March 5, 2023
analysis123 analysis123
LIFE INSURANCE CORPORATION OF INDIA (LIC), Valuations remain attractive; VNB margin growth remains on track, less impacted by Budget 2023
Call & Research Report by ICICI Securities
Sector: Life & Health Insurance
CMP Rs. 627, Target Rs. 917 (46% upside potential)
Target Period: 12 Months
LIC is treading well towards increasing VNB by pushing product mix towards non- participating segment (9.45% in 9MFY23 Individual APE mix). However, volume growth has outperformed the industry in 10MFY23TD (25% YoY growth for LIC vs 19% growth for private insurers in terms of total weighted APE), especially in group segment (52% YoY growth in 10MFY23 vs 26% growth of private insurers in terms of group weighted APE). We have always believed that product mix driven possible increase in VNB margin (management’s aim is to close in on private peer levels within next 3-4 years) is achievable and is underappreciated by the market. Concerns on high sensitivity of EV to equity movement is also overdone considering NIFTY has moved 1-2% in 10MFY23TD. The company is also less affected by the removal of tax exemption in insurance income as percentage of its policies with ticket size beyond Rs500k is small (~0.12%).
● Maintain BUY with an unchanged target price of Rs917 based on 0.9x FY24 EV of Rs6.5trn. For the calculation of EV, we have factored an impact of 250bps increase in reference rate, flattish market movement in FY23, 50bps increase in FY24 and 2% market correction. This may result in economic variance of Rs60bn/99bn in FY23/FY24, respectively. We have estimated this value based on FY22 sensitivity assumptions. Further, we have estimated 25%/10% growth in APE, VNB margin of 16%/17% and unwind of 9% each in FY23/24E, respectively. We have changed our valuation method from VNB to EV multiple considering the volatility in interest rates/equity markets which impacts EV (more so with higher non-par mix).
● 9MFY23 VNB / VNB margin on net basis stands at Rs55bn/14.6%. VNB margin walk between FY22 and 9MFY23 includes positive effect of increase in risk free rate assumption (120bps) offset by change in product mix (170bps). 9MFY23 gross VNB margin for individual PAR/non PAR stood at 14.4/73.5% as against 13.5/104% in FY22 while group business margin dipped from 19% to 17.7% during the same period.
● Non-par mix increase on track: In terms of individual APE, share of non-par APE has increased from 7.2% in FY22 to 9% in H1FY23 and 9.45% in 9MFY23. Within non-par, the focus is broad-based and includes ULIPS, protection savings and annuity. Increase in ULIP mix within non-par mix has led to drop in margins (ULIP mix as %age of NBP increased from 5% in Q1FY23 to 7% in 9MFY23). Individual non-par margin (gross) has declined from 104% in FY22 to 73.5% in 9MFY23. In terms of NBP, share of non-par mix stood at 34% of which annuity/pension premium mix stood at 24%, while ULIP/other non-par/term mix stood at 7/2.3/0.4%, respectively. LIC is selling more non-par as the strategy is being driven by the launch of new products like Dhan Sanchay, BIMA Ratna, Pension Plus, Dhan Varsha, Jeevan Amar and new tech term plan, as well as through appropriate training to agents. Target groups for selling non-par among agents include young millennials, agents who are already selling these products and also club members which comprise experienced agents who can eventually sell all products.
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