An impressive highlight of Life Insurance Corporation of India’s (LIC’s) FY24 performance was the big 330 basis points (bps) jump in the individual segment net value of new business (VNB) margin to 18.8%, even as the segment’s annualised premium equivalent (APE) remained almost flat at ₹38,433 crore.
LIC therefore has a market-capitalisation-to-embedded-value (P/EV) of just 0.9x as against 2 to 2.6 for the other three companies. RoEV for insurance companies can be seen as similar to RoE for companies. Going by this, LIC’s valuation discount seems rather steep, notwithstanding the lower VNB margin and RoEV.
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With a gradual recovery in margin in FY24, aided by the shift towards more profitable products, there is scope for the valuation discount to narrow, but this process could be gradual at best.
Note that agents account for over 90% of LIC’s new business premium but less than 30% at private companies. LIC is keen on increasing its focus on bancassurance, but it’s unlikely to be material in the context of overall mix in the near future and might increase from 4% to 5-6%.
Govt gets more time to sell shares
Management alleviated some concerns during the earnings call, clarifying the company may only enter the health-insurance segment of general insurance as there are synergies in life insurance and health insurance. They added, though, that the move is still at a preliminary stage. Management also ruled out a merger with any public-sector general insurance company, but said LIC could pick up a strategic stake in a general insurance company.
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The other overhang for LIC’s stock was the additional supply of shares owing to a likely sale by the government of India that would reduce its stake from 96.5% to 90% or less. However, Sebi clarified this month it would give the government another three years to reduce its shareholding.
Unfortunately for investors, LIC’s stock has gained just 7% since it was listed almost two years ago. Despite the undemanding valuation, investors don’t seem to be in a hurry to buy the stock, going by the subdued post-results reaction on Tuesday.
