Life Insurance Corporation to join league of top global insurance firms

Expected to list with m-cap of Rs 6 trillion - making it world's fourth biggest

When Life Insurance Corporation (LIC) of India gets listed on the bourses next month, it will be among the biggest listed life insurers globally in terms of market capitalisation (m-cap), assets, and revenue, but will also be among the least profitable and capitalised among its peer group.

A big gap between LIC’s m-cap, profits, and networth (shareholder capital) will make it one of the priciest insurers globally, in terms of price-to-earnings (P/E) multiple and price-to-book value (P/B) ratio.

LIC also lags behind its Indian listed peers in terms of profit and networth. LIC is expected to list with an m-cap of around Rs 6 trillion ($78.4 billion), based on the upper price band of Rs 949 per share. This will make it the world’s fourth-most valuable life insurer, behind China Life Insurance (m-cap of $89.1 billion) but ahead of Axa S.A. ($64.7 billion).

LIC’s net profit and networth are a fraction of its global peers. It is expected to report a net profit of Rs 3,008 crore ($180 million) during 2021-22 (FY22), based on its numbers for the first half (H1) of FY22 on revenues of Rs 6.74 trillion ($88 billion).

In comparison, the world’s biggest insurance giant — Ping An Insurance (also known as Ping An of China) — reported a net profit of $13.6 billion on the latest trailing 12-month basis, while Allianz SE and China Life Insu­rance Company reported net profit of $7.9 billion each. LIC is expected to list on the bourses with a P/E multiple of 200x and P/B ratio of 75x.

In comparison, global life insurance majors are currently trading at a P/E multiple ranging between a high 60.8x for Aviva plc and a low 5.2x for China Life Insurance Company.

Similarly, global insurance majors’ P/B ratio ranges between a low 0.3x for Samsung Life Insurance and a high 1.1x for Allianz SE.

LIC valuation is also on the higher side, compared to listed private sector insurers, such as HDFC Life Insurance Company, SBI Life, and ICICI Prudential Life Insurance. These private insurers are currently trading at a P/E of 88x on average — less than half of LIC’s. Sim­ilarly, private sector insurers average P/B value at 8.5x is also a fraction of LIC’s. Many insurance analysts, however, say that LIC is reasonably priced on the basis of its embedded value (EV). The public-sector insurer reported an EV of around Rs 5.4 trillion at the end of September 2021 (2020-21, or FY21), up 464 per cent from Rs 95,600 crore at the end of March 2021.

“At the upper price band, LIC is valued at around 1.11x its EV. In comparison, private-sector insurers are trading at 3-4x their EV,” says an insurance analyst at a brokerage.

Analysts attribute LIC’s poor profitability to its policy of distributing most of its surplus to policyholders unlike private-sector insurance companies.

“Currently, shareholders only get 5 per cent of the surplus generated by the LIC insurance business. This will rise to 10 per cent by 2024-25, translating into higher net profit in the future,” says another insurance analyst.

EV is the present value of shareholder interest in earnings, distributable from the assets of the life insurance business after an allowance for aggregate risks in the existing life insurance business of the entity for the relevant date. While LIC is cheaper on a price-to-EV basis, compared to private-sector peers, its margins are also much lower.

LIC reported a value of new business (VNB) margin of 9.9 per cent in FY21, against HDFC Life’s reported VNB margin of 26.1 per cent, followed by Max Life Insurance at 25.2 per cent. LIC’s VNB margin declined further to 9.3 per cent during H1FY22.

It is calculated by dividing VNB (expected profitability of new business written during the financial year) during the period by the annualised premium equivalent.

The VNB margin for all players improved substantially between 2015-16 and FY21.

But LIC is likely to remain a pricey stock, even if its net profit doubles from the current levels over the next three years.