Brokerage firms such as Motilal Oswal and BOB Capital, in their report released in November, feel that LIC is currently selling at a significant discount to its issue price. The brokerages are under the impression that the company is making the right efforts to increase the Value of New Business (VNB) by pushing its product mix towards non-participating and expanding in non-agency distribution channels. While BOB has given a target price of Rs 767, Motilal Oswal`s target price is Rs 850.
Given LIC’s entrenched brand equity, clear market leadership and superior agency force, they believe the company has levers in place to maintain its industry-leading position and ramp up growth in the highly profitable product segments.
The increases in turnover indicate growing investor confidence in LIC. The LIC market capitalisation has reached 4.3 trillion. "Competition in the group segment is increasing, hence the decline in premium from this segment. The management is trying to recover growth and increase market share," per the Motilal Oswal financial services report.
Here are some reasons why brokerage firms believe LIC could maintain its lead in the insurance industry.
VNB and VNB margin: VNB margin (net) was flattened at 14.6% at end-H1FY24 as the positive impact of a better product mix (2.3%) and favourable change in assumptions (1.9%) was offset by a 4.2% negative impact from product benefits. The benefits are being enhanced in some products, particularly annuity products, putting downward pressure on the margin, per a BOB Capital Markets report.
Individual net VNB margin declined from 15.8% in H1FY23 to 14.6% in H1FY24, whereas that in the group business increased from 12.9% to 14.6%.
Within the individual business, the net VNB margin of the non-par business declined from 68.7% in H1FY23 to 50% in H1FY24, owing to product repricing.
Net VNB was Rs 33bn at end-H1FY24 as compared to Rs 37bn at end-H1FY23.
LIC has levers to maintain its industry-leading position and ramp up growth in the highly profitable product segments (mainly Protection, Non-PAR, and Savings Annuity). However, changing gears for such a vast organisation requires a superior and well-thought-out execution plan.
"We expect LIC to deliver a 3% CAGR (decline in FY24 and a sharp recovery in FY25) in APE over FY23-25, thus enabling a 9% VNB CAGR. However, we expect operating RoEV to remain modest at 10.5%, given its lower margin profile than private peers and a large EV base. LICI is trading at 0.6x FY24E EV, which appears reasonable, considering the gradual recovery in margin and diversification in the business mix. We cut our VNB estimates to factor in the decline in VNB margins. However, we raise our EV estimates owing to better-than-expected equity market returns," per the Motilal Oswal financial services report.
Focus on profitable products: The company has introduced three non-par products during H1, indicating a sustained focus on the segment. On the non-par side, LIC continues to push annuity plans as ~25% of its non-par business comes from annuities, with a similar trend last year. Persistency ratios were largely stable, with improvement across the 13th-month cohort but a marginal decline in the 61st-month cohort, per the BOB Capital Markets report.
Agency channel continues to dominate: LIC’s moat is its strong agency network (1.35mn), which commands 49% market share and contributed 96% of the company’s individual NBP at the end of end-H1FY24. The bancassurance and alternate channels grew 4% YoY in H1 to Rs 8.6bn. Besides, the company has 153 corporate agents, 296 brokers, 19,000+micro insurance agents and 3,600+ branches.