One of the mega events in 2022 for the stock markets was the listing of Life Insurance Corporation of India (LIC). It was not the first time that an insurance company had got listed in India, but what created the euphoria and excitement around it was the sheer size and scale of its operations. Consider this: The behemoth insurer alone had assets under management worth Rs 41 lakh crore in FY22, which is more than the current (October) market size of the entire mutual fund industry of Rs 39.50 lakh crore. Not to mention, it has a huge policyholder (lives insured) base of 280.7 million, 1.33 million agents and 104,036 employees spread across the length and breadth of the country.
Therefore, when the government announced its plans to list LIC, one question everyone had was how the company would unlock its huge value. The size of the company was one challenge but at the same time, dealing with the complexities of the insurance business was another. Finally, following analysts’ meets and road shows across the country, the government-owned insurer listed 3.5 per cent of its equity on May 17, 2022, which made it one of the most valuable companies after Reliance Industries, TCS, Infosys and HDFC Bank, among others.
Given the stellar background of the company, it came as no surprise that LIC broke into the top 10 of the coveted BT500 list in 2022. With an average market cap of Rs 4.42 lakh crore, the company lands the 9th spot on the list that is led by Reliance Industries, a commendable feat since the rankings of other insurers have gone down this year. Consider this: Insurance firms HDFC Life and ICICI Lombard have slipped by 13 places each to the 39th and 76th positions, respectively. Other insurers such as General Insurance Corporation of India and The New India Assurance Company have dropped 72 and 73 places to the 209th and 235th ranks, respectively.
What makes LIC an attractive proposition is the stability of the company, given its legacy of more than 65 years. Over the years, the company has started offering a diverse set of participating insurance products (policies where the profit of the company is shared with policyholders) like money back plans and guaranteed plans, and non-participating products like unit-linked insurance products and term insurance.
Currently, its product mix is inclined more towards participating policies, but the company is now focussing on diversifying its portfolio. “LIC is the most visible insurance brand and its strength is its wide distribution network spread across India. LIC’s digital initiatives and improvement in product mix are also gradually showing results,” says Piyush Nagda, Director of Private Wealth at Monarch Networth Capital Ltd.
The insurer’s growth journey is reflected in its increasing market share in the first six months of the current financial year (April-September). According to data from the Insurance Regulatory and Development Authority of India (Irdai), the overall market share in first-year premium income of LIC increased to 68.25 per cent at the end of September 2022 from 63.25 per cent in FY22. It continues to maintain its lead in the life insurance space.
LIC’s firm footing in the insurance market is reflected in its results. It registered profit after tax (PAT) of Rs 4,124.70 crore in FY22 against Rs 2,974.1crore in FY21. The first-year premium collected in FY22 stood at Rs 1.99 lakh crore, a jump of 7.92 per cent over FY21. During FY22, the insurer settled 27.22 million claims worth Rs 2.38 lakh crore, which works out to 91.09 per cent maturity claims and 98.50 per cent death claims. The insurer registered total life fund (an amount of money from which life insurance payments and investments are made) of Rs 37.35 lakh crore and total assets of Rs 42.30 lakh crore in FY22.
LIC reported 11x jump in net profit to `16,635 crore for H1FY23 compared with `1,437 crore a year ago. LIC said that the massive surge was due to the transfer of an amount of `14,271.80 crore (net of tax), due to accretions on the available solvency margin, from non-participating (non par) to shareholders’ accounts. Available solvency margin—the difference between the value of assets and that of insurance liabilities—is a measure of how solvent an insurer is.
The insurer recorded a net profit of Rs 682.90 crore in the June quarter. Its first-year premium stood at Rs 9,124.7 crore for Q2FY23 compared with Rs 8,198.30 crore a year ago. Gross value of new business (VNB) for the six-month period ended September was at Rs 4,836 crore. Its VNB margin was 14.6 per cent at the end of September 2022 (compared with 9.3 per cent a year ago).
For a life insurance firm, a key metric is the VNB margin, as it indicates the profit margin of the company. It is arrived at by dividing the value of new business by the year’s annualised premium and it is similar to the profit margin of any other business. A high VNB margin indicates the higher profitability of a company’s business.
One of the reasons for LIC’s low VNB margin is the high share of participating plans in the product mix where operating costs are very high. “As the company focusses on generating revenue from high VNB-margin products, it will perform well over the long term,” says Manoj Dalmia, Founder and Director of Proficient Equities Ltd.
“The results signify our consistent move towards diversifying our product mix aimed at increasing the non par business share,” says LIC Chairman M.R. Kumar. “In the individual business, on an APE [annual premium equivalent] basis, the share of non par business has increased to 8.99 per cent for the half year ended September 30, 2022, against 7.12 per cent for the full year ended March 31, 2022... The same philosophy of diversification is visible in our distribution channel mix where the share of new business premium being sourced from banca [bancassurance] and alternate channels has also increased,” he adds. APE is the sum of the regular annualised premium plus 10 per cent of single premium.
LIC’s issue price was fixed at Rs 949, but its stock has since dropped by more than 31 per cent. Among the reasons for the selling pressure on LIC’s stocks is its product mix being dominated by the traditional savings business with low margins and the low share of the bancassurance distribution channel. For example, the share of participating business within the the overall individual business (retail), in terms of APE, was as high as 93 per cent for FY22.
The insurer, however, intends to increase the share of non-participating policies. “We intend to increase our market share of non par business as well as diversify the channel mix while ensuring that our agents stay as the main distribution pillars of our products,” wrote Kumar in LIC’s annual report for FY22.
The stock is currently trading at a market cap to embedded value of less than 1 with the embedded value being Rs 5.41 lakh crore for FY22, which is at a steep discount if compared to the 2-3x valuations commanded by LIC’s listed peers. Embedded value is the total of present value of all future profits from the existing business plus net worth, which includes capital.
The insurance behemoth, however, is taking many measures to increase the confidence of shareholders. Dalmia of Proficient Equities says. “Most private players have focussed on increasing the mix of high-margin non par/protection products. LIC’s reliance on participating products remains high. But it enjoys a high market share in the annuity segment. However, private players are also catching up as they have reported 23-131 per cent CAGR over the past three years.”
In the long run, as LIC focusses on generating revenue from high-margin products, the insurer is expected to perform well over the long term with a focus on new product launches and digitalisation to aid growth.
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