LIC sells insurance coverage insurance policies. They acquire money (premiums) from purchasers and promise to supply future financial advantages in change. Once they acquire these premiums, they make investments these monies in shares, bonds and different financial devices based on tips prescribed by the regulator. And they’ll do all this due to the 1.35 million particular person brokers that scour the nation trying to insure each Indian potential.
No doubt this gives them appreciable leverage.
They are the most important insurance coverage company in India and the fifth largest insurer on this planet. They promote 3 out of 4 life insurance coverage insurance policies within the nation. They handle belongings to the tune of ₹39 lakh crores. In impact, they’re managing extra money than your entire mutual fund business mixed. They personal 4% of all shares listed on the Indian stock market and so they’re sitting on unrealised good points to the tune of ₹4 lakh crores. They maintain extra authorities bonds than the RBI. And based on one UBS report, about 10% of all family financial savings go to LIC every year. Even the State Bank of India can’t solicit this sort of funds from most people.
LIC is a behemoth.
A behemoth like no different.
Having stated that, buyers seldom care about previous glory. They’ll need to regulate future progress prospects and it’s the one cause why they’d pay up for LIC’s shares.
But alas, right here we see a number of cracks opening up. There’s a marked slowdown on the horizon. Growth in new business premiums is lacklustre and so they proceed to cede market share to personal life insurers. Now LIC will declare that this might be attributed to Covid induced disruptions. They’ll argue that their brokers couldn’t spend as a lot time within the area these previous two years and this has had an impression on producing new business. But even in the event you did account for this anomaly, you’ll see that progress isn’t prefer it was. Especially in city areas. And this isn’t nice information.
Also, LIC primarily markets insurance coverage merchandise that aren’t significantly profitable. And this may be problematic relying on what facet of the aisle you’re on.
Let us clarify.
When you consider insurance coverage, you’re in all probability pondering of pure safety merchandise i.e. If there’s a loss of life or a hospitalization, the insurance coverage company pays up. Nothing extra, Nothing much less. But LIC doesn’t promote these merchandise. At least that’s not the place they make most of their money. Instead, they promote insurance policies that might be greatest described as half insurance coverage, half funding merchandise.
Effectively each time you pay a premium, a small chunk of will probably be put aside to give you loss of life cover (first rate payout in case you do die). And the remaining funds are invested throughout shares and bonds, the best way we described earlier. In this case, loss of life isn’t a needed situation for the policyholder to realize from this association. They’ll nonetheless get some money again after the coverage expires and this seeming profit makes these insurance coverage merchandise extraordinarily engaging to the layperson.
You don’t even must market it aggressively. The product sells itself.
However, regardless of being the obvious enchantment, the margins on these merchandise aren’t nice. It’s the pure safety merchandise which are profitable. So whereas personal life insurers proceed to concentrate on the latter, LIC continues to be sticking to its weapons. Which might not be an issue proper now, however might grow to be a little bit of a problem because the Indian market matures.
There’s additionally the truth that LIC ploughs numerous its surplus again to policyholders every year. This they’re anticipated to do as a result of they promote a great chunk of what we name taking part merchandise — Where prospects are entitled to a few of LIC’s earnings along with different coverage advantages. However, for shareholders trying to nook a bigger a part of the excess, this will likely not look very engaging. They like non-taking part merchandise higher— Where prospects solely get a set profit and no share within the earnings. So in the event you’re shopping for into LIC’s promise that’s one thing you’ll must regulate as effectively — the share of taking part vs non-taking part insurance policies.
Now often we don’t do valuations. Because it isn’t a very fruitful train. But on this case, we really feel compelled to the touch upon the topic as a result of insurance coverage isn’t like different companies in any respect. It’s a very completely different ballgame. LIC collects money upfront after which guarantees to compensate policyholders someday sooner or later. The premiums they acquire can’t be recognised as income and you’ll’t simply expense the determine to derive P&L numbers. It simply doesn’t work that manner.
Instead, analysts use a determine referred to as the Embedded Value. Think of it as a quantity that encapsulates the current worth of all future earnings anticipated from insurance policies offered and funds accrued through the years that explicitly belong to shareholders. With Embedded worth, you may get a ballpark determine of what the company is definitely value right now.
What’s the EV for LIC?
Well, as of 30 September 2021, the Embedded Value was pegged at a whopping ₹5.4 Lakh crores.
But keep in mind, that’s the worth of the company proper now. LIC will go on to promote extra insurance policies sooner or later. They’ll acquire extra premiums, make extra money and redistribute it to shareholders. And in the event you account for this progress, you’ll see that LIC needs to be valued greater than the ₹5 lakh crore determine we quoted.
Analysts consider it might be within the vary of ₹13–14 lakh crores.
And which means when LIC places up 5% of its company on the market, it’s going to suck a lot money out of the ecosystem, it’s not even humorous. The authorities goes to make billions out of this little question.
Now at this level, we now have to admit one thing. Over the previous year or so, we’ve been promoting insurance coverage (well being & time period) at Ditto. It’s given us some insights on what’s an opaque business. And if there’s one key takeaway right here, it’s this.
When you’re promoting insurance coverage you aren’t promoting insurance coverage in any respect. You’re providing individuals “peace of mind” — in change for a modest sum. It’s why so few individuals run the numbers or compute returns earlier than investing in a sub-optimum endowment plan. Sure the brokers have a task to play right here. But individuals are typically keen to decide to this program as a result of the phrases “fixed returns” and “guaranteed sum insured” evoke emotions that trump cause.
And if there’s any entity on this planet that embodies this spirit in full, it’s LIC. An LIC plan (regardless of how badly it is structured) gives you tranquillity. People relaxation relaxed figuring out that their money is parked in a authorities entity that may prioritize the pursuits of the policyholders above else.
Is this an correct evaluation?
But as long as this notion prevails, LIC will reign supreme.
Perhaps this level is greatest exemplified by the liberalisation instance. Every time the federal government selected to ask personal-sector competitors in a profitable area, the incumbents within the public sector faltered quickly after.
Air India and Indian Airlines made file earnings every year till the federal government opened the civil aviation market to personal gamers. BSNL thrived as a monopoly till the introduction of Airtel and the likes.
But regardless of the liberalisation of the insurance coverage sector publish-2000, LIC’s efficiency has been nothing wanting resilient. Yes, they’ve lost market share and progress isn’t prefer it was. But the company continues to be placing up a combat. If something, you may argue that with personal sector insurers engaged on consciousness and increasing the market, LIC has remained a tacit beneficiary. The company continues to be synonymous with insurance coverage in India.
It’s LIC in spite of everything!
There’s nothing like LIC.