Cheap valuation likely to lend support to LIC amid weak performance

Life Insurance Corporation of India (LIC) reported weak growth through H1FY24 but it witnessed a boost in embedded value (EV) due to equity-market performance. But concerns regarding its stock include loss of market share as it is outpaced by private sector rivals, sticky operating expenses (reduced slightly year-on-year but up in Q2FY24 versus Q1FY24), and high sensitivity of embedded value to equity volatility.

Traders may also factor in the likelihood of another stake sale by the Government of India. These concerns are reflected in valuations. LIC trades at a big discount in price/EV terms (less than 1x) compared to private sector rivals (mostly 3x or more).

Growth is healthy on a sequential basis but weak on a Y-o-Y basis. The individual annualised premium equivalent (APE) in H1FY24 was flat Y-o-Y at Rs 14,640 crore, whereas the group APE was down by 24.5 per cent Y-o-Y to Rs 7,990 crore. Within the individual business, participatory APE dropped by 2 per cent Y-o-Y; non-participating grew 19.8 per cent Y-o-Y.

Policies that provide policyholders a share of the insurance company’s profits as an annual dividend payout are also called par or with-profit policies.

The VNB (value of new business) margin was flat on a Y-o-Y basis despite the rise in share of non-par business, which is margin-positive. The VNB margin for H1FY24 was 14.61 per cent against 14.58 per cent in H1FY23. Though the rise in share of non-par products had a positive impact on the VNB margin, more benefits were given to policyholders, particularly for annuity, which pulled margins down again.

The EV is up but this may be due to non-structural factors. The EV has risen 21.7 per cent Y-o-Y and equity returns and unwinding operations remain key contributors to the rise. The EV is quite sensitive to equity. A 10 per cent move in the market index translates to about 7 per cent change in EV. Hence, volatility in EV will be significant.

Ticket sizes have improved for LIC due to changes in the plans, such as an increase in sum assured, and minimum ticket size. A rise in the share of annuities has also led to a higher ticket size. Growth in the par business has been slow. LIC has launched three new non-par products.

The product mix shift to non-par should push the VNB margin up in the long term. But competitive intensity meant product pricing had to be low-margin and more benefits were offered to policyholders. The annuity rates have also been increased.

The IEV (Indian embedded value) as of September 2023 was at Rs 6,62,600 crore, up 21.7 per cent Y-o-Y. The MTM (mark-to-market) proportion stood flat at 15 per cent and a large part of the rise was driven by equity markets. The return on EV was 11.8 per cent.

The overall APE dropped 10.3 per cent over the past year to Rs 22,630 crore. The individual business accounted for 64.7 per cent of the APE. The individual APE was flat Y-o-Y, whereas the group business dropped 24.5 per cent. Inside the individual business, the share of par was 89.24 per cent and that of non-par was 10.76 per cent for H1FY24. LIC’s market-share for first-year premium income was 58.5 per cent with the individual business’ share at 40.35 per cent and the group’s at 70.26 per cent. Persistency didn’t shift much.

The solvency ratio is adequate, and the movement to non-par is positive for margins. But further loss of market share would occur unless LIC pushes up growth rates to match rivals. It’s hard to estimate EV trends. Valuations are cheap which leaves room for some upside.