Ability to sell non-par products to be LIC’s big challenge

Ability to sell non-par products to be LIC’s big challenge

As the country’s largest life insurance company, LIC’s brand and distribution franchise are unparalleled. Following its recent reorganisation, the company is set to increase the share of non-participating pure protection products which currently form just ~5-6% of its overall product portfolio. However, the ability to sell high-margin non-par products – as opposed to par products that provide policyholders a significant share of policyholder’s surplus – will require a change in the mindset of the organisation and its agency force, which could be LIC’s biggest challenge.

Inherent volatility in embedded value (EV) is another big challenge given a substantial portion of EV constitutes marked-to-market (MTM) unrealised equity gains.

Due to legacy reasons, LIC traditionally has largely sold just one product, i.e. participating (par) policies. The management earlier never looked at profitability of products in terms of value of new business (VNB) margins, ROEV, etc. To change the approach and start selling high-margin non-par savings policies and pure protection products could be difficult in our view. We have already factored in an aggressive ~30% non-par premium CAGR over FY21-26E.

LIC has been losing market share in the individual segment with annualised premium equivalent (APE) growth of just ~6-7% over the past five years, compared with ~14% for private players. Ticket sizes for LIC are also one-fifth that of the private sector, implying the target segment is different, and selling non-par savings products to smaller ticket-sized segments won’t be easy. We assume LIC will deliver a ~12% APE CAGR and a ~30% VNB CAGR over FY22-26E. Downside to our assumptions can’t be ruled out.

Scaling up of bancassurance channel

While LIC’s highly productive agents – almost ~7x the size of the next largest player in the market, remains a formidable force, we remain sceptical about scaling up of the bancassurance business considering the three largest banks – HDFCB, ICICI and SBI – are not partners for bancassurance. Also, in other channels like direct/online, LIC’s presence has been insignificant.

Stock needs to trade closer to EV

LIC’s EV in September 2021 consisted of almost ~70% of equity MTM gains, and hence sensitivity of EV to equity market corrections is far higher than private-sector peers. Unlike private-sector peers where 9-10% of accretion to EV comes from VNB, for LIC, the accretion is just a mere 1% (due to the large EV base coming from existing policies in force), and so the contribution of new business to overall value is much lower.