The change
The life insurance space in India has been gaining significant traction, with top private sector players delivering strong performance over the past two to three years. The three listed players — HDFC Life, ICICI Pru Life and SBI Life — have done spectacularly well since listing. It is possibly because of this that the Centre has made a strong proposal to list the life insurance behemoth — LIC — in the coming year.
The background
Given that the sector is emerging as an attractive investment opportunity for investors looking to invest in the financial services space, the timing is good. Since the 2010 and 2013 regulations, top life insurers have restructured their product portfolios, focussed on cost efficiencies and persistency to drive profitability.
LIC has delivered a strong performance over the past year. Its market share in new business premium shot up to 70 per cent (year to date December) from 66 per cent last year. The insurer also leads the industry with its strong claim settlement record (95 per cent of claim amount settled in 2018-19).
The biggest positive for LIC is its huge assets under management (AUM) of ₹27.6-lakh crore (according to IRDAI FY19 annual report), way above HDFC Life (₹1.2-lakh crore), ICICI Pru Life (₹1.57-lakh crore) and SBI Life (1.39-lakh crore). The large legacy investment book could be a big draw for investors who have been willing to give a valuation of 3-5 times embedded value for private listed players.
LIC’s strong agency network is another factor that can help drive valuations. As of December 2019, LIC’s net agent count stood at about 11.95 agents. The total number of agents with private players put together is about 10.65 lakh.
The verdict
Product diversification, distribution network and profitability are drivers of a life insurance business. LIC’s strength has been in traditional policies. Building a more diversified product portfolio will be important to drive earnings. By focusing on protection business (essentially pure life cover), life insurance players have been driving the value of new business. Given that there is intense price competition in this space, LIC’s focus on the protection business will be keenly watched. Also, how the insurer expands into other distribution channels such as bancassurance will be important.
LIC’s share of investments in public sector has seen a significant jump in the past decade — to 85 per cent as of March 2019, from about 75 per cent a decade ago. This has been mainly on account of it stepping in to mop up share sales from the Centre. Investors will look for more transparency in such deals in future, when LIC gets listed.
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