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RoEV improves due to underlying factors, Upgrade

Our view – Growth and margin show improved traction, BUY

VNB margin - VNB margin has improved in a reasonably healthy manner on YoY basis, driven by product mix change: The VNB margin for 2QFY25 amounts to 17.9% compared with 15.3% in 2QFY24, up 257 bps YoY. On half-year basis, VNB margin has improved 160 bps YoY, with product mix change enhancing 1H margin by 430 bps whereas economic assumption change offsetting the same by 290 bps. The share of Individual Non-Par business has risen by 11.8% points on YoY basis to 19.2% in 2Q. This has come with some sacrifice in margin with 1H margin for Non-Par business declining 6.2% points to 43.8%. However, mix change proved to be the over-arching factor influencing margin. Importantly, due to various measures undertaken, the company expects the VNB margin will not get impacted due to the change in surrender value norms.

APE growth – APE growth continued to remain robust, with Non-Par segment driving overall growth: Total APE has grown 25.7% YoY to Rs 164.65bn in 2QFY25. Individual Non-Par segment grew 227% YoY, driven by 438% YoY growth in Non-Par Savings. While Agency remained the overwhelmingly important channel with 95.3% share in business (Individual NBP terms), other channels continued to grow faster from a small base. The banca, alternate and digital channels grew 31.8%, 28.2% and 35.6% YoY, respectively (Individual NBP terms). It may be noted that the number of policies sold in October is down as the company is focused more on ensuring persistency. In the new products, the company has revisited the minimum sum assured where there were challenges in terms of persistency. In the initial phase, the intermediaries get used to the appropriate ticket size but the company is confident that, going forward, the number of policies sold will pick up.

We upgrade to BUY rating with a revised price target of Rs 1150: We value LIC at 0.7x FY26 P/EV for an FY25E/26E/27E RoEV profile of 11.5/11.6/11.7%. We most prefer MFS and SBIL in the life insurance space.

Other Highlights (See “Our View” above for elaboration and insight)

* VNB growth: VNB grew 82.7%/46.9% QoQ/YoY to Rs. 29.41bn, sequentially driven higher by increase in total APE and VNB margin.

* Expense control: Expense ratio rose/fell by 170/-365bps QoQ/YoY to 13.6%, where QoQ the opex ratio was up 72bps and comm. ratio was up 98bps.

* Persistency: 37th month ratio fell/rose -558/28bps QoQ/YoY to 60.5% whereas 61st month ratio fell -365/-41bps QoQ/YoY to 54.8%

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