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An insurance goliath crafting its own growth path

Business drivers in place; execution remains the key | Initiate with BUY

* Life Insurance Corporation (LIC) has maintained its market leadership position in the life insurance industry underpinned by its strong brand, vast distribution, and superior customer-connect despite the advent of a large number of private players.

* During FY22, LIC accounted for 63%/46% of the total New Business Premium (NBP)/Annualized Premium Equivalent (APE) with a distinct focus on PAR business that formed 70%/92% of individual NBP/APE, respectively, in 9MFY22.

* Unlike private peers, LIC relies on its dominant agency channel (1.3m agents, 54% of industry as of 31st Mar’22) to distribute insurance products; yet it has maintained a strong control on the cost ratios.

* We estimate LIC to deliver ~10% CAGR in NBP during FY22-24E while the Value of New Business (VNB) margin is likely to improve to 13.6% on improving product mix and higher profit retention. However, we estimate LIC’s operating RoEV to remain modest at ~9.7% on lower margin profile than private peers.

* LIC’s valuation at 0.7x FY24E EV appears reasonable considering gradual margin recovery and diversification in business mix though high sensitivity to equity market volatility remains an overhang. We initiate coverage on the stock with a BUY rating and a TP of INR830 based on 0.8x FY24E EV.

An insurance trailblazer – growing on its own terms

LIC has maintained its Numero Uno positioning in the market even as it differs in its growth strategy v/s private players on – Distribution (Agent dominated v/s Banca for private), Product Mix (Traditional heavy v/s ULIPs, Non-PAR, Protection for private), and high mix of Single Premium (82% of total NBP v/s 47% for private in FY22) with heavy reliance on Group Business (72% of total NBP v/s 39% for private in FY22). While the focus on profitable growth will compel LIC to reassess its growth trajectory, maneuvering such a large franchise will be a challenging task and requires superior execution over the next few years. We estimate LIC to report ~10%/8% CAGR in NBP/APE over FY22-24E.

Mix of Non-PAR to improve gradually

LIC’s product mix is dominated by traditional savings business with low-margin PAR products accounting for 19%/65% of total NBP/APE in FY21. While most of the private players have focused on increasing the mix of high-margin NonPAR/Protection products, LIC's reliance on PAR products remains high. However, the company aims to ramp up the mix of non-par business markedly, driven by consistent new product launches in the non-par segment.

Annuity – a key growth driver; Protection pricing becoming competitive

Annuity: LIC enjoys a high market share in the Annuity segment (77% in FY21) due to its strong positioning in the group business. The share of Annuity in total new business mix stood at 21% in FY21. Annuity has enabled LIC to report high VNB margin of 118% in the Non-PAR segment and it has an immense growth potential. However, private players are also catching up fast as they have reported 23-131% CAGR over the past three years (FY19-22).

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