to the Profit and loss account based on the recommendation of the Appointed Actuary. A deficit in any line of business in the Revenue account is funded from the Profit and loss account other than the transfers to and from the Revenue account, the Profit and loss account contains the income and expenses pertaining to shareholders. Surplus as per the Revenue account, not appropriated to Profit and loss account, is held as Funds for future appropriations (FFA) which is shown in the Balance Sheet. Funds for Future Appropriation comprise funds which have not been explicitly allocated either to policyholders or to shareholders at the balance sheet date.

The various lines of business disclosed in the Revenue account are as per the requirements of IRDAI regulations. However, for analysis of our Revenue account, it can be viewed from three broad lines of business as given above i.e., participating, non-participating (including non-par life, non-par pension, non-par variable (life and pension), annuity, protection, health), and linked. Shareholders profits in participating lines of business depend on the total bonuses declared to policyholders on an annual basis. Currently, one-ninth of the bonus declared to policyholders is transferred to shareholders. In case of the non-participating line of business, profit arises primarily from premium and investment income net of expenses, claims, and policyholders liabilities whereas in case of linked business, profit primarily arises from charges levied on the policyholders fund net of expenses, claims, and policyholders liabilities.

1 Includes balance of variable insurance products.

2 Reinsurance premium received in non-par line of business amounting to Rs 634 thousand during the year ended March 31, 2022(Rs 584 thousand for the year ended March 31, 2021) 3 Netted for any impairment in investments, which is shown as provision for diminution in the value of investments in the Revenue account.

4 Commission also includes rewards and/or remuneration to agents, brokers or other intermediaries 5 Including provision for doubtful debt and bad debts written off.

1 Netted for any impairment in investments, which is shown as provision for diminution in the value of investments in Profit and loss account. and including other income. 2 Including Managerial Remuneration in excess of the allowable limits – refer note 3.21 of Schedule 16: significant accounting policies and notes forming part of the financial statements.

Element-wise analysis of the Revenue account and Profit and loss account is given below:

1. Gross premium (Revenue account)

1 Group includes policy sourced to group customers under par, non-par, and linked line of business.

The gross premium increased by 4.8% from Rs 357.33 billion in FY2021 to Rs 374.58 billion in FY2022 primarily on account of an increase in retail initial and single premium and group single premium. The total retail premium increased from Rs 297.92 billion in FY2021 to Rs 307.32 billion in FY2022 primarily on account of an increase in non-par business.

The total group premium increased from Rs 59.41 billion in FY2021 to Rs 67.26 billion in FY2022 primarily on account of an increase in group term & credit life businesses.

2. Reinsurance (Revenue account)

Reinsurance premium ceded increased by 49.7% from Rs 7.60 billion in FY2021 to Rs 11.37 billion in FY2022 primarily on account of an increase in protection business from group segment and increase in reinsurance rates. Reinsurance inward business had commenced in FY2021. The reinsurance premium accepted in FY2021 was Rs 0.6 million and Rs 0.6 million in FY2022.

3. Investment income (Revenue account)

1 Includes par and non-par line of business

Non-linked: The investment income of the non-linked line of business decreased from Rs 51.85 billion in FY2021 to Rs 50.78 billion in FY2022 primarily on account of a decrease in the net profit on sale of investments partly offset by an increase in the interest income corresponding to an increase in interest–earning assets.

Linked: The investment income of the linked line of business decreased from Rs 422.32 billion in FY2021 to Rs 198.68 billion in FY2022. The investment income for the linked line of business includes income on the unit–linked portfolio which has decreased from Rs 421.43 billion in FY2021 to Rs 197.82 billion in FY2022 and is directly passed on to the policyholders with the corresponding changes in the fund reserve. The decrease in the investment income of the unit–linked portfolio is primarily on account of decrease in the unrealised gains/ (losses) resulting from mark-to-market valuation of assets held. The growth in S&P BSE 100 in FY2022 was 19.2% as compared to 71.5% in FY2021. The unrealised gain of the linked line of business decreased from Rs 327.04 billion in FY2021 to Rs 22.89 billion in FY2022.

4. Other Income (Revenue account)

Other income includes fees and charges and other miscellaneous income. The other income increased from Rs 0.93 billion in FY2021 to Rs 1.13 billion in FY2022 primarily on account of an increase in interest on policy loans in line with the increase in the loans given to policyholders against policies.

5. Contribution from shareholders account (Revenue account):

Contribution from Shareholders account represents the funding from the Profit and loss account (Shareholders account) to various lines of business in case of a deficit in any line of business and also excess of Expense of Management (Refer note 3.50 of schedule 16).

Contributions from Shareholders account increased from Rs 15.75 billion in FY2021 to Rs 21.61 billion in FY2022 primarily on account of higher new business strain14 in the non-par segment.

6. Commission expense (Revenue account)

1 Represents rewards as defined under IRDAI (Payment of commission or remuneration or reward to Insurance agents and Insurance intermediaries) regulations, 2016.

2 Commission/(total premium- 90% of single premium).

The total commission including rewards expense increased from

Rs 15.00 billion in FY2021 to Rs 16.73 billion in FY2022. There was an increase in commission rates from 5.0% in FY2021 to 5.5% in FY2022.

The new business commission increased from Rs 10.32 billion in FY2021 to Rs 11.79 billion in FY2022 primarily on account of an increase in first year and single premium. Renewal commission marginally increased from Rs 3.98 billion in FY2021 to Rs 4.12 billion in FY2022 primarily on account of an increase in the retail renewal premium of traditional savings products.

7. Operating expense relating to insurance business (Revenue account)

The total operating expenses relating to insurance business increased from Rs 26.90 billion in FY2021 to Rs 36.78 billion in FY2022.

The employee–related expense increased from Rs 9.92 billion in FY2021 to Rs 11.97 billion in FY2022. The employee headcount increased from 14,413 at March 31, 2021 to 15,530 at March 31, 2022.

The advertisement & sales related expenses increased from Rs 9.03 billion in FY2021 to Rs 14.46 billion in FY2022 primarily on account of an increase in the advertisement related expenses in FY2022. The other expenses increased from Rs 7.95 billion in FY2021 to Rs 10.35 billion in FY2022 primarily on account of an increase in expenses towards professional charges to support operations and expenses relating to information technology.

8. Goods and service tax charge on linked charges (Revenue account)

Goods and service tax charge on linked charges represents the tax payable on the charges collected on linked products, and the tax is collected from policyholders. Goods and service tax charge on linked charges increased by 5.5% from Rs 6.55 billion in FY2021 to Rs 6.91 billion in FY2022.

9. Benefits paid (net) and interim bonus paid (Revenue account)

1 Includes interim bonus paid.

Benefits paid (net of reinsurance) and interim bonus paid increased from Rs 226.41 billion in FY2021 to Rs 293.59 billion in FY2022. The increase was primarily on account of an increase in surrender claims from Rs 162.13 billion in FY2021 to Rs 204.07 billion in FY2022 and increase in mortality (death) claims from Rs 27.29 billion in FY2021 to

Rs 56.21 billion in FY2022. The COVID-19 related death claims (net of reinsurance) in FY2022 was Rs 10.17 billion as against Rs 1.98 billion in FY2021.

10. Change in valuation of policy liabilities (Revenue account)

1 Change in valuation of policy liabilities in respect of reinsurance accepted in non-par line of business amounts to Rs 43 thousand for the year ended March 31, 2022 (nil for FY2021)

Change in non-unit/mathematical reserves (net of amount ceded in reinsurance) increased from Rs 128.59 billion in FY2021 to Rs 134.67 billion in FY2022 reflecting the new business written and change in valuation assumptions.

Change in fund reserve (including discontinued policies), which represents liability carried on account of units held by unit-linked policyholders, decreased from Rs 414.65 billion in FY2021 to

Rs 123.17 billion in FY2022 primarily due to lower investment income.

11. Provision for taxation (Revenue account)

The provision for taxation shown in the Revenue accounts represents tax charged on the total surplus (grossed up for bonus) of the participating line of business in the Revenue account, in line with the Companys accounting policy and the directions issued by IRDAI. The provision for taxation increased from Rs 1.42 billion in FY2021 to

Rs 1.66 billion in FY2022 primarily on account of an increase in the allocation of bonus to participating policyholders.

12. Surplus after tax (Revenue account) and Net transfer to shareholders account

As a result of the above changes in income and expenses, surplus after tax in the Revenue account increased from Rs 21.06 billion in FY2021 to Rs 21.90 billion in FY2022.

The surplus generated in the Revenue account after setting aside fund for future appropriation is transferred to Profit and loss account (Shareholders account) based on the recommendation of the Appointed Actuary. The net transfer to shareholders account decreased from Rs 4.10 billion in FY2021 to Rs (0.01) billion in FY2022. The remaining surplus of Rs 0.30 billion in FY2022 was retained as a fund for future appropriation.

Participating business: The surplus in the Revenue account for participating line of business is net of bonus and interim bonus. The surplus (grossed up for bonus) increased from Rs 9.25 billion in FY2021 to Rs 10.27 billion in FY2022. The shareholders profits in participating business depend on the total bonuses declared to the policyholders. Currently, one-ninth of the bonus declared to policyholders is transferred to shareholders. The transfer to shareholders for the participating line of business increased from

Rs 0.80 billion in FY2021 to Rs 1.01 billion in FY2022 primarily on account of an increase in bonus declared to the policyholders. In FY2021, the transfer to shareholders was netted by one time transfer of Rs 0.49 billion to par policyholder.

Non-participating business: The surplus in the Revenue account for non-par line of business arises primarily from premium and investment income net of expenses, claims, and policyholders liabilities. The deficit in the non-par line of business before contribution from shareholders increased from Rs 13.88 billion in FY2021 to Rs 16.61 billion in FY2022 primarily on account of higher new business strain resulting from the new business growth of non-par segment.

Linked business: The surplus in the Revenue account for the linked lines of business arises primarily arises from charges levied on the policyholders fund net of expenses, claims and policyholders liabilities. The surplus in linked line of business before contribution from shareholders decreased from Rs 17.67 billion in FY2021 to

Rs 15.59 billion in FY2022 primarily on account of decrease in investment income and higher claims partly offset by decrease in policyholders liabilities.

13. Investment and other income (Profit and loss account)

Investment income (net) increased from Rs 7.40 billion in FY2021 to Rs 8.85 billion in FY2022 primarily on account of profit/ (loss) on sale of investments. Interest, dividend and rent increased from

Rs 4.82 billion in FY2021 to Rs 5.04 billion in FY2022 primarily on account of an increase in interest income due to an increase in the interest-earning assets. Profits and losses are realised as the portfolio is realigned based on the market conditions and expected attractiveness of securities and sectors. During FY2022, profit on sale on investments (net of loss on the sale of investments & net of provision for diminution in value of investments) increased from

Rs 2.63 billion in FY2021 to Rs 3.93 billion in FY2022.

Other income increased from Rs nil in FY2021 to Rs 0.02 billion in FY2022.

14. Expenses other than those directly related to insurance business (Profit and loss account)

Expenses other than those directly related to the insurance business increased from Rs 0.69 billion in FY2021 to Rs 0.94 billion in FY2022 primarily on account of interest expenses amounting to Rs 0.82 billion on issuance of non-convertible debentures during the year and partly offset by decrease in provision of doubtful debts. Corporate social responsibility expenses (CSR expenses) are charged to Profit and loss account and have decreased from Rs 0.11 billion in FY2021 to

Rs 0.07 billion in FY2022.

15. Provision for tax (Profit and loss account)

Tax on other than participating line of business and shareholders income is shown in Profit and loss account. Provision for tax has decreased from Rs 1.21 billion in FY2021 to Rs 0.36 billion in FY2022 on account of decrease in taxable surplus computed as per Income tax Act, 1961.

16. Profit after tax (Profit and loss account)

Profit after tax decreased from Rs 9.60 billion in FY2021 to Rs 7.54 billion in FY2022 primarily due to COVID-19 related death claims (net of reinsurance and COVID-19 provisions reversals) of Rs 6.64 billion, offset, in part, by increase in shareholders surplus.

b. Financial position

1. Shareholders fund & capital position

During FY2022, there was no capital infusion except from the exercise of stock options to employees under Employee Stock Option Scheme.

The net worth of the Company increased from Rs 91.19 billion at March 31, 2021 to Rs 91.63 billion at March 31, 2022 primarily on account of an increase in the balance of profit in profit and loss account and offset by decrease in the fair value change account. The balance of profit in profit & loss account increased from Rs 36.11 billion in FY2021 to Rs 40.78 billion in FY2022 on account of profit for the year.

The Company had performed an independent valuation of its investment property and consequently revaluation reserve increased from Rs 0.23 billion (Historical cost: Rs 3.65 billion; revalued amount:

Rs 3.88 billion) at March 31, 2021 to Rs 0.31 billion (Historical cost:

Rs 3.65 billion; revalued amount: Rs 3.97 billion) at March 31, 2022.

Fair value change account represents the unrealised gains/loss on equity securities and mutual fund and it decreased from Rs 6.16 billion at March 31, 2021 to Rs 1.34 billion at March 31, 2022. Movement in fair value change account is a function of the performance of the equity markets and the mix of equity and mutual funds in the portfolio.

The Company had a solvency ratio of 204.5% at March 31, 2022, compared to the regulatory minimum required level of 150%.

2. Borrowings

The Company had issued non-convertible debentures of Rs 12.00 billion in FY2021 with coupon rate of 6.85% per annum payable annually. The outstanding balance at March 31, 2022 was

Rs 12.00 billion. Further, the Company has been identified as a Large Corporate as per the criteria under the SEBI circular SEBI/ HO/DDHS/CIR/P/2018/144, whereby the Company shall raise not less than 25% of its incremental borrowings by way of issuance of debt securities. There were no incremental borrowings during the year. (Refer note 3.23 of schedule 16)

3. Policyholders fund

Fair value change account and revaluation reserve - investment property

Fair value change account decreased from Rs 29.93 billion at March 31, 2021 to Rs 28.27 billion at March 31, 2022. Movement in fair value change account is a function of the performance of the equity markets and the mix of equity and mutual funds in the portfolio.

The Company had performed an independent valuation of the investment property and consequently revaluation reserve decreased from Rs 0.69 billion (Historical cost: Rs 0.19 billion; revalued amount: Rs 0.87 billion) at March 31, 2021 to Rs 0.68 billion (Historical cost: Rs 0.19 billion; revalued amount: Rs 0.86 billion) at March 31, 2022.

Policy liabilities

The movement in policy liabilities is explained in the element-wise analysis of the Revenue account.

Funds for future appropriation (FFA)

FFA increased from Rs 13.53 billion in FY2021 to Rs 13.84 billion in FY2022 on account of an increase in the undistributed surplus of participating line of business.

4. Investments

Total investments increased from Rs 2,122.12 billion at March 31, 2021 to Rs 2,381.08 billion at March 31, 2022. The decrease in shareholders investments is primarily attributable to payment of dividend on equity shares in FY2022.

The increase in policyholders non-linked investments is largely attributable to net inflows into the fund. In case of the Asset held to cover linked liabilities, the increase is primarily attributable to realised and unrealised gains due to improved equity market performance and partly offset by the net outflows during the year. The investment held in unit linked funds (Asset held to cover linked liabilities) at March 31, 2022 was 63.4% of the total investment assets as against 65.3% at March 31, 2021. Further, of the total investment assets at March 31, 2021, 47.4% of the assets were held as equity at March 31, 2022 as against 45.5% at March 31, 2021.

5. Loans

The Company has seen a growth in loan against policies from Rs 6.63 billion at March 31, 2021 to Rs 9.40 billion at March 31, 2022 primarily on account of the higher number of policyholders availing this facility. The Company has performed an impairment assessment and based on this assessment, no impairment has been recognised.

6. Fixed assets

Fixed assets increased from Rs 4.57 billion at March 31, 2021 to Rs 4.87 billion at March 31, 2022.

7. Net current assets (i) Details of current assets

1 Including income on unclaimed amount of policyholders.

2 Represents receivables towards investments sold.

3 Includes other advances net of provision for doubtful advance, other receivables net of provision for doubtful receivables, agents balance net of provision for doubtful agent balances, due from subsidiary and advances to employees.

The explanation for key elements is as mentioned below:

Income accrued on investments increased from Rs 12.11 billion at March 31, 2021 to Rs 14.90 billion at March 31, 2022.

Pursuant to IRDAI circular on "Handling of unclaimed amounts pertaining to policyholders", the Company has created a single segregated fund to manage all the unclaimed monies. Assets held for the unclaimed amount of policyholders increased from Rs 8.09 billion at March 31, 2021 to Rs 10.60 billion at March 31, 2022. Cash and bank balances increased from Rs 5.57 billion at March 31, 2021 to Rs 6.70 billion at March 31, 2022.

Balance due from reinsurers represents amount receivable from reinsurers on account of claims, net of reinsurance premium payable for reinsurance ceded. It also includes reinsurance premium receivable net of claims under reinsurance accepted business. The balance due from reinsurers increased from Rs 2.83 billion at March 31, 2021 to Rs 5.11 billion at March 31, 2022, on account of reinsurance ceded business, primarily due to an increase in claims receivable from the reinsurer, offset in part by an increase in reinsurance premium payable.

Outstanding premium represents the premium due but not received on participating & non-participating, non-linked products at March 31 and which are within the grace period. It increased from Rs 1.70 billion at March 31, 2021 to Rs 2.86 billion at March 31, 2022.

GST unutilised credit represents GST input tax credit which will be utilised in the future for set-off against payment of GST liabilities. It increased from Rs 1.90 billion at March 31, 2021 to Rs 2.86 billion at March 31, 2022.

Advance taxes and tax deducted at source increased from

Rs 1.16 billion at March 31, 2021 to Rs 1.48 billion at March 31, 2022 primarily due to income tax payments made during FY2022.

Sundry debtors (investments) represents the sales proceeds pending to be received (but not overdue) on sale of investment securities. It decreased from Rs 2.75 billion at March 31, 2021 to Rs 1.06 billion at March 31, 2022.

(ii) Details of current liabilities

1 Including due to holding company, expenses payable and payable towards investments purchased.

2 Including interest on unclaimed amount of policyholders.

3 Including TDS payable and other deposits.

The explanation for key elements is as mentioned below:

Policyholders claims payable represent amounts payable to the policyholders for all claims (death, maturity, survival, surrender, foreclosure, annuity, etc.) that are intimated to the Company and are outstanding due to pending investigation as a part of the normal claims process or pending due to incomplete documentation from the policyholders. The increase in claims payable from Rs 7.65 billion at March 31, 2021 to Rs 12.85 billion at March 31, 2022 is primarily on account of an increase in death and surrender related claims payable.

Sundry creditors representing creditors for expenses and investment increased from Rs 8.14 billion at March 31, 2021 to

Rs 11.04 billion at March 31, 2022.

The details of unclaimed amounts of policyholders including breakup and ageing at March 31, 2022, and March 31, 2021 is given in note 3.6 and 3.7 of Schedule 16: Significant accounting policies and notes forming part of the financial statements for the year ended March 31, 2022.

Unallocated premium including premium received in advance primarily represents premium received from customers where policy issuance is in progress or pending due to requirements awaited from customers. It increased from Rs 5.19 billion at March 31, 2021 to

Rs 8.02 billion at March 31, 2022.

Goods and Service tax/Service tax payable primarily represents goods and service tax payable in respect of services rendered by the Company.

Payable to unit fund decreased from Rs 2.38 billion at March 31, 2021 to Rs 1.87 billion at March 31, 2022. The amount represents payable to unit-linked policyholders account from shareholders account, which is transferred to the unit-linked policyholders account immediately on the next banking day and hence held as a current liability.

Payable to agents represents the amount payable to insurance agents, brokers, insurance marketing firms and web aggregators towards commission. The amount outstanding is primarily attributable to the business sourced during the last month of the financial year.

8. Contingent liability

The contingent liability decreased from Rs 13.12 billion at March 31, 2021 to Rs 9.83 billion at March 31, 2022. The contingent liability decreased primarily on account of decrease in uncalled portion of partly paid securities due to payments made during the year. The uncalled portion of the securities decreased from Rs 10.61 billion at March 31, 2021 to Rs 7.00 billion at March 31, 2022.

c. Cash flow statement

Cash flows from operating activities:

Net cash flows generated from operating activities decreased from

Rs 73.20 billion in FY2021 to Rs 18.31 billion in FY2022 primarily on account of an increase in policy benefits paid from Rs 235.57 billion in FY2021 to Rs 306.73 billion in FY2022 offset in part by an increase in premium and other receipts from Rs 394.92 billion in FY2021 to

Rs 417.01 billion in FY2022.

Cash flows from investing activities:

Net cash flows used in investing activities decreased from Rs 50.90 billion in FY2021 to Rs 8.15 billion in FY2022 on account of decrease in the purchase of investments offset in part by sale of investments.

Cash flows from financing activities:

Net cash flows used in financing activities for FY2022 was Rs 3.19 billion primarily due to final dividend and interest on sub debt paid during the year. The net cash flow from financing activities was Rs 12.05 billion in FY2021 and included Rs 12.00 billion received from issuance of non-convertible debentures.

d. Key financial ratios

1 Calculations are in accordance with the IRDAI circular IRDA/ACT/CIR/ GEN/21/02/2010 dated February 11, 2010 2 Total cost including commission excluding interest on sub debt/ (total premium-90% of Single premium).

Persistency ratio: The Company has a strong focus on improving the quality of business and customer retention, which is reflected in our best in class 13th month persistency ratios. Our 13th month persistency stood at 84.6% for FY2022. The 61st month persistency stood at 54.7%.

Expense ratio: The cost to total weighted received premium (TWRP) ratio stood at 18.6% in FY2022 compared to 14.8% in FY2021. The increase is primarily attributable to higher discretionary expenses in light of the easing of the pandemic as well as investment in capacity for future growth. Solvency ratio: The Company had a solvency ratio of 204.5% at March 31, 2022, compared to the regulatory minimum required level of 150%.

C. Consolidated financial results and subsidiary performance

The Company has a wholly-owned subsidiary, ICICI Prudential Pension Funds Management Company Limited (PFM). The PFM is licensed by the Pension Funds Regulatory and Development Authority as a Pension Fund Manager under the National Pension System (NPS). The PFM had also obtained registration as a Point of Presence (PoP) for NPS distribution and servicing.

Pension fund industry

The total assets under management (AUM) of the pension fund industry has grown from Rs 5,780.26 billion at March 31, 2021 to Rs 7,365.93 billion at March 31, 2022, a growth of 27.4% in FY2022. Inflows largely comprises funds from the government sector, however, private sector grew at a faster pace as compared to overall industry. The AUM from the government sector, private sector, Atal Pension Yojana and National Pension System lite segments was Rs 6,339.76 billion, Rs 770.08 billion, Rs 209.23 billion and Rs 46.87 billion respectively.

Business

The subscribers funds managed by the PFM increased from Rs 75.59 billion at March 31, 2021 to Rs 116.14 billion at March 31, 2022, an increase of 53.6% during the year.

The PFM has a market share of 15.1% in the private sector AUM at March 31, 2022.

The net worth of PFM at March 31, 2022 is Rs 0.55 billion (at March 31, 2021 Rs 0.29 billion). The net worth increased on account of capital infusion of Rs 0.21 billion by the Company to comply with the statutory requirement of PFRDA as well as due to profit during the year. For the year ended March 31, 2022, the PFM registered a profit of Rs 0.05 billion as against a loss of Rs 0.04 billion last year. The profit was primarily on account of change in investment management fee rate from 0.01% to 0.09%, POP business growth and growth in inflows. The overall contribution of the subsidiary to the financial results of the Company is not significant currently, however it has started showing positive signs. The subsidiary is committed towards increasing its presence in the industry and is focused on scaling up the business and revenue.

Basis of consolidation

The consolidated financial statements are prepared in accordance with the accounting standards notified under section 133 of the Companies Act 2013, read together with paragraph 7 of the Companies (Accounts) Rules 2014, section 129(4) of the Companies Act, 2013. The financials are consolidated on a line-by-line basis in accordance with AS 21 on ‘Consolidated Financial Statements. These consolidated financial statements for the Group are prepared in accordance with the principles and procedures for preparation and presentation of consolidated financial statements as laid down under the Accounting Standard (AS) 21, "Consolidated Financial Statements" and are presented in the same format as that of the Holding Company. The financial statements of the Holding Company and its subsidiary have been combined on a line-by-line basis by adding together similar items of assets, liabilities, income and expenses in respective components of financial statements after eliminating intra-group balances, transactions and resulting unrealised profits/ losses. The Policyholders account specifically dealing with direct insurance business governed by IRDAI regulations has retained its distinct independent form in these consolidated financial statements.

The consolidated profit after tax for the Company decreased from Rs 9.56 billion in FY2021 to Rs 7.59 billion in FY2022.

III. INTERNAL CONTROL SYSTEMS AND THEIR ADEQUACY

The internal controls of the Company are commensurate with the business requirements, its scale of operation and applicable statutes to ensure orderly and efficient conduct of business. These controls have been designed to provide a reasonable assurance with regard to maintaining proper accounting controls, safeguarding of assets, prevention, and detection of frauds and errors, ensuring operating effectiveness, reliability of financial reporting, and compliance with applicable regulations.

In most aspects of operations and processes, the Company has deployed automation for control and efficiency. The Company operates in a robust IT control environment with adequate controls focused on reconciliation between systems, auto checks to avoid any duplicate data upload, reconciliation of all jobs run at the beginning and end of day, matching of trial balance and ensuring no unposted entries in the system monthly. The IT change management work flow is tracked in an application and changes moved to production only after user acceptance testing sign off by business teams. The Company has an automated control over access management with addition/deletion/modification of access to IT environment as per defined authorisation matrix. The reconciliation of user rights in applications is conducted every quarter as part of access management. In conjunction with the IT controls, all financial transactions also have a compensating detective controls (system exception reports, maker checker, etc.) at the process level. These controls are covered under the IFC framework which is aligned with Internal Control Framework 2013 given by the Committee of Sponsoring Organisations (COSO) of the Treadway Commission and tested at regular intervals for design and operating effectiveness.

Due to COVID-19 pandemic, the facility to work from home (WFH) was provided to the employees of the Company through IT systems. The systems were hardened and configured with requisite data security controls. The day to day operations of the Company were carried out through remote location/WFH via secured servers. There had been no material changes in the process level controls or activities conducted in the financial statement closing process of the Company. The Company had tested all material controls over financial reporting at March 31, 2022 and found them to be operating effectively.

In addition, internal audits are undertaken to reviews significant operational areas regularly. The Audit Reports, submitted by the Internal Auditors, are reviewed by the Audit Committee and corrective action is initiated to strengthen the controls and enhance the effectiveness of the existing systems. Statutory and Internal Auditors are also invited to the Audit Committee meetings to ascertain their views on the adequacy of internal control systems. The management believes that strengthening internal controls is a continuous process and it will, therefore, continue its efforts to keep pace with changing business needs and environment.