Strong growth, margin metrics could support LIC's stock valuations

In the September quarter (Q2FY25), LIC reported net premium income of Rs 1.2 trillion, up 12 per cent year on year (Y-o-Y). For H1FY25, net premium income grew 14 per cent Y-o-Y to Rs 2.3 trillion. Net premiums are estimated to grow 8 per cent Y-o-Y during H2FY25.

 

The new business annual premium equivalent (APE) grew 26 per cent Y-o-Y in Q2FY25 to Rs 16,470 crore, led by a 31 per cent  Y-o-Y growth in individual APE to Rs 11,420 crore and 15 per cent  Y-o-Y growth in group APE to Rs 5,050 crore. In H1FY25, new business APE grew 24 per cent Y-o-Y to Rs 28,020 crore.  

 

The net value of a new business (VNB) margins improved by 260 basis points Y-o-Y to 17.9 per cent, driven by a 47 per cent Y-o-Y growth in absolute VNB to Rs 2,940 crore. For H1FY25, VNB grew 38 per cent Y-o-Y to Rs 4,550 crore translating into a VNB margin of 16.2 per cent  (14.6 per cent in H1FY24).

 

LIC reported 4 per cent Y-o-Y decline in shareholder net profit to Rs 7,620 crore. For H1FY25, net profit grew 4 per cent Y-o-Y to Rs 18,080 crore. 

 

The management aims for a positive growth trajectory in the par segment and expects strong growth to continue in the non-par segment. 

 

The encouraging H1 results have led to upgrades for premium growth and VNB margin estimates for FY25 and FY26. Embedded value estimates are also up. Given an increase in the share of non-par, the VNB margin should rise at least 250 basis points by FY26.

 

In Q2FY25, individual new business premium income increased by 20 per cent to Rs 17,650 crore and individual renewals grew 4 per cent Y-o-Y to Rs 59,860 crore. Group business premium grew 20 per cent Y-o-Y to Rs 42,400 crore.

 

The par APE grew 7 per cent Y-o-Y to Rs 8,250 in Q2FY25, contributing 50.1 per cent while the non-par segment APE jumped 3 times Y-o-Y to Rs 3,160 crore in Q2FY25. Non-par contribution in APE was at 19.2 per cent (7.4 per cent in Q2FY24).  

 

On the distribution side, the agency channel contributed 95 per cent  (95.9 per cent  in Q2FY24). The share of the bancassurance and alternative channels improved to 4.1 per cent in Q2FY25 (3.6 per cent  in Q2FY24). Persistency declined marginally across all time frames Y-o-Y.

 

The assets under management increased to Rs 55.39 trillion in Q2FY25 from Rs 47.40 trillion in Q2FY24, up 16 per cent Y-o-Y.

 

Management says that the commissions have been aligned to policy duration and not reduced. The LIC is currently not implementing clawback provisions and waiting to review uptake on new products. Rewards and benefits, apart from the commission, may be introduced. 

 

LIC is redesigning products with a mindset of aligning with the regulator’s expectations, maintaining investor profitability, and keeping the benefits of intermediaries. Policies have been modified to link rewards to better persistence.

 

LIC has relaunched 32 out of 54 products in the first tranche. Many products have undergone revisions in premium rates, along with design changes. A redesign is to ensure no adverse impact on margins due to new regulations. LIC will buy a stake in a standalone health insurance company given the right opportunity. 

 

LIC is focusing on ramping up growth in profitable product segments (mainly protection, non-PAR, and savings annuity). New product launches, stronger bancassurance, alternative channel presence, and digitisation may enable LIC to bridge the gap with private players. Modified commission structure after new surrender value regulations will be a key to growth. 

 

 VNB margin may improve to 19 per cent by FY26, while 10 per cent annual growth in APE over FY24-27, and 14 percent VNB annual growth is possible. The valuation multiple in price/embedded value terms will be lower than the private insurers but it could improve. Weaker October 2024 numbers could create a buying opportunity.