LIC is the biggest insurer in India and the fifth-largest in the world. It sells 3 out of 4 insurance policies in the country. Yes, it is a profitable business, but the growth in new business premium has been slightly dull. Now COVID-19 has affected the sales and increased expenses through claim settlements. This is something that investors should look at. Now, there has been much hype about the embedded value (EV) – the present value of future profits plus the net adjusted value. In September 2021, the EV was Rs 5.39 lakh crore as compared to 0.96 lakh crore at the end of the fiscal. How has the EV risen about 5x despite economic pressure and high claim settlements?
Meanwhile, LIC has a low persistency ratio, which stood at 78.8% for the 13th month, 70.9% for the 25th month and 60.6% for the 61st month. Also, LIC’s new business margins (NBP) is less than the private insurers. LIC’s NBP has grown at 14% CAGR over the last five years as compared to the 18% CAGR of the private insurers.
LIC has been considered as the last resort of the lenders. If a financial institution is caught in bankruptcy, the government can use LIC to bail out these institutions. The Indian government might take action that may be against shareholder interests, states the company’s IPO prospectus.
Should This Concern You?
Policyholders will be slightly at risk now. LIC previously shared 95% of its surplus profits with policyholders, but after the amendment, the profit-sharing ratio with the policyholders has been reduced. Now going forward, LIC will have to balance both policyholders and shareholders.
Investors will have to be cautious if they are applying for LIC IPO because the recent market volatility has affected the currency and forex markets. This could impact the listing premium.
What Lies Ahead?
There’s a list of headwinds that could dampen the show, but amidst all, everyone’s expecting a rosy listing. LIC’s financial performance has been resilient even if the growth is slow. To date, it’s synonymous with insurance. We will have to now wait and watch what happens when the IPO opens.