MK GANDHI'S autobiography The Story of My Experiments with Truth — translated from the Gujarati original, Satya Na Prayogo — is a confession of all things personal and gives a glimpse into how the biggest persona of India’s tryst with freedom dealt with his own prejudices and established dogmas. The book touches on every aspect of Gandhi’s life, including his brush with life insurance! The chapter titled, ‘Quickened Spirit of Sacrifice’, reveals how Gandhi, then a practising lawyer in Bombay, was cajoled into buying a policy by an American insurance agent. But after paying the initial premium, Gandhi discontinued the policy worth ₹10,000 as he felt that “the real protector was neither I nor my brother, but the almighty… What happened to the families of the numberless poor in the world? Why should I not count myself as one of them?” wrote Gandhi.

Even today, most Indians — either by choice or socio-economic compulsions — would be following Gandhi’s philosophy, yet life insurance penetration in the country stands at 3.2% — close to the global penetration level of 4.4% — with the Life Insurance Corporation of India (LIC) commanding a lion’s share (67.72%) of the market as of October 2022. The life insurer — an amalgam of 154 Indian and 16 non-Indian insurers besides 75 provident societies — has held sway over the business since 1956 with a million-plus agency force. The trust in brand is evidenced from the 275 million individual policies in-force, as of March 2022.

This year, the behemoth has made a grand debut, grabbing the No. 2 spot from state-owned Indian Oil Corporation by the sheer might of its total income of ₹7 lakh crore — a lakh crore more than the oil company. The debut follows the insurer’s listing in May this year. But for all its might and clout, the state insurer made for a dismal listing and till today (November 22) continues to trade 34% lower than its issue price of ₹949. Though its market cap of ₹3.95 lakh crore as of November 22 dwarfs the three listed private life insurers, SBI Life, HDFC Life and ICICI Prudential Life, LIC’s size and legacy are its strength and weakness as well.

Making the Grade

LIC’s objectives were in a way defined and enshrined in the speech that the-then Prime Minister Jawaharlal Nehru made in Parliament when he said: “The nationalisation of life insurance is an important step in our march towards a socialist society… Its (LIC) objective will be to serve the individual as well as the state.”

Since its creation and till the time it went public, the corporation was designed to aid the government’s growth initiatives, besides providing an insurance-cum-saving proposition for the public. Till 2000, when the sector was opened to private competition, LIC was the only life insurance monolith in the country. As a listed entity with an emphasis on profitability and margins, LIC’s strength and weaknesses have been exposed vis a vis competition.

Coming to its strengths, the corporation has a robust agency channel with agent count of 1.3 million, making up for more than a majority (54%) of the industry strength of March 2022. Though the higher share of commission eats into margins, the channel’s productivity remains excellent. “At `413K, new business premium (NBP) per agent is 2.3x of the average of top five private insurers,” says Ansuman Deb, who tracks the sector at ICICI Securities. NBP is the aggregate of first year and single premiums from fresh policies issued during a year. “Agents, on an average, sold 15.6 policies in FY22 compared with an average of 1.9 for top five private players,” mentions Deb. Unlike private players, LIC derives only a fraction (2.7%) of its individual NBP through the banca (banks) channel despite a network that exceeds that of private insurers. “With the regulator proposing that banks can have tie-ups with nine insurers, it can help increase the bancassurance premium mix,” says Deb.

LIC is the market leader with 68% share in total NBP, 46% in terms of weighted APE (annualised premium equivalent), 80% in terms of group NBP and 42% in individual NBP as of October 2022. APE is a metric to measure life insurance revenue by normalising policy premiums into the equivalent of regular annual payments. “LIC has dominated the group life insurance (market share of 76% in FY22) range over the years despite competition from private players,” says Nitin Aggarwal, analyst, Motilal Oswal.

While LIC has maintained its market share in terms of new policies issued for individual and group segments, it lost market share in APE due to its weak emphasis on Unit Linked Insurance Plans (ULIPs). Further, given its strong rural base and a low share of high-priced ULIPs, the insurer’s ticket size (average NBP) is much lower at ₹25,242 compared with private players’ range of ₹83,000 to ₹1.40 lakh.

The corporation post its avatar as a listed company has had to separate the funds between non-participating and participating shareholders and consequently its embedded value (EV) rose from a very low ₹0.95 lakh crore (FY21) to ₹5.41 lakh crore as of FY22. EV, the prominent valuation metric for insurers, represents the current value of all future profits that an insurer is expected to make combining its policies and net worth. Besides the impact of market movement, the product mix, market share, and premium growth are among the several factors that influence the EV. Thus, the value of new business (VNB), which captures the value of policies sold during a reporting period, also impacts the EV.

At a press meet held early this year to reveal the FY22 embedded value, LIC’s executive director, actuarial, K.R. Ashok said the EV change had to be looked at in totality. “There was a market movement downwards and that impact of around ₹40,000 crore has been captured in the calculation. However, other factors increased such as the VNB,” said Ashok. However, Aggarwal points out that the VNB contribution to LIC’s EV, which was marginally up at ₹5.44 lakh crore as of September 2022, is quite low. “In the first half of FY23, they have made ₹4,800 crore VNB, which works out to 1-2% of the EV. In comparison, private players have a VNB contribution of 9-10%. Thus, LIC is losing 7-8% of return on EV,” points out Aggarwal.

The management has told analysts that the focus is now on high margin non-participating products to ensure better returns for shareholders and to also improve the EV. Protection was never a focus area for LIC. But to boost margins and increase the share of more profitable products, LIC is trying to increase sales of individual as well as group protection products.

The insurer is on a sound footing given that its persistency ratios, which measures the stickiness of a premium-paying customer, are robust. For instance, the 13-month persistency stands at 75.75% for Q1FY23. Similarly, for 25th, 37th, 49th and 61st month the ratio was 67.78%, 64.34%, 60.82% and 58.99%, respectively, for the quarter ended June 30, 2022. In FY23 thus far, life insurers have seen a 35% year-on-year jump in premium to `2.06 lakh crore, of which LIC saw a 42% growth compared with 21% for private insurers.

Premium Expectations

While LIC’s assets under management stand at ₹42.94 lakh crore, the NPA ratio in its debt portfolio is 5.60%. Certain investments of the corporation’s pension, group and life annuity funds were reclassified as other investments but were not transferred to shareholders’ funds at amortised cost, as per regulations. Had the transfer been done, LIC would have incurred a loss of ₹6,028 crore (as of December 31, 2021). The regulator has given LIC time till January 2023 to clear the books. If the corporation is unable to sell these investments, it will have to transfer the same to shareholders’ funds. Effectively, the P&L could bear the brunt in the near term. For instance, reports indicate that an asset reconstruction company has offered to buy LIC’s ₹3,400-crore bond exposure to the troubled Reliance Capital at 30 paise to a rupee. LIC MD Raj Kumar at a recent press meet was quoted as saying, “We have made substantial progress. Still, ₹5,000-6,000 crore remains, and we are hopeful that we will be able to dispose these off.”

In Q2FY23, LIC got a one-off bump in its profit to ₹15,952 crore from ₹1,434 crore a year ago, on the back of ₹15.03 lakh crore transfer to shareholders’ account. After the initial excitement, the stock fell off from ₹664 to ₹625 levels. Concerns around sustained profitability and growth metrics continue to weigh down on the share. Around 4.66 lakh retail investors have dumped the stock with the number of small investors down to 35.23 lakh against 39.89 lakh during its IPO.

Rajeev R. Shah, MD and CEO, RBSA Advisors, a transaction advisory firm, believes the overhang on the stock is also owing to concerns around the probability of a higher float in the market, given that the government owns 96.5% stake in the company. “While it is a great value, whether it is a good investment, is still in question. Scarcity is inherent for any valuation to pick up,” says Shah. What Shah is alluding to is that according to regulations, public holding in listed entities has to be 25% and that means fresh supply of equity is a given in LIC. “Now when you know that the government is going to, maybe, dilute 5% every couple of years for the next 10 years, there is an immense amount of supply. Investors can buy as much of LIC as they want and each time there could be a 5% discount of sorts for retail shareholders. Hence, public sector stocks do not enjoy a premium on the Street,” says Shah.

On the current price/EV metric, LIC is trading below 1x compared with 2x-plus for its private peers as the Street wants to see more credible growth and improvement in margins from the behemoth. Analysts, though, are keeping the faith. “I feel the valuation at 0.6x-0.7x EV is relatively cheap. We estimate the company will deliver at least 10-11% ROEV, in the coming years, which is not bad,” says Aggarwal.

While Gandhi believed in the powers of the Almighty, LIC wants to play the caretaker, given its tagline, Yogakshemam Vahamyaham” inspired from Verse 22 (Chapter 9) of Bhagavad Gita that states: “Ananyash chintayanto mam ye janah paryupasate tesham nityabhiyuktanam yoga-kshemam vahamyaham.” In essence, those who keep the faith, the supreme arranges for securing what they lack and preserves what they have. But, for now, it’s LIC that needs divine blessings.

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