Why LIC has hit new lows and what should investors do?

If you think that the problems of LIC listing would be done with the tepid listing, think again. The stock has been virtually falling vertically in the last few months since listing. The IPO of LIC was priced at Rs949 per share with discounts for retail shareholders and policy holders. However, the stock listed weak and has been on a downtrend since. The stock price hit a low of Rs650 in June 2022 and showed a semblance of bounce after that. However, since then, the stock has been under pressure and on 23rd September, the stock of LIC has closed Rs642.75, very close to its all-time low price of Rs642.

LIC now trades 32.3% below the issue price of Rs949 per share and still shows no signs of bottoming out. In short, the investors who bought the stock of LIC in the IPO would be sitting on losses of 32.3%, although the retail investor would have got some respite from these losses due to the discount that they had received at the time of the IPO. With the Fed hiking rates, the investment portfolio of LIC is also likely to take a hit and that is reflecting in the stock price of LIC. One argument is that, the stock of LIC was overpriced at the time of the IPO and the government literally left very little on the table for the investors to make.

But there are larger concerns over the pace of growth of LIC as compared to the other private insurers. That has been a major reason why the stock has been rather languid in the last few days. For instance, if you look at the month of August 2022, the retail annualized premium equivalent (APE), a popular measure for life insurance companies, grew by just 5.2% on a yoy basis. This is in sharp contrast to 8.9% growth for the private insurers. The gap is wider if you look at a longer term perspective. If you consider 3 year CAGR growth of APE, then LIC has grown at a CAGR of 0.66% in last 3 years, against 12.6% for private insurers.

According to the insurance market experts, this annualized premium equivalent of the retail business is a very important indicator of the robustness of the insurance business. That is where LIC is lagging its private sector counterparts. There is a very deep structural divergence between the growth of LIC and the growth of the private insurers. LIC has long enjoyed the dividends of its monopoly status, but now competition is pinching. Like it or not, the private insurers have taken away more than 30% of the life insurance market from LIC and that is something that LIC has lost from its kitty. That is pinching valuations of LIC.

If you look at the estimates of most brokers for FY23, it hardly looks too satiating. For instance, the overall APE growth in the insurance industry for FY23 is expected to happen at around 12% to 13% range. However, while the private insurers are likely to grow APE in FY23 by a healthy 16% to 17%, the growth of LIC is expected to be in single digits. This dichotomy is only going to widen the perception schism between LIC and the private insurers and force the LIC stock to trade at a deeper discount in terms of valuations.

So what should investors do with LIC?

It is still a good long term play, but the wise thing to do would be use bounces in the LIC stock to gradually pare positions in LIC and add up positions in private insurers. The current trajectory shows that the growth dichotomy is likely to continue. Losses may still be there for the IPO investors but you can look to reduce the losses. Would lower levels offer a good buying opportunity in LIC? That is slightly hard to say, but here is something you can watch out for, if you are looking at LIC as an investment option.

Today, insurance is not just about LIC and private insurers but also powerful aggregators that allow comparison of policies before making a decision. That is likely to keep pricing under pressure. Insurers are into cost saving programs, but that can only help partially. The bigger challenge for LIC would be about improving productivity, which is where it is missing the bus. LIC has a great network of agents and feet-on-street salespersons. How best it leverages this advantage would determine the future course of the LIC stock.