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What do LIC’s Q4 numbers tell us?

Market share and costs remain pain points for the insurance behemoth but it has managed to keep a decent business growth.

May 31, 2022 / 10:33 AM IST

Life Insurance Corporation of India’s policyholders-turned-investors have felt short-changed ever since the behemoth’s shares fell sharply below the initial public offer issue price. The company’s fourth-quarter performance doesn’t seem to make things better for them.

An 18 percent drop in net profit is surely a dampener. The 15 percent dividend pay-out does little to mollify investors smarting from the Rs 90,000 crore erosion in valuation. Market share and costs remain pain points for the insurance behemoth but it has managed to keep a decent business growth. Further, LIC continues to generate good returns for policyholders as seen from its yield on investments, much better than rivals.

While the insurer hasn’t detailed key profitability metrics such as the value of new business and new business margins, here are five things that LIC’s fourth-quarter performance metrics tell us about the company and the sector:

Tax factor

LIC hasn’t disappointed in terms of growth. It reported a neat 18 percent increase in consolidated net premium income for the March quarter. First-year premium – essentially new business – grew by 33 percent to Rs 14,614 crore.

Retail first-year premium grew smartly, by 18 percent. For perspective, first-year premium growth for SBI Life Insurance Company, the largest private sector insurance company, was 5.3 percent in the quarter. HDFC Life Insurance Company, the most valuable private insurer, managed 7.8 percent.

Investors should note, though, that the fourth quarter of every financial year is one of high growth for insurance companies. Indians typically rush to buy life insurance to fulfil their tax exemptions for the year during this quarter. Given its near-omnipresence, LIC gains big through this tax rush.

Staying on

High new business growth means nothing unless policyholders stay on for a period that justifies the initial costs of acquiring them. For an insurance company, costs are upfront while earnings from underwriting policies are staggered over time.

One indicator of policyholder loyalty is the persistency ratio. LIC’s 13th month persistency ratio fell sharply to 69.2 percent in the fourth quarter from 73.94 percent a year ago. This means fewer policyholders are sticking with LIC beyond one year. This is detrimental to the life insurer given that most of the underwriting cost is taken in the first year. This ratio improved only for the 23rd month interval. For perspective, close rival SBI Life’s persistency ratio for 13th month was stable at 85 percent while that of HDFC Life rose to 86.9 percent .

Agents, commissions

LIC’s expense ratios and the cost of underwriting policies has been higher than those of private peers because of its reliance on its network of agents. Though the unparalleled agent base has served on growth, it has kept costs up because of high commissions. In Q4, commissions on new business grew by 7.4 percent and those for single-premium policies grew faster.

As a result, LIC’s expense ratio remained elevated at 13.53 percent for the fourth quarter. In comparison, SBI Life’s expense ratio was 9.01 percent.

LIC chairman MR Kumar indicated ahead of the IPO that cost reduction would be a key focus area. The company is pushing its digital channels and partnering online aggregators to get more growth at a lower cost. That said, LIC would be loath to tamper with its network of 1.3 million agents, which could keep costs from coming down.

Asset manager’s woes

LIC is the largest asset manager in the country, overseeing Rs 36.8 lakh crore. The insurer earns handsomely through its investments but also incurs losses. A good indicator of LIC’s returns for its policyholders is the yield on investments.

In the fourth quarter, the yield was 7.46 percent, excluding unrealised gains, down from 8.02 percent. If unrealised gains are included, the yield is 9.39 percent, a steep fall from 15.41 percent a year ago.

The insurer may have made mark-to-market losses on its investments due to the rise in bond yields and the adverse movement in the equity indices. Rising bond yields correspond to a fall in bond prices, resulting in losses for investors. SBI Life reported an investment yield of 6.82 percent, down from 10.30 percent a year ago.

LIC is also a big lender to the economy and faces the risk of bad loans, just like a bank. In Q4, the company’s gross non-performing assets (NPA) were 6.03 percent of policyholder funds. To be sure, this was lower than over 7 percent from a year earlier. Even so, the NPA ratio is steep compared with its private sector peers that have reported almost zero NPAs.

Future imperfect

It’s clear that LIC’s biggest focus should be on growth and arresting market share loss. Indeed, its chairman indicated that the loss of market share would be slowed down, but his bigger focus was to keep growing at a decent pace in FY23.

Data for April from the sector regulator shows that the insurer is still losing market share. Note that April this year is an imperfect month to assess trends, partly because of the seasonal lull in insurance policy sales after the tax rush and partly because of the low base of April 2021 owing to the pandemic.

The monthly data shows that LIC’s new business premium plunged 72 percent compared with a 59 percent fall for private sector counterparts.

LIC is far from stanching the bleeding in its market share.

Aparna Iyer
first published: May 31, 2022 10:33 am