Insurance behemoth Life Insurance Corporation of India (LIC), which commands a 68 percent market share, is trying to convince investors that its profitability is no longer inferior to its private-sector peers. And it has done a pretty good job with its latest quarterly performance.
The life insurer is also serious about getting its growth mojo back and the 2.8-percentage-point market share gain during the quarter is a good start. But the big question is whether this is enough for investors who picked up its stock at the initial public offering (IPO) to finally get any bang for their buck. They are still sitting on a 24 percent wealth erosion despite the 8 percent share price gain over the past month.
The improvement in profitability metrics such as the expansion in value of new business (VNB) and VNB margin goes a long way in giving comfort to investors. The management’s outlook, though pithy, does indicate better days ahead in terms of growth and profits too. At a post-earnings call with analysts, LIC executives reiterated that the company is focused on pushing margin-friendly non-participatory insurance policies (which do not pay dividends) that would ensure that it can distribute more profits to its shareholders.
“Within the next few years, the product mix could be 25:75 in proportion of par/non-par (participatory/non-participatory). Once that happens, there could be significant change in VNB margin,” chairman M R Kumar said during the call.
Note that shareholders also get a greater share of the profits after an accounting change that brought about the one-time tidal wave of surplus to shareholders from policyholders ahead of the IPO. LIC splits its surplus in the 95:5 ratio between policyholders and shareholders now against the earlier ratio of 98:2. Meanwhile, the September quarter numbers provide enough fuel for profitability prospects but not as much for growth.
The whale goes breaching
LIC reported a multi-fold increase in net profit for the September quarter that was partly driven by growth. VNB expanded by 132 percent year-on-year (YoY) while VNB margin rose to 14.6 percent for the September quarter from 13.6 percent in the June quarter.
New business premium grew 24 percent sequentially. For the April-September period, it was up 12 percent compared with the corresponding period in FY22. That said, the growth is slower than the 34 percent clocked in the June quarter. The first half is typically a slower business period for life insurers. Notably, LIC got 68.25 percent of new business during the first six months of FY23 compared with 63.25 percent share for all of FY22.
Another metric that shows LIC’s growth prospects are improving is rise in total business on an annualised premium equivalent basis. LIC reported 48 percent growth in its total business. The growth assumes significance when viewed in the context of the massive size of the company’s balance sheet. Kumar said that the growth is broad-based, although the focus remains on expanding the share of non-participatory products. Analysts believe that with a greater proportion of growth coming from such products, the company’s profitability metrics would only shine more.
“Increasing non-participating mix and change in surplus distribution policy are significant growth drivers of the value of the new business (VNB) and in turn embedded value (EV),” analysts at ICICI Securities pointed out in their note ahead of the results. The share of non-participatory products has climbed to over 8 percent now from less than 7 percent a year ago. Non-par business has grown by 75 percent, over a low base, of course.
Participatory products allow customers to get a slice of LIC’s profits, usually distributed as bonus (dividend) every year. Non-participatory products are those policies where policyholders have no claim over the company’s profits.
Some discordant notes
While LIC’s new business growth is healthy, its persistency ratios aren’t cutting it. The 13th-month persistency ratio was 70.52 percent for the September quarter, down from 75 percent in the previous quarter.
Persistency ratios drop sharply as one goes to longer periods. LIC’s 61st-month persistency ratio is just 55.83 percent. What this means is that customers do not stick with LIC for long and let policies lapse. This is detrimental to future profits as insurance is a business where costs are upfront while profits are staggered over the life of the product. Low persistency ratios mean that for every rupee LIC spends on acquiring a customer, it is not getting the commensurate return by way of profits.
Moreover, LIC’s expense ratios are higher than peers’. Operating expense ratio was 16.69 percent for the first half of FY23 compared with 15.33 percent in the corresponding period of FY22. LIC has a large network of agents and is known to give high commissions to them. The cheaper digital route of acquiring business is yet to bring in a significant share of business although the share is increasing. “We will focus on all channels for business and digital will be an important one,” LIC executives had said in the call.
It still ain’t a show
The impressive increase in margin-friendly non-par business has made all the difference in VNB and margins. But the impact on LIC’s embedded value has been muted. Embedded value is the present value of all future profits plus adjusted net asset value of an insurance company. Simply put, it shows how much shareholders would get out of the business already underwritten by the company. LIC’s embedded value was flat YoY for the September quarter at Rs 5.44 lakh crore. When life insurers report an increase in the value of business written during a year along with increasing margins, it leads to a boost to the embedded value.
However, in LIC’s case this boost has been limited. The management didn’t offer a clear explanation but did assure that embedded value would continue to expand in the coming years. As such, LIC will detail its embedded value (based on Indian embedded value calculations) every six months to give investors a sense of the business value. Embedded value is the most preferred metric to judge a life insurance business for valuation. Therefore, LIC would need to ensure that its growth and profitability metrics ultimately result in a big expansion in the embedded value. “The H1 embedded value expansion is not that impressive when you see it in the context of the margins and the VNB improvement. Ultimately, EV is the driver for valuation,” said an analyst, requesting anonymity.
The life insurer’s shares are still 24 percent down from its listing price. They trade at a modest 0.75 times estimated price-to-embedded value, much lower than peers such as ICICI Prudential Life Insurance (at P/EV of 2.2) and HDFC Life Insurance (at a P/EV of 3).LIC’s balance sheet heft and market share have been a reflection of a slow-moving monopoly akin to a whale in the ocean. But for investors to sit up and notice, the insurer has to put up a sparkling show, just like dolphins. So far, the business performance has been mixed.