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APE grows 26% YoY, VNB margin expands 260bp YoY to 17.9% Strong growth in premiums driven by exceptional sales in Sep’24

* In 2QFY25, LIC reported net premium income of INR1.2t, up 12% YoY. For 1HFY25, net premium income grew 14% YoY to INR2.3t. We expect net premiums to grow 8% YoY during 2HFY25.

* New business APE grew 26% YoY to INR164.7b, driven by 31% YoY growth in Individual APE to INR114.2b and 15% YoY growth in Group APE to INR50.5b. For 1HFY25, new business APE grew 24% YoY to INR280.2b. We expect new business APE to grow 5% YoY in 2HFY25.

* VNB margins (net) improved by 260bp YoY to 17.9%, driven by 47% YoY growth in absolute VNB to INR29.4b. For 1HFY25, VNB grew 38% YoY to INR45.5b, reflecting VNB margin of 16.2% (14.6% in 1HFY24). We expect VNB to grow 12% YoY in 2HFY25.

* LIC reported a 4% YoY decline in shareholder PAT to INR76.2b. For 1HFY25, PAT grew 4% YoY to INR180.8b. We expect PAT to grow 4% YoY in 2HFY25.

* The management aims to achieve a positive growth trajectory in the par segment and expects strong growth to continue in the non-par segment.

* We have raised our premium growth and VNB margin estimates for FY25/FY26, factoring in 2QFY25 performance. We have also raised our EV estimates, factoring in higher economic variance. With the increase in the share of the non-par segment, we expect VNB margin to improve to 19% by FY26. Reiterate BUY with a TP of INR1,200 (premised on 0.7x Sep’26E EV).

Rising share of non-par in APE mix

* LIC’s first/renewal/single premium rose 12%/4%/24% YoY to INR112b/ INR619.1b/INR469.4b in 2QFY25.

* For 2QFY25, individual new business premium income increased by 20% to INR176.5b and individual renewals grew 4% YoY to INR598.6b. Group business premium grew 20% YoY to INR424b.

* Par segment APE grew 7% YoY to INR82.5b in 2QFY25, contributing 50.1% to the mix.

* Non-par segment APE jumped ~3x YoY to INR31.6b in 2QFY25, taking the non-par contribution in APE to 19.2% from 7.4% in 2QFY24.

* On the distribution front, the share of the agency channel stood at 95% vs. 95.9% in 2QFY24. The share of the banca and alternate channels improved to 4.1% in 2QFY25 from 3.6% in 2QFY24. ? The 13th/25th/37th/49th/61st month persistency stood at 68.2%/65%/60.5%/ 56.5%/54.8% in 2QFY25 vs. 71.2%/65.2%/60.2%/57.7%/55.2% in 2QFY24. ? AUM increased to INR55.4t in 2QFY25 from INR47.4t in 2QFY24, up 16% YoY.

Highlights from the management commentary

* Commission has been aligned to policy duration and not reduced. The company is currently not implementing clawback provisions and may make a decision after seeing the experience on new products. Rewards and benefits, apart from commission, can be introduced going forward to encourage business in areas with wider spread and profitable customers.

* LIC is redesigning products with a mindset of 1) aligning with the regulator’s expectations, 2) maintaining investor profitability, and 3) keeping benefits of intermediary intact. While there has been no change in commission rates, policies have been modified to link rewards to better persistency.

* The company has relaunched 32 out of 54 products in the first tranche. Many products have undergone revisions in premium rates, along with design changes. The company has realigned product offerings to ensure no adverse impact on margins due to new regulations.

*  LIC is working to find the right opportunity in SAHI sector. The plan is to buy stake in a SAHI, which can be done without a composite license, and restrictions will only be due to investment regulation.

Valuation and view

LIC maintains its industry-leading position and is focusing on ramping up growth in the highly profitable product segments (mainly Protection, Non-PAR, and Savings Annuity). New product launches, stronger banca & alternates channel presence, and digitization will enable LIC to bridge the gap with private players. The modified commission structure after new surrender value regulations will be key for growth and profitability. We have raised our premium growth and VNB margin estimates for FY25/FY26, factoring in 2QFY25 performance. We have also raised our EV estimates after factoring in higher economic variance. With the increase in the share of the non-par segment, we expect VNB margin to improve to 19% by FY26. We expect LIC to deliver a 10% CAGR in APE over FY24-27, enabling a 14% VNB CAGR. We expect operating RoEV to remain modest at 11.2% in FY26, given its lower margin profile vs. private peers and a large EV base. We have reduced our EV multiple factoring in higher sensitivity to equity market movements, weaker than expected performance in Oct’24 and impact of surrender charges. Reiterate BUY with a TP of INR1,200 (premised on 0.7x Sep’26E EV).

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