HDFC Life insurance company trades in the stock market at more than 5 times its embedded value ( EV), a key market valuation parameter for life insurance companies. The other two listed insurance biggies - ICICI Pru Life and SBI - gets a market valuation of over 3 times their respective EVs. Will the country’s largest insurer Life Insurance Corporation (LIC) enjoy a similar valuation from public investors ?
The stock market is a ruthless place as seen in the country’s biggest IPO in history --Paytm -- where the investors have hammered the company’s valuation.
Let’s first understand the key components of EV. The EV is the sum total of present value of all future profits from existing business (insurance policies ) plus net worth, which includes capital. Globally, the life insurance companies are valued at a multiple of EV.
There are reports that LIC's EV is around $150 billion (or Rs 11.25 lakh crore). Since the market valuation is always over and above the EV, the multiple of 3-5 times enjoyed by the private players should be applicable to the insurance giant LIC, which has a market share of 60-70 per cent despite competition from over two dozen private players.
But it is easier said than done.
Experts point out that the traditional savings product mix of LIC will come in the way of getting 3-5 times EV multiple in the market. There is a liability on the part of the LIC to pay back policyholders in its money back and other savings policies at the time of maturity. The private players, however, have a higher share of protection plans, which also brings higher profits and higher valuation.
Secondly, LIC's profit-sharing arrangement of 95:5 with policyholders and shareholders for participating business is also not favourable for investors' community. In private insurance companies, the shareholders gets a higher share of profits at 10 per cent whereas the policyholders gets 90 per cent.
While LIC would shift to private sector model of 90:10, which is also required by the insurance regulator IRDAI, but it would take at least 3-5 years for the new arrangement to be effective.
The high-cost structure of LIC with huge agents workforce will also come in the way of matching the private sector valuation multiples in the market. LIC's commission ratio, which is gross commission paid to gross premium, is 5.40 per cent as compared to 4.56 per cent, say for HDFC Life. The private sector insurance companies are using the cost effective bancassurance model of selling policies, which is an arrangement between banks and insurance firms, allowing the latter to sell its products to a bank's clientele.
In addition, there are fears in the minds of investors that LIC will remain as a lender of last resort for the government. In the past, LIC has always stepped in to bail out the government. IDBI Bank's bail out is a recent example where LIC had to pump in huge amounts of capital for a majority stake in the struggling bank.
Given the negatives, there are experts who give LIC a valuation of around 1.3-1.4 times its EV.
In fact, the outgoing Chief Economic Advisor K V Subramanian had earlier made a wild guess that the government could mobilise Rs 90,000 crore by selling 6-7 per cent stake in LIC. Subramanian's calculation had put LIC's valuation at Rs 12.85-15 lakh crore. The reports of LIC’s EV at Rs 11.25 lakh crore fits in well with a multiple of 1.3 to 1.4 times, which will give it a market valuation of Rs 14.62 to Rs 15.75 lakh crore. Subramanian, too, predicted a similar number.
Clearly, the public listing of LIC will make it as one of the top five largest companies in terms of market cap, joining the marquee club of RIL, TCS, and HDFC Bank.
HDFC Life, whose EV is Rs 26,617 crore in 2020-21, has a market capitalisation of Rs 1.40 lakh crore. SBI Life with an EV of Rs 33,390 crore, enjoys a market capitalisation of Rs 1.15 lakh crore. Similarly, ICICI Pru Life, that has an EV of Rs 29,106 crore, has a market cap of Rs 88,528 crore.
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