LIC Q4 result review: Hits, misses, and the road ahead for investors

LIC Q4 review: Post Tuesday's share price decline, the insurer has slipped one position to India's seventh most valuable firm after ICICI Bank

Life Insurance Corporation of India’s (LIC’s) March quarter (Q4FY22) result turned out to be a mixed bag and investors were torn between the positives and negatives. Though setbacks continue to outweigh growth numbers right now, analysts said it was premature to judge the company, which debuted on the bourses last month amid market volatility.

LIC shares slipped 3 per cent to Rs 811.5 apiece on the BSE on Tuesday. And after Tuesday’s fall, the insurer has slipped one position to seventh on the list of India’s most valuable companies. It ended with a market capitalisation of Rs 5.13 trillion, compared with ICICI Bank’s Rs 5.21 trillion.

The positives

LIC’s Q4 net profit fell to Rs 2,371.55 crore, down 18 per cent year-on-year (YoY) from Rs 2,893 crore last year, but its revenue rose 11.64 per cent YoY to Rs 2.11 trillion.

However, the firm said the Q4 numbers are not comparable. “LIC’s Q4 FY21 profit of Rs 2,893 crore pertains to full financial year 2020-21 since LIC was conducting actuarial valuation once in a year until that year. Therefore, Q4 of last year (FY21) [versus] Q4 of the current year (FY22) profits are not comparable," Raj Kumar, managing director, LIC told Business Standard.

For the whole of FY22, the insurer recorded a profit after tax (PAT) of Rs 4,043 crore, up 39 per cent YoY, compared with Rs 2,900 crore in FY21.

That apart, the 61st-month persistency ratio improved to 55.62 per cent during the quarter, as against 54.43 per cent in the year-ago period. For the full year, it stood at 61 per cent, compared with 58.79 per cent in FY21.

Besides, income from first-year premiums rose 32.65 per cent YoY to Rs 14,663 crore. The income from renewal premium rose 5.37 per cent to Rs 71,158 crore, and from single premium it increased by 33.70 per cent to Rs 58,251 crore.

The negatives

According to market watchers, the deferment of declaration of the embedded value (EV) till June is one of the worrying signs for investors.

LIC’s EV had increased from Rs 95,605 crore in March 2021 to Rs 5.39 trillion in September 2021, according to its draft red herring prospectus (DRHP). According to global brokerage Macquarie, almost 70 per cent of LIC’s EV consists of equity mark-to-market gains, which inherently makes the EV more volatile.

“Even though LIC has done a better job on the asset management (AUM) front, relative to private players, it has been facing pressure on yields on its investment due to volatility in the equity and bond markets. Thus, LIC could be staring at some mark-to-market losses,” concurred Nirav Karkera, head of research, Fisdom.

LIC has an AUM of Rs 36.8 trillion. The yield in Q4FY22 was 7.46 per cent, excluding unrealised gains, down from 8.02 per cent last year. However, including unrealised gains, the yield was 9.39 per cent, down from 15.41 per cent a year ago.

The second disappointment came from low dividend outgo. The insurer announced a dividend of Rs 1.5 per share, which analysts said wasn’t rewarding after a nearly Rs 90,000 crore erosion in investor wealth since listing.

The third setback for investors came from low premium growth rate. LIC earned a net premium of Rs 1.43 trillion in Q4, up 18 per cent from Rs 1.21 trillion in the year-ago period. Overall, in FY22, net premium stood at Rs 4.27 trillion, up 6.21 per cent from Rs 4.02 trillion in FY21.

“The net premium growth rate was not in-line with what the markets were expecting, despite Q4 being a seasonally strong quarter for insurance players. This has soured the sentiment,” said Gaurang Shah, head investment strategist at Geojit Financial Services.

Lastly, there was a fall in thirteenth month persistency ratio to 69.2 per cent in Q4FY22 from 73.94 per cent a year ago.

“The fall in first-year persistency ratio highlights that fewer people are renewing their policies in one year. This will be a critical challenge for LIC as most of the underwriting costs are front-loaded in the first year itself, and a lower persistency ratio could translate into a stressful cash flow situation,” Karkera of Fisdom said.

Against this backdrop, analysts say investors should wait for a few more quarters to analyse LIC’s performance.

As the corporation is eyeing a change in its product mix, and is focusing more on non-participating policies, profitability is expected to improve over the medium to long term.