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Calculated VNB margin expands sequentially

Result Highlights

* VNB margin: Calculated VNB margin for 2QFY23 rose 164bps QoQ to 15.2%

* VNB growth: VNB growth was at 63% QoQ, aided by growth in total APE and margin expansion

* APE growth: New business APE growth was at 46% QoQ, driven by growth in individual non-par business and group business.

* Expense control: Expense ratio grew 365bps/332bps QoQ/YoY to 18.3%, QoQ driven by growth of 436bps in opex ratio

* Persistency: 37th month ratio de-grew/grew -370/141 bps QoQ/YoY to 60.6% whereas 61st month ratio de-grew/grew -116/195 bps QoQ/YoY to 55.8%

Our view – Calculated VNB margin expands sequentially

Sequential VNB margin expansion, we believe, was driven by product mix change, among other factors: Individual Non-Par APE grew 63% QoQ, with share in Total APE rising 58 bps QoQ to 5.4%. Group business APE grew 77% QoQ, with share in Total APE rising 803 bps QoQ to 45%. The FY22 gross VNB margin of Individual Non-Par and Group businesses was 103.6% and 19.0%, respectively compared with 13.6% for Individual Par business.

Improving traction for Bancassurance channel augurs well: Banca & alternate channels contributed 1.72% by number of policies and 3.37% by NBP for 1HFY23. For 1HFY22, Banca & alternate channels contributed 1.41% by policies and by 2.31% by NBP. This channel has grown approximately 39% YoY on number of polices basis and 63% YoY on NBP basis.

Management flagged a transfer from Non-Par to Shareholders Account: LIC has changed its accounting policy and transferred Rs 142.72bn, pertaining to the accretion on Available Solvency Margin, from the Non-Par to the Shareholders Account. The accounting profit for the period has been enhanced by the amount equal to the transfer. The transfer from the ASM fund to Shareholders’ account aids capital efficiency.

We maintain ‘BUY’ rating on LIC with a revised price target of Rs 875: We value LIC at 0.8x FY24 P/EV for an FY23E/24E/25E RoEV profile of 10.8/10.9/11.0%.

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