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LIC: Opportunity In Sight? 💡

Updated: Jan 13, 2023

Well, it seems like the IPO of the darling of the insurance world, Life Insurance Corporation of India (LIC), was a bit of a flop.


The allotment price was a hefty Rs. 904, but on the first day of trading, the stock fell by 3%. To add insult to injury, the shares have recently been seen trading as low as Rs. 590 (a steep fall of 35%)!

But hold on a minute, let's not count LIC out just yet.


Despite its lacklustre IPO performance, LIC remains the leading player in India's expanding life insurance industry. With only a 3.2% market penetration of insurance in CY20, there is still a vast untapped market in India.


So, could LIC be a good buy after all?


Market Share 🤼

  • LIC, the giant of the Indian life insurance industry, towers over its competitors like a colossus. With a market share that is more than twice of all the industry's private players combined, it's almost as if they're playing a completely different game.

  • Despite concerns of LIC losing out the market to private players it actually increased market share in premiums paid from 64% to 68% in 2QFY23

  • One of the reasons why LIC has been able to maintain its position as the top life insurer in India is because it has a very strong brand name acting as a moat. People trust LIC, and in the insurance industry, trust is vital

Strong Distribution Network 📡

  • Most of LIC's clients are like those grandmas who hide their money under the mattress because they're scared of investing in the stock market. They see these policies as a safe place to stash their cash and get returns, rather than actual insurance coverage.

  • According to data from the RBI, life insurance is the second-largest financial savings product after fixed deposits, and it is fair to assume that LIC agents pushing the product were a significant factor in achieving this feat

  • While other private companies rely on banks to sell their products, LIC has a massive army (13 lakh+) of agents on the ground who are able to sell the product at a competitive price.

  • Plus, with offices in practically every corner of the country (including those remote, dusty towns where people don’t trust the “share market”), they're reaching more people than any other company. Its offices are present throughout 91% of India's districts as opposed to 81% of the entire private sector

Discovery of New Profit 💰

  • Insurance companies sell policies known as par policies (participating) and non-par (non-participating).

  • In par policies, policyholders participate in the profits of the life insurance company. The profits are distributed to policyholders in the form of bonuses or dividends.

  • In non-par policies, life insurance companies pay out the guaranteed amount to policyholders on maturity. However, the profits made beyond the guaranteed amount are not shared with policyholders.

  • Since it doesn't share the surplus from non-par policies with policyholders, it can be instead transferred to shareholders, adding to dividends (and returns) for any shareholders of LIC.

  • LIC currently has Rs. 11.6 lakh crore in its non-par fund. It plans to transfer a sixth of this (Rs. 1.8 lakh crore) to its shareholders’ fund. This would provide a major boost to shareholder confidence and interest - a much-needed move given the 35% decline in share price since listing, which eroded the market cap by more than Rs. 2 lakh crore.

Better Product Mix 📦

  • LIC is trying to shake things up and bring some new blood into the life insurance game with their non-par policies. Currently making up only 9% of total policies by value, they're aiming to increase that number to a much more impressive 25% in a few years

  • The introduction of new products and effective agent training are driving factors in LIC's aim to sell more non-par

  • Young people are the target market for non-par sales, and within non-par, the focus is broad and includes ULIPS, protection savings, and annuities

  • With the assistance of their experienced agents, LIC has a significant opportunity for cross-selling and up-selling in both individual and group business

Known Risks ⚓

  • One risk with LIC is that it's a government company, so it could be influenced to act in ways that aren't best for minority shareholders (i.e. people like you and me who don't work for the government).

  • The government owns a huge chunk of the company (over 90%), but they have to sell some of it off in the near future (down to 75%). This could temporarily push the price of the stock down because there will be more shares on the market.

In Sum ➕

  • Insurance companies are usually valued as a multiple of embedded value which includes the present value of future profits plus adjusted net asset value

  • Currently, the business is valued at just 0.7x EV which is much lower than private players like HDFC Life at 3.8x and even SBI Life at 3.2x, on a TTM basis

  • Despite the risks involved, this makes it a very attractive price for the stock given its normalised earnings from next quarter onwards and increasing (Value of New Business) VNB margins

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