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November 10, 2023 1 Growth remains an issue, while margin provides no solace

Result Highlights (See “Our View” below for elaboration and insight)

? VNB margin: Calculated VNB margin for 2QFY24 rose 163bps QoQ to 15.3%.

? VNB growth: VNB grew 53.8% QoQ, due to growth in total APE and margin expansion.

? APE growth: New business APE grew 37.4% QoQ, driven higher by growth in Individual Par and Non-Par APE. APE was still down -12.5% YoY

? Expense control: Expense ratio rose/fell by 437bps/-102bps QoQ/YoY to 17.2%, where QoQ the opex ratio was up 391bps and commission ratio 46bps

? Persistency: 37th month ratio fell-409/-44bps QoQ/YoY to 60.2% whereas 61st month ratio fell -408/-66bps QoQ/YoY to 55.2%

Our view –Material rise in Embedded Value not due to structural factors

Growth seems healthy on sequential basis but is weak on YoY basis:

The Individual APE in 1HFY24 was flat YoY at Rs 146.4bn whereas the Group business has de-grown -24.5% YoY to Rs 79.9bn. Within Individual business, Par APE has de-grown -2.0% YoY whereas Non-Par has grown 19.8% YoY.

VNB Margin has remained flat on YoY basis despite a rise in share of Non-Par business: The VNB margin for 1HFY24 amounts to 14.61% compared with 14.58% in 1HFY23. While the rise in the share of Non-Par products had a positive impact on VNB margin, more benefits have been given to policyholders, particularly for Annuity products, which has negatively impacted margin.

Embedded value has ramped up materially on YoY basis but this is on the back of nonstructural factors: EV has risen 21.7% YoY and Unwind remains the key contributor to this rise. Other than this, Economic Variance is likely to have been another key contributor. The EV remains sensitive to equity markets with a 10% move translating to a ~7% change in EV. We do not regard these factors as structural and prospective operating RoEV remains subdued.

We maintain a less-than-bullish ADD rating with a revised price target of Rs 695: We value LIC at 0.6x FY25 P/EV for an FY24E/25E/26E RoEV profile of 10.1/10.2/10.3%. We most prefer MFS and SBIL in the life insurance space.

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