State-owned insurance behemoth Life Insurance Corp. of India on Sunday evening filed draft papers for the most-anticipated public share sale in memory, the biggest ever to hit the Indian stock markets. The draft red herring prospectus gives investors a deep insight into the insurance giant's operating metrics. Mint went through the 652-page document to bring to you some of the eye-popping numbers that LIC boasts of, and some worrying trends that the numbers reveal which investors should keep an eye on. The insurer was formed by merging and nationalizing 245 private life insurance companies in India on 1 September 1956, with an initial capital of Rs 5 crore. Till 2000, it was the only life insurer in India.
Embedded value
Embedded Value (EV) of a life insurance company is the present value of future profits plus adjusted net asset value. It is the industry standard for valuing an insurance company. The DRHP pegs LIC’s embedded value at Rs5.39 trillion or or Rs5,39,686 crore as on 30 September 2021.
LIC versus global peers
The DRHP says IC is ranked fifth globally in terms of life insurance GWP (gross written premium) after German insurer Allianz SE, China’s Ping An Insurance and China Life Insurance and Italy’s Assicurazioni Generali S.p.A, and tenth globally in terms of total assets.
Largest asset manager in India
LIC is the largest asset manager in India as of 30 September, with assets under management (AUM) of ₹39.55 trillion on a standalone basis, which was more than 3.3 times the total AUM of all private life insurers in India and more than 1.1 times the entire Indian mutual fund industry’s AUM. Its investments in listed equity represented around 4% of the total market capitalization of NSE as of 30 September.
The bulk of LIC's investments are in central government and state government securities. Around ₹14.8 trillion — representing 37.45% of its total investments – are in central government securities. Around ₹9.74 lakh crore – representing 24.62% – are in state government securities. Investments of more than ₹9.78 lakh crore are in equities, representing 24.78% of its investments. Around ₹3.18 lakh crore – representing 8.06% – are in debentures, bonds and pass-through certificates. Only around ₹ 30,905 crore, or 0.78% of its total investments, are in mutual funds, exchange traded funds and AIFs.
Agent dependence
In FY2019, FY2020, FY2021 and the six months ended 30 September 2021, LIC’s individual agents were responsible for sourcing 96.69%, 95.73%, 94.78% and 96.42% of LIC’s new business profit for its individual products in India. It has the largest individual agent network among life insurance entities in India, comprising approximately 1.35 million individual agents as of 31 March 2021, which was 7.2 times the number of individual agents of the second largest life insurer.
LIC paid agents in commission Rs 9815.2 crore in six months ending September 2021. In the fiscal ending March 2021, the figure stood at Rs 22,358 crore. Percent of commission is capped between 2% and 40%.
Operating expenses on the rise
For FY2019, FY2020, FY2021 and the six months ended September 30, 2021, LIC's operating expenses related to insurance business to premium ratio (as a percentage of premium) was 8.33%, 8.99%, 8.66% and 10.08%, respectively, on a consolidated basis. Total expenses (including commissions paid to agents) for LIC has been steadily worsening from Rs. 28331.6 crore in FY19 to Rs. 34425.88 crore in FY2020 to Rs. 35162.21 crore in FY2021. Total expense for the six months of FY2022 was Rs. 18,906.36 crore.
LIC reported negative cash flows from operating activities in the first half of FY2022 at Rs11,114.3 crore due to high other operating expenses. It reported positive cash flows in the previous three financial years. Cash on its balance sheet has reduced substantially from Rs67,899.5 crore in fiscal 2019 to Rs26,050 crore in the first half of fiscal 2022.
LIC versus Indian peers
Private life insurance companies’ assets under management grew by over 15% CAGR over the past three years. On the other hand, LIC's AUM (comprising policyholders’ investment, shareholders’ investment and assets) on a standalone basis increased at 10.92% CAGR.
Though it is the market leader, LIC lags listed insurance peers in earnings per share (EPS). For fiscal 2021, it reported an EPS of Rs4.70, compared to an EPS of Rs14.55 for SBI Life Insurance, Rs6.73 for HDFC Life Insurance and Rs6.66 for ICICI Prudential Life Insurance.
Erosion of market share
LIC has gradually lost market share in individual new business premiums. Its share has dropped from 56% in fiscal 2016 to 44% in the first half of fiscal 2022. In the group new business premium segment, its share has reduced from 81% in fiscal 2016 to 77% in the first half of fiscal 2022.
The pandemic and related lockdowns played a big role in LIC’s falling market share. Sales of individual policies decreased in the fourth quarter of fiscal 2020 by 22.66% to 6.35 million from 8.21 million in the fourth quarter of fiscal 2019. The sales in the first quarters of fiscal 2021 and fiscal 2022 were down 46.20% and 34.93% respectively.
LIC acknowledges that it may lose more of its market share if it does not offer its products on third party websites, signaling that dependence on the agent network for distribution may have to reduce in future for sustainability and growth.
Covid impact on claims
LIC’s insurance claims by death increased during the pandemic. For FY2019, FY2020, FY2021 and the six months ended September 30, 2021, its insurance claims by death in benefits paid (net) were Rs17,128.84 crore, Rs17,527.98 crore, Rs23,926.89 crore and Rs21,734.15 crore, respectively, on a consolidated basis, which were 6.79%, 6.86%, 8.29% and 14.47% of its total insurance claims, respectively.
Equity investment performance
LIC's realized investment income in equities for the six months ended September 30, 2021 was Rs 35,987 crore. For FY21, ended March 31, 2021, its realized equity investment income (including interest, dividend and amortization and realized gains or losses) was Rs 49,659 crore, up from Rs 29,702 crore in FY20.
In FY19, its realized investment income from equities was higher at Rs 34,799 crore. For context, equity markets were down at the end of FY20 as fears around the new coronavirus had begun to spread.
NPAs
LIC said that its gross NPA stood at 7.78% for FY21 while Net NPA stood at 0.05%. This is only for its debt portfolio. It disclosed NPA only for policy holders' funds, not shareholders' funds.
Dividend
LIC paid Rs2,663 crore of dividend to the government in fiscal 2019 and retained its share of the surplus in fiscal 2020 and 2021 for the issuance of bonus equity shares to the government.
Litigation
As on 6 February 2022, LIC is involved in as many as 26,919 criminal, consumer, civil proceedings, tax proceedings and actions taken by statutory or regulatory authority.
