High ULIP Sales, Annuity Products' Repricing Squeezed LIC Margins

Despite a rise in the share of its non-participating plans, state-owned Life Insurance Corporation's (LIC's) value of new business (VNB) margins, a measure of profitability of life insurers, has not improved much largely because during this period, it sold more unit-linked plans, which typically have lower margins than non-par savings products.

The VNB margin of the insurer stood at 14.6 per cent in the 9MFY23 period. Margins were also impacted by the revision of annuity rates in August 2022 to be in line with the competition. However, LIC’s management expects growth in annualised premium equivalent (APE) to offset the impact on margins and, hence, the absolute VNB should grow going forward.

As per the disclosures, LIC’s margins in the individual par segment improved to 11 per cent from 10.6 per cent in 1HFY23, while those for the non-par segment moderated to 63.6 per cent from 68.7 per cent in 1HFY23. Within the group segment, the margin moderated to 12.3 per cent in 9MFY23.

“We could see changes in the non-par bucket on a quarterly basis because most of our agents are getting used to these new products. We need one- or two-year visibility before things happen as we want them to. As of now, we're focused on non-par products and we leave it to customers as to what they want to buy – annuity, Ulip or term,” M R Kumar, chairperson of LIC, had said in the post earnings media call. He said LIC would reach 25 per cent margins faster than its private sector rivals. “We have come from 9 per cent to 14.6 per cent in hardly any time,” Kumar had added.

LIC earned a total premium of Rs 37,545 crore on an APE (annualised premium equivalent) basis for the nine months ended December 31. Of this, Rs 23,419 crore was accounted for by the individual business and Rs 14,126 crore by the group business. The share of non-par products has increased to 9.45 per cent in the APE mix for 9MFY23 versus 7.12 per cent for FY22. The management, in their commentary in the post earnings analyst call, has said that the non-par book has been growing gradually and consistently with dynamic customer demand.

The corporation reported a manifold increase in its net profit aided by accounting policy change adopted from FY23, wherein it is transferring surplus in the non-par account to shareholders’ account every quarter.

“Given its large back book and surplus sitting in the non-par book, LIC has started to deliver strong accounting profit. However, at the same time, there is very little (relative to embedded value ) value creation from the new business and the sustained market share loss in retail business continues”, said analysts at Emkay Research.

According to them the corporation would see better profits by transferring surplus from the non-par fund to shareholders, but there could be growth challenges for the corporation, leading to inferior shareholder value creation, reflecting lower embedded value growth and inferior operating return on embedded value (RoEV).

LIC has all the levers in place to maintain its industry-leading position and ramp up growth in the highly profitable product segments (mainly Protection, Non-PAR, and Savings Annuity). However, we expect operating RoEV to remain modest at 10.4 per cent, given its lower margin profile than private peers, analysts at Motilal Oswal said in their report.

Shares of the insurer closed 2.16 per cent lower on the BSE at Rs 606.70.