Investors react positively to LIC's good showing in second quarter

Strong September quarter results for the 2022-23 financial year (Q2FY23) from the giant Life Insurance Corporation of India (LIC) has led to a spurt in the share price, which is still, however, well below the Initial public offering (IPO) price.

LIC posted a record rise in the Q2 profit after tax (PAT) to Rs 15,950 crore, up 10x year-on-year (YoY) compared to Rs 1,433.71 crore a year ago. This PAT surge was driven by the transfer of Rs 14,300 crore from non-par to shareholders’ account.

The net premium grew 27 per cent YoY to Rs 1.321 trillion. Market share calculated on first year premium improved to 68.3 per cent in the first half (H1), from 63 per cent in 2021-22. The net value of new business (VNB) was up 64 per cent quarter-on-quarter (QoQ) to Rs 2,290 crore, led by healthy APE (annualised premium equivalent) growth of 46 per cent QoQ in Q2 and a sequential improvement of about 170 basis points (bps) in margin to 15.3 per cent. The improvement in VNB margin was due to an improved mix of products with larger share of higher margin products.

For H1FY23, VNB margin improved by 530 bps to 14.6 per cent. Also for H1, the APE was Rs 25,200 crore, with individual business contribution at 58 per cent. Within the individual segment, the share of participating products stood at 91 per cent with 9 per cent from non-par products including unit-linked investment plan.

The rise in PAT resulted from an accounting change with Rs 14,300 crore being transferred from non-participating policies to shareholders’ funds. This means an accretion to the solvency margin. The breakup is Rs 5,580 crore (net of tax) Q2FY23, Rs  4,148.77 crore (net of tax) for Q1FY23 and Rs 4,542.30 crore (net of tax) for Q4FY22. The LIC also received an IT refund of Rs 25,527 crore. 

The net income from investments for Q2 stood at Rs 84,103 crore, compared to Rs 76,533 crore YoY. The LIC has provided Rs 5,132 crore towards provision for doubtful debts and written off bad debts of Rs 117 crore. There is an additional provision of Rs 11,543 crore for employee retirement benefits due to wage revision, (due from August 2022). LIC also settled claims to the tune of Rs 84,269 crore in Q2 against Rs 85,451 crore YoY. The persistency ratio improved on YoY basis but deteriorated on QoQ basis.

The assets under management (AUM) increased to Rs 42.94 trillion, compared to Rs 39.51 trillion a year ago – for 8.7 per cent rise YoY. The yield on investments on policyholders’ funds (excluding unrealised gains) was 8.32 per cent for H1FY23, against 8.62 per cent for H1FY22. Given rising interest rates, the small dip in yield is not surprising. The embedded value (EV) on September 30th, 2022 was Rs 5,44,291 crore, against EV of Rs 5,41,492 crore (March 2022) and Rs 5,39,686 crore (September 2021).

The rise in premium market share indicates that the giant could become even more dominant and it has shown signs of growth in highly profitable segments such as protection and non-par. In line with the strategy of increasing non par business, LIC launched 3 new non-par products during H1FY23.

But the operating return on EV remains lower than the private sector players with the valuation at around 0.6x EV. The stock jumped by 5.9 per cent to around Rs 665 on Monday, which is still around 28 per cent down from the listing price.