LIC investors' policy of patience paid off

livemint.com:

₹10,461 crore, the price-to-earnings multiple works out to 20x for FY25, while the same for peers is over 80x plus. To be sure, the price-to-earnings multiple is not the most preferred valuation metric for life insurance companies. That’s because the expenses in the life insurance business are recognized upfront, depressing the profits in the initial years.

Thus, faster growth may mean slower growth in reported profit and vice versa. In the Q1FY25 earnings call, LIC’s management said they are not fixated on margins and remain focused on delivering absolute VNB growth. Still, FY25 VNB margin is likely to be higher year-on-year.

Also, they are striving to push the VNB margin higher towards 20% plus in the medium term. But they also want investors to appreciate that the margin is an outcome of the business where margin cannot be the only focus. For instance, if a customer wants a participating policy, he cannot be sold a non-participating policy just because the management wants to reduce the share of less profitable participating policy.

Participating policies are less profitable for shareholders as these policyholders are entitled to a share the insurance company's profit. LIC’s VNB margin in non-participating policy in Q1FY25 at 40% is five times that of its participating policy. LIC, being the oldest life insurance company, will take some time to reduce the share of participating policies even though its share in APE fell from 56% to 44% in Q1FY25.