There are a number of KPIs used by both companies and analysts when they're monitoring the performance of life insurance companies. Now, the first one is the gross premium growth rate, and that is the amount of gross written premiums each year compared with the prior year. This metric is therefore akin to the revenue growth rate for corporate, so it's an important indicator of business growth. Note that for life insurance, gross written premiums are the amount of gross premiums due in a given year. So it'll reflect premiums from both existing and new business rather than just the premiums from new business. Now, the second KPI is the operating result or operating profit, and this can be defined in two ways. Either top down, so pre-tax profits before financing costs, or in a bottom up way, which is the sum of the profits from the insurance activities, the investing activities, and after deducting all the operating expenses. Now, most European insurance companies go further when they're showing the results of their insurance activities, investing activities, and expenses by breaking it down into the technical margin, the investment margin, and the other expenses. Now, the technical margin is the premiums less claimed expense before the interest cost on insurance liabilities, whereas the investment margin is the spread of the investment returns less any interest cost on the insurance liabilities. Once we add together the technical margin, the investment margin and the expenses, that still gets us to the same final number, which is the operating result for the business. And although the individual components are important, it is essential to track the overall operating profits as that's the only metric that will give us an indication of whether the premiums charged by the company are sufficient to cover the insurance and the investment risk, as well as the business expenses. Now, the final KPI is one of the most important when assessing an insurance company's profits, and that's the return on equity. And that's the net income of the insurance company divided by either the beginning shareholders equity or the average shareholders equity. The net income is usually adjusted to include only recurring income and expense. So any profits from, for example, discontinued activities would be excluded from this. But why is return on equity such an important metric, where it tells us the amount of profits being generated for the equity investors relative to the funding provided by the equity investors? But why just the equity investors? Well, remember that a large part of an insurance company's financing is actually the free financing provided by the premiums from customers. In the same way, that a bank's depositors provide most of the financing for a bank's activities. So similar to a bank, we tend to think of an insurance company's capital purely in terms of its equity, and therefore, when we're looking at their profitability, we focus on their return on equity.
