The big challenge for LIC is its ability to sell non-par products

As the largest life insurance company in the country, LIC’s brand and distribution franchise is unmatched. Following its recent restructuring, the company is poised to increase its share of non-participating net protection products, which currently make up only ~ 5-6% of its overall product portfolio. However, the ability to sell high-margin non-par products – as opposed to equivalent products that provide policyholders with a significant portion of the policyholder’s surplus – requires a change in the mindset of the company and its agency forces, which may be LIC’s biggest challenge. .

The underlying volatility of embedded value (EV) is another major challenge that constitutes a significant portion of EV marked-to-market (MTM) unrealistic equity gains.

Scaling non-par business will be a challenge

Because of the legacy, LIC has traditionally sold only one product, namely the participant (par) policy. Management has never before looked at the profitability of products in terms of new business (VNB) margins, ROEV, etc. Changing procedures and selling high-margin non-par savings policies and pure security products can be difficult in our eyes. . We’ve already factored in an aggressive ~ 30% non-premium CAGR on FY21-26E.

LIC is losing market share in individual segments with annual premium equivalents (APE) growth over the past five years, compared to% 14% for private players. LIC’s ticket size also refers to one-fifth of the private sector, the target segment, and it will not be easy to sell non-par savings products in smaller ticket-sized segments. We assume that LIC will provide Y 12% APE CAGR and ~ 30% VNB CAGR on FY22-26E. The negative aspects of our assumptions cannot be dispelled.

Scaling up the bancassurance channel

Although LIC’s highly productive agent – about ~ 7x the size of the next largest player on the market – remains a strong force, we are skeptical of the growth of the bancassurance business considering the three largest banks – HDFCB, ICICI and SBI – not partners. For bancassurance. Also, on other channels like live / online, the presence of LIC is negligible.

The stock needs to be traded near EV

As of September 2021, LIC’s EV equity comprises about ~ 70% of MTM profits, and so EV’s sensitivity to equity market correction is much higher than its private-sector counterparts. In contrast to the private sector counterparts where 9-10% growth in EV comes from VNB, for LIC, the growth is only 1% (due to large EV base coming from existing policies), and therefore the overall value of newcomer contributions is much lower.

Leave a Reply

Your email address will not be published.