JPMorgan 'Overweight' On LIC With A Target Price Implying 28% Upside

JPMorgan initiated coverage on Life Insurance Corp. with an ‘overweight’ rating.

Source: Unsplash

JPMorgan initiated coverage on Life Insurance Corporation of India with an ‘overweight’ rating, citing that the market is mispricing the stock that has tumbled 31% since its initial public offering.

The research firm has a March 2023 target price of Rs 840, implying an upside of 28% for India’s largest insurer, according to its June 20 note. "We are overweight on LIC given its attractive valuations."

JPMorgan’s optimism stems from LIC’s "unduly harsh" price-to-embedded value of 0.75 times. EV is a measure of the market value of an insurer’s current and future policies. LIC will release its embedded value next on June 30.

Prior to the IPO, LIC’s operations were largely focused on participating policies—where surplus profit is shared with policyholders—that allowed consistent cash flows.

Amendments to the LIC Act in the run-up to listing led to segregation of participating and non-participating funds with a revised surplus distribution policy in favour of the shareholder (95:5 to 90:10 by FY25), JPMorgan said. LIC is working on diversifying its product mix to the margin accretive non-par segment, it said.

The market views LIC as an equity market proxy and recent weakness in markets is overdone, the note said. “We don’t foresee LIC trading at private sector valuations of 2-3x P/EV, but our March 2023 target price of Rs 840 is based on 1x FY23E P/EV (price-to-embedded value), which we think is justified on a mostly par back book, excess assets on the balance sheet and a 185% solvency ratio."

Key Highlights

  • LIC’s new business value is only 1% of its policies in force. Therefore, with 99% of value from old policies, we see the 0.75x P/EV as unduly harsh, even assuming no growth.

  • In reality, LIC has picked up growth recently and JPMorgan forecast 6% growth in annual premium equivalent over FY22-24.

  • The value is compelling even adjusting EV lower for market declines, and tacking on an additional 15% discount to fair value.

  • Investor confidence through consistency and disclosure will be a rerating driver.

  • While LIC had lost retail market share to private insurers over last five year, the improved ability of agents post-Covid should drive growth.

  • In the last four months, LIC’s retail premium is growing faster than the industry (32% year-on-year) and is above the 2019 level.

  • LIC primarily worked in national interest earlier. Regulatory change in the surplus distribution policy now ensures LIC retains more profit.

  • The brokerage estimates a conservative 12% profit CAGR over FY22-25.

  • First-ever EV report as of September 21 was up five times on base due to higher profit accumulation post change in surplus distribution regulation.

  • LIC would need to show consistency in EV, which would signal accuracy on assumptions used.

  • A steady trajectory on value of new business margin is key.

  • The asset risk seems to be overdone. LIC is well capitalised; even the 30% market dip in March 20 did not have an impact on the balance sheet liquidity.

Key Risks To The Upside

  • Consistent stake reduction by the government.

  • National service by way of products or asset allocation.

  • Investment write-offs

  • Premium decline.

Of the other two brokerages tracking LIC, Macquarie is 'neutral' and Emkay Global has recommended 'hold' on the stock, according to Bloomberg data. The average of analyst price targets implies an upside potential of 42.6%.

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WRITTEN BY
Monal Sanghvi
Monal Sanghvi is a Senior Correspondent at NDTV Profit. She is a Chartered ... more
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