Life Insurance Corporation (LIC) saw a lacklustre debut at stock exchanges on Tuesday, with its shares listing at a discount of over 8% over the issue price. The script closed at Rs 875.45 per share on the BSE, down Rs 73.55 or 7.8%. There was some protection for policyholders and retail investors who had been allotted shares at Rs 889 and Rs 904 apiece, respectively, thanks to the discount offered by the insurer. The subdued listing of the state-owned insurance behemoth can be attributed to choppy market conditions, mixed opinions of institutional brokerages and investors and the fall in valuations of life insurance stocks.
Hold on to LIC
Experts, however, suggest that investors in LIC should continue to hold on to their investment with a long-term perspective as the company is a household name with dominant market share and loyal policyholder base. “There still exists a strong trust in the brand, and hence, this can be a better investment bet as the track record and reach of LIC is well-known,” says Harshad Chetanwala, co-founder, MyWealthGrowth.com.
While that may be true, analysts point out that post the recent reorganisation, the insurer is looking to increase the share of non-participating pure protection products which today account for only 5-6% of the product portfolio. However, selling high-margin non-par products will require a mindset change among LIC agents.
While the business may be a strong one with stability in operating metrics and potential for growth from an under-penetrated life insurance market, there’s the volatility in Embedded Value (EV) which must be considered given a substantial portion of EV constitutes marked-to-market unrealised equity gains.
Again, 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 around 14% for private sector players. Experts have pegged the target price for the stock at around Rs 1,000. So investors should wait for the price to correct meaningfully. Analysts point out that ticket sizes for LIC is one-fifth that of the private sector, implying the target segment is different, and selling non-par savings products to smaller ticket-sized segments may be difficult.
Jayesh Bhanushali, assistant vice president for research at IIFL Securities Ltd, told Bloomberg that LIC’s stock is a “good portfolio hedge against volatility”, but could face headwinds in the medium term if the government decides to dilute its stake in LIC further. He further added that a “3%-4% regular dividend could be a sweetener that will make shareholders stay put.”
A long-term business
Life insurance penetration (premiums as % of GDP) and density (premiums per capita in US$) in India at 3.2% and $59, respectively, are fairly low compared to global levels of 3.3% and $360. Dhaval Kapadia, director, Investment Advisory, Morningstar Investment Adviser (India), says as per capita income grows, penetration and density would increase. “Life insurance stocks need to be viewed as a longer term play,” he says.
Brijesh Damodaran, managing partner, BellWether Associates LLP, says retail investors must consider investing in stocks of life insurers based on their asset allocation strategy and risk appetite.