LIC’s recent good performance has failed to enthuse investors. What’s going on?

Life Insurance Corporation of India, the country’s largest life-insurance company, has so far proved to be a bad investment for its shareholders. From its IPO price of `949 (the upper end of its price band), its share price has crashed by over 35 per cent. While it may be tempting to classify it as yet another instance
of a PSU destroying shareholders’ wealth, a closer look at LIC reveals a very different picture. Despite its legacy issues, LIC has actually been able to show strong growth in its new business premium (NBP), which
is a metric that represents the total premiums collected from new policies sold during a period (as opposed to the renewal premiums collected from policies sold in the past). Since the growth rate for life insurers is directly dependent on the value of NBP collected, a YoY increase of 46 per cent in H1FY23 is good news for its shareholders.

Interestingly, LIC has also managed to post a 4 percentage point improvement in its NBP market share (from 64 per cent in H1FY22 to 68 per cent in H1FY23). This is significant because it marks a reversal of
the long trend of private insurers taking away LIC’s market share.

A final icing on the cake for shareholders is that LIC has also made key changes in the proportion of the ‘valuation surplus’ shared with policyholders. In simple terms, the valuation surplus refers to the actuarial profit that has been earned by a life insurer. After sharing this surplus with a section of the life insurer’s policyholders (known as ‘participating policyholders’), the remaining surplus can be given to shareholders via dividends or buybacks.

As per disclosures in its recent annual report, LIC has reduced the share of surplus allocated to its policyholders from 95 per cent to 89 per cent. This has resulted in a scenario where, despite the
total quantum of the surplus generated by the corporation reducing by 6.5 per cent YoY in FY22, the absolute value of the surplus allocated to LIC’s shareholders has almost doubled.

And this sudden jump in shareholders’ entitlement to the surplus is not a one-time event. The board of LIC has formulated its ‘surplus-distribution policy’, in which it has made it clear that over the next three years, it will allocate an increasingly higher portion of the valuation surplus to its shareholders.

The bottom line is that the profits of LIC should, ideally, see better times ahead. Since LIC has an effectively captive consumer base, there should not be much difficulty in retaining existing policyholders in the near to mid term. But lower policyholder returns may have an adverse impact on LIC’s ability to attract new customers over the long run.

Information Source : Value Research & www.HotShotAdvisory.com