Life Insurance Corp: Is the government saving the best for last?

Madhuchanda DeyMoneycontrol Research

The Indian insurance sector is certainly in a sweet spot, thanks to favourable demographics, rising affluence and the silent but sustained shift towards financial savings. The demonetisation drive and the government’s tacit hint to discourage physical savings are added sweeteners. In this context, the quarterly financial highlights from India’s largest insurer – Life Insurance Corporation (LIC) -- beckons attention. Given that we now have a valuation benchmark with a pure play private sector listed entity, this is a gold mine that the markets should watch closely.Source: ICICI PruWhat makes the insurance sector attractive?India is the 10th largest life insurance market in the world and the fifth largest in Asia. India’s current life penetration rate of 2.7 percent is still far below the global average of 3.5 percent. India’s insurance density (premiums per capita) at USD 43 is also much lower than global peers’ average of USD 346. These metrics indicate that there is immense scope for growth in life premiums in India.LIC, the market leader, held a press conference after a long time to report its numbers for the first nine months of the fiscal. The insurer reported a little over 12 percent growth in total premium income as well as assets under management and an over 15 percent rise in gross total income.In the absence of detailed disclosure on profitability parameters it wouldn’t be prudent to take a call on the quality of the performance. However, some of the other details deserve attention. The management of LIC, in the first nine months of FY17 invested Rs 39,705 crore in equity markets – down 38 percent yoy. This is a period that witnessed a 5.8 percent rally in the Nifty and a 14 percent surge in the Nifty Midcap Index. Interestingly, the strategy was quite different in the first nine months of FY16. LIC invested close to Rs 64,000 crore in the market between April and December 2015 when the Nifty declined by 6.4 percent. Should the 'long-term retail Investor’ take cues from LIC’s contrarian strategy?The numbers of LIC, put in the context of its listed private sector rival ICICI Pru throw some interesting insights. The state-owned LIC’s market share is almost 5X its nearest private sector competitor, while its assets under management is 21X. Though the private sector players optically report higher growth in premium income thanks to the lower base; in terms of size, LIC’s premium accretion in the like-to-like period is almost 10x and gross total income around 14x.While it will be premature to put a number on the market value of the state-owned insurer in the absence of Embedded Value (EV) that some of its private peers have started reporting, a peep into ICICI Prudential’s KPI (key performance Indicator) does give us a sense of the magnitude. ICICI Pru, albeit on a high growth trajectory, has one of the lowest life new business value (NBV) margins (9.4 percent vs. 13.9 percent average) in the industry due to the predominance of primarily savings product like ULIP (Unit Linked Insurance Plan). Nevertheless, with a market capitalisation of Rs 51,900 crore (USD 7.7 bn) it trades at P/EV multiple of 3.3X (significant premium to global peers given the attractiveness of a growth market like India). As the broad KPIs suggest, LIC is at least 10X, going by any parameter. Source: ICICI PruLIC is a statutory corporation set up under LIC Act and any divestment requires the nod of the Parliament. However, its name has not come up despite the rather tall divestment target of Rs 725 billion in FY17. With the insurer now reporting its quarterly numbers and given the immense value unlocking opportunity, the government may be preserving the precious family silver for the absolutely rainy day.