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.

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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.

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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.