Shares of Life Insurance Corp. of India Ltd (LIC) hit a fresh 52-week low on Tuesday, dropping to ₹793.25 apiece. The life insurer’s December quarter (Q3FY25) results have been disappointing even as expectations were already low. LIC’s total annualized premium equivalent (APE) and value of new business (VNB) declined 24% and 27% year-on-year to ₹9,951 crore and ₹1,926 crore in Q3, respectively.
The only segment to report a meaningful jump in APE growth was unit-linked insurance plans (ULIPs), where premium income from sales nearly tripled to ₹803 crore. In contrast, APE declined across all other categories except protection (term plans), which remains too small to make a significant impact, contributing less than 1% of total APE.
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LIC’s shares have slipped about 2% since the results amid the already low valuation in terms of market capitalization to embedded value multiple at 0.62x. Note that other leading private life insurance companies enjoy a valuation multiple of at least twice of that.
The fall in VNB margin was contained to 60 basis points year-on-year to 19.4% as LIC’s policy mix shifted in favour of non-participating policies from participating. Participating insurance policies allow policyholders to share the company’s profit, leaving a smaller pie of profit for shareholders. Participating share has declined to 68% of individual APE from 81%, which meant that profit pool of shareholders increased.
However, this metric remains much higher than private peers, where it is typically below 25%. Thus, it will not be a surprise if LIC’s VNB margin continues to improve over the next few quarters as well. However, the Street will stay focused on absolute growth in VNB, which depends on APE expansion alongside margin improvement.
Though LIC is looking to sell more policies along with pursuing higher ticket size of policies to increase its APE, analysts at Emkay Global Financial Services and Centrum Broking are not convinced. Both have slashed their APE estimate for LIC by 6% and 4%, respectively for FY25-27. Emkay believes growth is still the “Achilles’ heel” for LIC.
Meanwhile, new surrender value guidelines, effective from October 2024, favour policyholders, has prompted LIC to restructure some of the non-linked saving products by increasing the premium and adjusting the commission of distributors to cushion its profit margin. However, this strategy of garnering more premium income from these products with such tweaks seems to be falling short, as LIC’s January numbers show a continued decline in new business premium.
LIC’s management, in the Q3 earnings call, attributed the slowdown to agents taking time to adapt to product modifications. Even otherwise, the sustained rally in equity markets has bolstered ULIP sales, positioning them as a proxy for equity mutual funds.
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LIC has a dominant agency force accounting for 47% of life insurance industry, which contributes nearly 95% of new business premium for the company. When queried about the threat from open agency architecture, which is being considered by the government, the management said they have objected to proposal involving an agent selling products of multiple life insurance companies. Their rationale behind opposing the move is that they have invested a lot of effort in training and building the agency force.
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Despite the risk of open architecture having potential to increase the competition challenge for LIC, the stock’s valuation even based on price-to-earnings multiple remains low at 12x of Bloomberg consensus earnings estimate for FY25. However, the interest in the stock might not revive without growth in APE.
