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Why is LIC share price falling?

List of reasons for the fall in the share price of LIC

Traveling in Indian local trains must be one of the best experiences. I say this against all odds, because I think Indian trains are the literal version of a social media app.

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 a wide variety of people. From deep inspiration to outright annoying, you get to know all kinds of species.

Last time I was traveling, an uncle in our compartment kept talking about himself regardless of the whole conversation. However, it was quite a pressing one as they made it through with their interesting stories.

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

“Every month our family pays a premium of Rs 2 lakh. I told my son whether you should save any more or not but you should get LIC. I believe everyone should get LIC.”

He meant life insurance policy but LIC is so popular that he kept calling the policy ‘LIC’. It’s 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 out the window the moment it was listed. A share with a subscription price of Rs 902-949 was listed at Rs 875!

According to Bloomberg, among the newly listed companies in Asia in 2022, LIC is second to lose the most market value.

shares of PSU Company Every passing day is killing less!

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Let’s know about the possible reasons for the fall in LIC’s share price:

#1 Competition from private sector players

Life Insurance Corporation (LIC) is in business for more than 60 years. It has enjoyed a leading position in the market. until recently.

Looks like the winds have changed. People are moving from LIC to private insurance companies like HDFC Life, ICICI Prudential, Max Life etc.

In the last two years, LIC has lost 8 percent of its market share to private life insurance companies. On a CAGR basis, in the last two years, retail weighted premium received (RWRP) growth for private life insurance companies stood at 10.2 per cent, while that of LIC fell by 6.6 per cent.

The life insurance sector was already under pressure due to the Covid-19 wave. The rising amount of claims made the insurance companies financially stressed. But even after the wave of Covid-19 has passed, LIC’s growth has been slow.

If we look at the continuity ratio, LIC has the lowest at 78.8 percent as against the industry average of 85.1 percent.

The persistence ratio is the total number of policies an insurer has that are renewed or in force. This means that a small number of policyholders are opting to renew their policies purchased from LIC.

LIC is slowly and steadily losing its grip in the market.

#2 Conservative business model

Remember the time when Nokia was the top selling cell phone company?

But then he made the mistake of denying Android, and it almost disappeared from the market as Android revolutionized the mobile industry.

Similarly, the market fears that LIC may face the same fate as it is reluctant to the changing business model of the insurance sector.

Private companies such as HDFC Life and SBI Life have used their existing business and group synergies to further their insurance business. They have combined the products of both businesses to boost the sales of the insurance business.

As a result, 50 percent of the insurance industry comes from banks. However, despite having the ability to use PSU banks as a channel, LIC is adamant on selling insurance through its agents.

More than 90 percent of LIC’s total premium comes from its agents.

Digital means of doing business are taking a swipe at the traditional means of doing business. LIC partners are making good use of online trading tools while LIC continues to use traditional tools.

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

#3 Government Control

PSUs have a bad reputation among investors, even profit-making ones. Some public sector undertakings operate in monopoly industry and have good financial position and investors still avoid them due to government control.

Even from valuation point of view, public sector undertakings often trade at cheap valuations and are considered undervalued stock, And there’s a good reason why investors still avoid them.

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

Now, LIC is a PSU, in which Government of India holds 96.5 percent of the total equity.

Just like public sector banks have to waive loans because of government schemes, LIC has to make bad investments because of the government.

Whenever the government needs money to finance public institutions, the government turns to LIC. As a result, today LIC has huge investments in public sector companies.

Too, A study shows that the bigger the IPOs, the harder they fall, LIC was India’s biggest IPO till date.

Investment takeaway…

Have you ever been fooled by a good looking dish? I believe.

A dish that looks so exquisite and mouth watering that you just have to order it. But later, when you taste it, your mouth closes…

LIC’s mega IPO looks like this.

The IPO seemed irresistible due to its major business share and public reputation. But if one takes a closer look at the business of LIC, one will start seeing problems.

Investing in a business that has great growth potential, because as the business grows, so will its share price. But entering the markets after ruling the market for 66 years makes one wonder if the business has already matured.

There may be contrasting views as the life insurance business will never go out of scope, especially given that India may overtake China in total population.

LIC may be losing market share, but you cannot deny that it rules the market with more than 50 per cent share. If it adopts contemporary business methods, it could give its competitors a tough time.

Will it adapt to the new trading tools? Will it be successful in taking back its share from private companies? want to see…

Disclaimer: This article is for informational purposes only. This is not a stock recommendation and should not be treated as such.

This article is syndicated from equitymaster.com,

(This story has not been edited by NDTV staff and is auto-generated from a syndicated feed.)

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