IGI Logo

APE and VNB in line; VNB margin expands to 15.4%

• In 1QFY26, LIC reported net premium income of INR1.2t (in line), up 5% YoY. Renewal premium grew 6% YoY to INR599b, while first-year/single premium grew 1%/4% YoY to INR75b/INR519b.
• New business APE rose 9% YoY to INR127b (in line), with individual APE growing 9% YoY to INR70.6b and group APE rising 16% YoY to INR55.9b.
• Absolute VNB grew 21% YoY to INR19b (in line). VNB margin improved YoY to 15.4% from 13.9% in 1QFY25 but was slightly below our expectation of 16%.
• Management expects premium growth to recover in 2HFY26 and the focus remains on absolute VNB growth. VNB margin improvement will be driven by product mix shift toward non-par, cost optimization, higher contribution from high-ticket size products, and improvement in persistency.
• We have kept our FY26/FY27 estimates unchanged considering the in-line performance in 1QFY26. Reiterate BUY with a TP of INR1,080 (premised on 0.7x FY27E EV).

Product mix shift to non-par results in VNB margin expansion

• Individual APE growth of 9% YoY was driven by 33% YoY growth in non-par APE to INR21.4b, which was offset by a 4% YoY decline in par APE to INR49.2b.
• The strong growth in non-par business resulted in a rise in non-par contribution to16.9% from 14% in 1QFY25 of the total APE. This led to a 150bp expansion in VNB margin for 1QFY26.
• Commission expenses declined 3% YoY to INR49.5b and operating expenses fell 10% YoY to INR75.5b, resulting in expense of management ratio of 10.5%, improving 140bp YoY.
• Income from investments in policyholders’ accounts grew 7% YoY to INR1,029.3b, while it increased 52% YoY to INR17.8b in shareholders’ accounts. Total AUM grew 6% YoY to INR57t (in line). Yield on investment for policyholders’ accounts declined slightly to 8.45% from 8.54% in 1QFY25.
• On the distribution front, contribution from agency channel was at 92.3% in 1QFY26 (95.8% in 1QFY25), with individual NBP growing 2% YoY. Individual NBP from bancassurance grew strongly by 72% YoY, with contribution growing to 4.2% (2.6% in 1QFY25) with enhanced focus on building omnichannel distribution network.
• LIC maintains the highest agency force in the country with ~1.5m agents, of which 51.56% have a vintage of more than five years. This constitutes 47.1% of the industry agency force. The company now has tie-ups with 94 bancassurance partners, 295 brokers and 177 corporate agents, reflecting a massive distribution network spread across the country.
• The 13 th/37th/61st month persistency stood at 70.9%/64.3%/58.3% in 1Q, witnessing a YoY decline across cohorts (except 49th month persistency).
• Solvency improved to 217% in 1QFY26 from 199% in 1QFY25.

Highlights from the management commentary

• Several steps have been taken to improve margins: (1) rising proportion and demand of non-par products, which carry higher margins; (2) redesigning of non-par guaranteed products following IRDAI regulation changes, and (3) shift toward high-ticket products with stronger persistency and profitability.
• Across lines, VNB margins have either stabilized or improved, with the most notable gains in the individual non-par segment.
• While agency productivity in terms of number of policies has moderated, the average ticket size has risen 23% and sum assured has increased 15%. LIC expects policy count-based productivity to improve going forward.

Valuation and view

• LIC maintains its industry-leading position and focuses on achieving growth recovery through wider product offerings, higher ticket sizes, a shift in the product mix toward non-par, agency channel expansion, and a higher contribution from bancassurance and alternate channels. A shift toward highermargin non-par products and improvement in persistency will boost VNB margin going forward. The company is also working on enhancing its digital capabilities for cost optimization. We have kept our FY26/FY27 estimates unchanged considering the in-line performance in 1QFY26. Reiterate BUY with a TP of INR1,080 (premised on 0.7x FY27E EV).

Highlights from the management commentary Business highlights

• LIC’s individual and group market shares stood at 38.76% and 76.54%, respectively (vs. 39.27% and 76.59% in 1QFY25).
• * The number of policies sold declined 15% YoY, impacted by changes in surrender value regulations; however, this also led to a shift toward higher ticket-size products. Growth is expected to pick up meaningfully in 2HFY26.
• Policy sales via the Ananda app rose 39.4% YoY, reflecting progress in digital adoption.
• Several steps have been taken to improve margins: (1) rising proportion and demand of non-par products, which carry higher margins; (2) redesigning of non-par guaranteed products following IRDAI regulation changes, and (3) a shift toward high-ticket products with stronger persistency and profitability.
• The company’s dividend payouts have increased consistently from INR1.5/share in FY22 to INR12/share in FY25 and this trajectory is expected to sustain. LIC aims to maintain solvency in the 1.8-2.0x range, balancing growth ambitions with potential regulatory changes that could impact solvency.
• Economic assumptions were impacted (50-75bp) by interest rate changes, while operating assumptions contributed positively owing to expense efficiencies and improved long-term persistency. Mortality experience remains stable, with a favorable effect from higher ticket-size products.
• Individual VNB margin improved to 23-24% in 1QFY26 from 21% in 4QFY25.
• Monthly premium mode accounts for 10-15% of policies. ? LIC is leveraging a combination of workforce rationalization and technology for cost optimization. The goal is expense optimization rather than outright reduction.
• Digital transformation is in focus, with AI/ML being integrated into the decisionmaking process across all departments. The company is also working with fintech partners to enable seamless digital services and it aims to remain competitive on the digital front.
• LIC is currently evaluating a health insurance foray through the acquisition of a stake in a standalone health insurer. However, this is contingent on further regulatory developments expected on the composite license proposal.
• The government’s stake in LIC is targeted to come down to 90% by 2027, with dilution expected in tranches.

Product mix and VNB margin

• ULIP witnessed strong growth due to a low base, while savings and annuity had a higher base. While non-par product margins were the highest, par product margins improved due to repricing. Strong ULIP growth led to a robust increase in absolute VNB resulting in margin improvement.
• Management remains focused on scaling up the non-par business, which will support continued improvement in overall VNB margins. While margin improvement remains an objective, business growth and customer demand remain the key priorities. Improved longevity assumptions and a stronger focus on protection in the group business have also supported VNB margin improvement.
• Group business VNB margin varies by product but is higher in the assurance segment. Group business contributes ~30% of overall VNB and remains a strategic segment, especially on the assurance side.
• Annuity products are expected to gain relevance as the senior citizen population rises. Cross-selling and upselling opportunities remain strong, and the company’s strategy is to sell customer-centric solutions.
• Across the lines, VNB margins have either stabilized or improved, with the most notable gains in the individual non-par segment.

Distribution

• LIC added 61,000 agents over the past year, maintaining its agent market share at 47.11% (vs 48.64% in 1QFY25).
• While agency productivity in terms of number of policies has moderated, the average ticket size has risen 23% and sum assured has increased 15%. The company expects policy count-based productivity to improve going forward.

For More Research Reports : Click Here 

For More Motilal Oswal Securities Ltd Disclaimer
http://www.motilaloswal.com/MOSLdisclaimer/disclaimer.html
SEBI Registration number is INH000000412