Can LIC maintain dominant mkt share, improve growth in profitable segments?

If new business premium and margin continue to improve, there can be a decent upside in the stock

PSU giant Life Insurance Corporation of India (LIC) has released some key data points. Its embedded value (EV) for 2021-22 has worked out to be Rs 5.41 trillion, which is marginally above Rs 5.39 trillion as projected in September 2021, though the Street had been expecting a higher number.

Until March 2021, LIC assumed a blended 5 per cent profit on all non-ULIP policies and put this amount into one fund from which all returns to policyholders were paid. This has now been bifurcated into two separate funds -- PAR (participating, meaning sharing profits of LIC) and non-PAR funds. This was on the cards following changes in the LIC Act and the IPO.

Non-PAR policies pay a fixed return, while PAR pay-outs are based on a share of LIC’s profits. The gross margin for non-PAR is around 100 per cent, while PAR policies have margins in the zone of 13 per cent.

The value of new business (VNB) stood at Rs 7,620 crore in 2021-22 which was well above Street estimates. VNB has risen 83 per cent year-on-year (YoY) over 2020-21; also, there was 11 per cent growth in APE (annualised premium equivalent), which reached Rs  50,400 crore. The VNB margin improved to 15.1 per cent in 2021-22 versus 9.9 per cent in 2020-21. This is positive since it brings LIC’s recent margins up to roughly the same levels as that of its relatively nimble private competitors. The return on embedded value stood at 11.9 per cent in 2021-22.

The individual business accounted for 71 per cent of APE, with the rest 29 per cent being contributed by the group business. This is roughly the same split as in the previous financial year. Within the individual segment, the share of PAR products grew marginally by 1.3 per cent to 92.9 per cent in 2021-22.
 

Does LIC have the ability to maintain its dominant market share and also improve its growth rates in more profitable segments, such as protection and non-PAR? This is the big call that investors must make.
 

How embedded value is calculated is worth discussing since this is a key measure for insurance. This is the sum of future profits discounted by a risk-free rate plus the net asset value adjusted to market value. It is an underestimate. It only considers premium from existing policies and ignores the probability of growth in new policies. In LIC’s case, it also underestimates a possible monetisation of its vast real estate holdings.

The rising interest rate trends negatively impact the value of LIC’s debt portfolio. According to the management, there were mark-to-market losses of around Rs 40,000 crore in the debt segment in the second half of 2021-22. However, growth in policy sales enabled marginal growth in embedded value. The value of the equity portfolio depends on trends in the stock market.

Sensitivity analysis by Motilal Oswal Securities indicates that embedded value eases down by 0.4 per cent to 0.7 per cent for every 1 per cent increase in the reference interest rate. Embedded value is also sensitive to shifts in share prices with an estimated drop of 6.5 per cent for every 10 per cent dip in the market index (VNB, however, grows if interest rates move up and falls if they move down).

The stock lost a little less than 1 per cent after the data release. At the current price of Rs 708.55, it’s trading at 0.8x embedded value/share. Its private competitors receive far higher valuations, ranging between 2.5x and 4x. The stock is down significantly from the IPO price of Rs 910.

If it delivers a 10 per cent CAGR in new business premium until 2023-24, while improving the margin, and if the stock market doesn’t see a big downturn, the EV growth rate shall improve. Motilal Oswal Securities maintains a ‘buy’ rating for the stock with a target price of Rs 830.