LIC’s valuation offers a silver lining

In the past one year, the LIC stock has lost about 25% of its value (Photo: Mint)
In the past one year, the LIC stock has lost about 25% of its value (Photo: Mint)


LIC’s annualized premium equivalent (APE), a key metric of growth for insurance companies, rose 12% year-on-year (y-o-y) in the March quarter.

Life Insurance Corp. of India’s (LIC) shares have gained just about 2% in the past two trading sessions since its March quarter results were announced. True, the results had its share of positives, but that was not enough to offer the much-needed boost to the stock.

LIC’s annualized premium equivalent (APE), a key metric of growth for insurance companies, rose 12% year-on-year (y-o-y) in the March quarter. In comparison, some private peers have done better on this parameter. For instance, ICICI Prudential Life Insurance Co. saw 26.5% APE growth.

In the March quarter, LIC’s group business APE growth was subdued, which the management expects to improve going ahead. However, LIC did well on the margin front last quarter as its product mix was skewed towards high-margin categories, giving a fillip to its value of the new business (VNB) margin.

Graphic: Mint
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Graphic: Mint

This led to calculated VNB margin rising by about 470 basis points sequentially to 19.4%. This margin improvement is comforting, sustainability of which needs closer tracking.

VNB margin in FY23 stood at 16.2%, up from 15.1% seen in FY22. LIC’s APE growth of 12.5% for FY23 lags industry growth of 19%. This has resulted in moderation in APE market share to 41.8% from 44.0% in FY22, said analysts at JM Financial Institutional Securities Ltd in a report on 25 May, adding that “though (the LIC) management remains confident of regaining the lost market share."

Simply put, LIC is facing stiff competition. Note that the loss of market share has been a sore point for investors in the LIC stock and a measure that investors will monitor going forward.

In its earnings call, LIC’s management said it is focusing on profitable growth in market share.

The insurer is taking measures to revive its share of non-participating (non-par) products without ignoring the par business.

The share of margin accretive non-par products stood at 8.89% in FY23 compared to 7.12% in FY22. Improving share of non-par products in the overall portfolio is expected to aid LIC’s profitability.

But the path ahead isn’t rosy. The impact of the change in taxation on large-ticket policies remains to be seen for all life insurance companies. Expectedly, FY24 has started on a weak note for the sector on a high base, with LIC lagging private peers. In April, retail APE declined by 2.5% for the life insurance sector with private insurers and LIC clocking 1% and 5% drop, respectively.

“On four-year CAGR basis, 13% growth for private players looks impressive, while LIC’s 2.5% growth is muted," said analysts at Emkay Global Financial Services in a report on 16 May. Overall, analysts expect the life insurance sector to deliver single-digit retail APE growth in FY24 on a supernormal FY23 base.

The silver lining, however, is that the valuation of LIC stock is undemanding. In the past one year, the stock has lost about 25% of its value. In a report on 25 May, analysts from Motilal Oswal Financial Services said LIC stock is trading at 0.6 times FY24E embedded value, which appears reasonable considering the gradual recovery in margin and diversification in the business mix.

“Despite expansion, LIC’s VNB margin will still be around half than that of top private peers; therefore, we expect the valuation gap to sustain," said Motilal’s analysts. The brokerage believes that a stronger-than-expected growth in non-par savings and protection can, however, lead to faster normalization of margin and narrowing of the valuation gap.

Good execution therefore remains key given LIC’s vast scale of operations.

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