Rating- Buy; Strong product segments of LIC driving growth

Rating: Buy; Strong product segments of LIC driving growth

LIC (Life Insurance corporation) recorded a profit after tax (PAT) of Rs 134.3 billion in Q4FY23, displaying a remarkable four-fold increase compared to the same period last year. This substantial growth can be attributed to the transfer of Rs 73 billion from the non-par segment to the shareholders’ account, which relates to the accretion on the available solvency margin in Q4. For the full FY, LIC’s PAT surged eight-fold y-o-y, reaching Rs 364 billion. Annualised premium equivalent (APE) experienced a 12% y-o-y growth in Q4, amounting to Rs 191.3 billion.

Sequentially, APE increased by 55% compared to the last quarter. In FY23, the total APE for the year reached Rs 566.8 billion.

The value of new business (VNB) in Q4 of FY23 amounted to Rs 37 billion, with a significant improvement in VNB margin. The VNB margin saw a q-o-q increase of 476 bps, reaching 19.4%. Over the course of FY23, the VNB margin improved to 16.2% compared to 15.1% in FY22. These improvements in VNB margin indicate enhanced profitability and efficiency in generating new business for LIC.

The individual/group business constituted 68%/32% of APE in FY23. In the individual business, the share of PAR products remained largely stable at 91%. In total NBP, the share of PAR products was lower at 66% in FY23. Annuity/Pension and ULIPs constituted the bulk of residual, with 25% and 7%, respectively. For the non-par segment, it moderated to 70.4% v/s 73.5% in 9MFY23. We slightly raise our FY24/FY25 VNB estimates by 4%/6%. We estimate LICI to deliver a 15% CAGR in APE over FY23-25, thus enabling a 27% VNB CAGR. We maintain our Buy rating. Sales (individual NBP) in the banca channel grew 26% y-o-y to Rs 20.2 billion in FY23.

Growth in the agency channel (Individual NBP) was modest at 7% y-o-y to Rs 565 billion. However, LIC is continuously training agents to sell non-par products. Agency contributed 96% of individual NBP in FY23. The persistency ratio moderated sequentially for most cohorts other than the 25th month persistency, which grew by 46bp q-o-q.

Also read: PR Sundar puts up brave face as ‘finfluencers’ feel the heat

LICI has the levers in place to maintain the industry-leading position and ramp up growth in the highly profitable product segments (mainly Protection, Non-PAR, and Savings Annuity). However, changing gears frequires a superior and well-thought out execution. We expect LICI to deliver a 15% CAGR in APE over FY23-25, thus enabling a 27% VNB CAGR.