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APE growth impact by group business; valuations inexpensive

In 3QFY23, reported APE of INR 123.2bn registering degrowth of 18% QoQ vs 3% for industry owing to 48% QoQ degrowth in group segment. Weakness in group segment was attributed to seasonality impact which is expected to recover going ahead; individual APE growth was better at 7% QoQ. Individual NBP was at INR 143bn up 5% QoQ with majority of the growth being driven by ULIPs and non-par savings segment. LIC’s strong agency network of 1.32mn agents as of Dec’22 (with 52.3% market share of individual agents) remains the major sourcing channel for LIC contributing to 96% of the insurer’s individual NBP in 9MFY23. Incrementally, banca and alternate channels are also gaining prominence with their share increasing to 3.5% (+90bps QoQ). LIC’s new business margins (NBMs - calculated) witnessed a 60bps QoQ decline to 14.6% largely on account of change in product mix. Management indicated that the sequential decline in NBMs was on account of a) higher growth in lower margin ULIP segment and b) impact on non-par segment margins due to increased rates; though was partially offset by positive movement in rates. We believe LIC would be able to maintain its NBMs in the 15-16% range aided by favourable product mix and cost controls. Current valuation of LIC of 0.5x FY25E EV is undemanding and we expect it to rerate on the back of its keys strengths: large customer base (278+mn in-force individual policies), huge agency network (accounted for 52.3% of total industry agents as of Dec’22), strong brand equity and, importantly, the sovereign guarantee (on sum assured and bonuses) attached to LIC policies. Maintain BUY rating with a TP of INR 940, valuing LIC at 0.8x FY25E EV. 

* Group segment impacts overall APE growth; outlook remains positive:? In 3QFY23, LIC reported APE of INR 123.2bn registering degrowth of 18% QoQ vs 3% for industry owing to 48% QoQ degrowth in group segment which management attributed to seasonality impact and expect group APE to recover strongly going ahead. On the individual APE basis, LIC’s growth was better at 7% QoQ (though still lower than industry indvl APE growth of 15%). Individual NBP was at INR 143bn up 5% QoQ with majority of the growth being driven by ULIPs and non-par savings segment. Thus, proportion of ULIPs and non-par savings (ex annuities) increased by 140bps and 380bps QoQ resp. Proportion of par savings and annuities declined 330 and 190bps QoQ. We expect growth to be strong going ahead as well aided by large customer base, huge agency network, strong brand equity and importantly, the sovereign guarantee (on sum assured and bonuses) attached to LIC policies; these advantages, along with strong expected tailwinds for the sector, should drive LIC’s overall APE growth to 10% over FY23-25E.

* Distribution mix remains dominated by agency: LIC’s strong agency network of 1.32mn agents as of Dec’22 (with 52.3% market share of individual agents) remains the major sourcing channel for LIC contributing to 96% of the insurer’s individual NBP in 9MFY23. Incrementally, banca and alternate channels are also gaining prominence with their share increasing by 90bps YoY to 3.5% in 9MFY23.

* Change in product mix impacts NBMs: LIC’s new business margins (NBMs - calculated)

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