Changes to the surplus/profit allocation rules for IPO-related LICs, which have already improved their margins by 700 basis points to 9.9% and will increase further to 20% when the national insurer redirects its range of activities towards policies without participation, can give nightmares to the private actors who have thrived for too long on this segment, indicates a report.
According to an analysis of its initial public offering (IPO) filings by Swiss brokerage Credit Suisse, SBI Life, ICICI Prudential, HDFC Life and Max Life will face the maximum impact of the LIC move.
The report notes that LIC’s margin has already increased by 700 basis points to 9.9% after the government changed LIC’s surplus/profit allocation rules, allowing it to change the composition by 10%. from participating business to non-participating business, which is only 4 percent now, which can bring its margins to 20 percent.
This is based on the assumption of a full transition to a new distribution of surplus, moving from 100% for non-participating policies now to 10% for participating policies.
A participating (participating) insurance policy offers both guaranteed and unguaranteed benefits to policyholders in the form of bonus or dividend payments, while a nonparticipating (non-participating) policy generally offers guaranteed benefits to policyholders, but they do not receive profit or dividend payments.
Currently, LIC has only 4% of its new corporate premium coming from non-participating policies, while the same is true for its top five private sector peers, ranging from 20 to 45%.
LIC holds 43 percent market share in sole proprietorships.
Its filings highlight how its profitability broke free after demutualization, in which its intrinsic value (EV) increased by 5x to Rs 5.4 lakh crore, carrying its shareholder’s interest in surplus at Rs 14.6 lakh crore from non-participating funds, or 37% of its AUM.
Intrinsic value (EV) is a common valuation measure used by life insurance companies outside of North America to estimate the consolidated value of shareholders’ equity in the company.
Inbound competition in non-pars is a big risk for private players who derive a large share of profitability, which ranges from 50-75% from non-pars, and have a disproportionately high share due to constraints inherited from LIC , says the report.
The report goes on to add that LIC’s non-par margins are greater than its own nominal business as well as private non-par margins.
Even after 21 years of liberalisation, LIC still holds 66% of the industry’s new premium market share thanks to its strong branch network of 1.3 million (7x of its private players), he noted. .
LIC’s AUM remains next player’s highest at 16x.
Within the industry, New Business Premiums or NBP and Group Business account for 60% and LIC dominates it with nearly 78% market share.
In the individual business, LIC’s market share in volumes remained stable overall at 75%, driven by the dominance of the peer segment.
However, in terms of NBP, LIC has lost market share due to weak presence in the category of high-priced, non-participating ULIPs that offer pure protection, deferred annuities, etc., where private players continue to dominate.
(Only the title and image of this report may have been edited by Business Standard staff; the rest of the content is auto-generated from a syndicated feed.)