Why LIC Share Price is Falling

Travelling in Indian local trains has to be one of the best experiences. I say this despite all its hurdles, because I feel Indian trains are the literal version of social media apps.

You meet people, talk to them as if you know each other well, and bam! Chances are, you'll never meet that person again.

Local trains allow you to meet different kind of people. Right from deeply inspiring to outright annoying, you get to know all kind of species.

The last time when I was travelling, an uncle in our compartment kept talking about himself, disregarding the entire conversation. However, it was quite pressing because he made it up with his interesting stories.

Out of all the stories he said, one particular stuck with me hard. We were all talking about the importance of financial savings and planning the future when he claimed that,

"Every month our family pays a premium of Rs 2 lakh. I told my son whether or not you do any other savings but you should get a LIC. I believe everyone must get a LIC."

He meant a life insurance policy but LIC is so popular that he kept calling the policy as 'LIC'. It's just like Colgate for toothpaste or Xerox for any photocopy.

Being the most popular insurance brand, the hype around LIC's IPO was expected. But all its hype went right out of the window the moment it was listed. A share with a subscription price of Rs 902-949 was listed at Rs 875!

Among newly listed companies in 2022 in Asia, LIC ranks second to lose the most market value, according to Bloomberg.

Shares of the PSU company have been hitting lows every passing day!

Let's find out the probable reasons as to why LIC share price is falling.

#1 Competition from private sector players

Life Insurance Corp (LIC) has been in the business for more than 60 years. It has enjoyed a lead position in the market. Until recently.

It appears, the winds have changed. People are moving from LIC to private insurers like HDFC Life, ICICI Prudential, Max Life, etc.

In the last two years, LIC has lost 8% of its market share to private life insurers. On a CAGR basis, for the last two years, the retail weighted received premium (RWRP) growth was 10.2% for private life insurers, while LIC's RWRP fell by 6.6%.

The life insurance sector was already under pressure because of the Covid-19 wave. An increasing amount of claims left the insurance companies financially stressed. But even as the covid-19 wave passed out, the growth of LIC has remained slow.

If we look at persistency ratios, LIC has the lowest at 78.8% against the industry average of 85.1%.

The persistency ratio is the number of total policies an insurer has to the policies that are renewed or in force. It means a lesser number of policyholders are choosing to renew their policies purchased from LIC.

LIC has been gradually and consistently losing its hold in the market.

#2 Orthodox business model

Remember the time when Nokia was the best-selling cell phone company? But then it did the mistake of denying Android, and it almost disappeared from the market as Android revolutionised the mobile industry.

Similarly, market is scared that LIC might also meet the same fate as it is reluctant to the changing business models of the insurance sector.

Private players like HDFC Life and SBI Life have used their existing businesses and group synergies to push their insurance business. They have tied products of both businesses, to boost the sales of the insurance business.

Resultantly, 50% of the insurance industry comes from banks. However, despite having the ability to use PSU banks as a channel, LIC has stuck to selling insurance through its agents.

More than 90% of LIC's total premium comes from its agents.

Digital means of doing business have been taking a swoop at traditional means of business. LIC's peers have been making good use of online business tools while LIC continues to use traditional means.

As more and more people move to buy insurance policies online, LIC loses business because it fails at providing proper means for such buyers.

#3 Government control

PSUs have a bad reputation among investors, even the profit-making ones. Some PSUs operate in monopoly industry and have good financials and investors still avoid them because of government control.

From a valuation standpoint too, PSUs often trade at cheap valuations and are considered undervalued stocks. And there's a good reason why investors still avoid them.

Also, a lot of PSUs are cyclical stocks. For instance, stocks like NMDC are more of a trading bet and not an investment. This is due to fluctuations and volatility in its earnings and stock price.

Now, LIC is a PSU with government of India holding 96.5% of the total equity.

Just like public sector banks have to do loan waivers because of government schemes, LIC has to make bad investments because of the government.

Whenever government needs funds to finance public institutions, government turns to LIC. As a result, today, LIC holds a massive investment in the public sector companies.

Also, a study shows that the bigger the IPOs are, the harder they fall. LIC was India's biggest ever IPO.

You can also check out the editorial we did back in June 2022 which explained why LIC was falling back then.

Investment Takeaway...

Have you ever been fooled by a good-looking dish? I sure have.

A dish that looks so exquisite and mouth-watering that you just have to order it. But then later, when you taste it, you end up gagging...

LIC's mega IPO appears exactly like this.

The IPO looked irresistible on account of its dominant business share, and pubic reputation. But if one took a closer look at the business of LIC, he/she would start to see problems.

Investing in a business that has stellar growth prospects makes sense because as the business grows, its share price will also rise. But entering into the markets after 66 years of ruling the market makes one wonder whether the business has already matured.

There can be contrary views to this because the life insurance business will never go out of scope, especially considering that India might take over China in total population.

LIC may be losing market share but, you can't deny that it rules the market with more than 50% of the market share. If it adopts contemporary business methods, it may give a tough time to its competitors.

Will it adapt to new business means? Will it be successful in snatching back its share from the private players? Only time will tell...

Till then, study LIC's financials and see what you can make from it. You can check LIC factsheet and LIC latest quarterly results on our website.

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such. Learn more about our recommendation services here...