Buy Life Insurance Corporation of India Ltd for Target Rs 635 by Elara Capital
Monthly frequency impacts APE growth
Life Insurance Corporation of India (LICI IN) reported Q2FY27 APE of INR 170.0bn, up 3.8% YoY and 8.1% below our estimate, as a sharp fall in ULIP pulled individual APE lower while group APE grew. VNB rose 17.1% YoY to INR 37.1bn, 14.4% below our estimate, with VNB margin at 21.8% (+250bps YoY; our estimate: 23.4%). H1FY27 VNB margin stood at 22.3% (+470bps YoY) but slipped from 22.9% in Q1FY27, as a ~40bps fall in risk-free rates cost ~120bps, more than offsetting a ~50bps gain from the mix. Embedded value rose just 1.0% from March to INR 7.97tn on mark-to-market losses. Management expects a favorable impact on competitive intensity for LICI, and we concur, as its commission rates are lower than peers’. The reforms should also open up opportunities in bancassurance. We retain Buy with an unchanged TP of INR 635.
Individual growth stalls on monthly ULIP reset:
Individual APE was flat in H1 (+0.3% YoY), as ULIP APE fell 40%, which had a share of ~24% in FY26, and has now dropped to ~14% of monthly premium payment mode policies, driven by weaker equity market sentiment and nudge to distributors to increase the minimum ticket size of the policies. Non-par savings (+35%) and protection (+59%) grew strongly, lifting non-par ex-ULIP to 13.0% of total APE from 10.7%, but the non-par share of individual APE fell to 34.0% from 36.3%. Individual weighted received premium grew 14.5%, and management expects APE and WRP growth to converge by year-end, aided by stronger Q3-Q4 seasonality and new launches in deferred annuity, health and term. Group APE grew 14% in H1.
Margin gains now rest on mix:
In H1 VNB walk, business mix added 330bps and assumptions (largely risk-free rates) 280bps, while expenses cost 140bps. With the yield-curve tailwind reversing, management expects further gains from mix (non-par savings and protection), higher ticket sizes and opex efficiency, and remains positive on FY28 margins. The H1 expense ratio improved 87bps YoY to 10.4%. LICI hedges ~80% of non-par premium, but margins remain highly rate-sensitive.
Persistency mixed; agency still the bedrock:
Thirteenth-month persistency on premium slipped to 74.7% from 75.3% and 61st-month to 61.0% from 63.8%, though policy-based persistency improved in the 13th, 37th and 49th-month cohorts. Agency contributed 92% of individual new business premium; banca and alternate channels grew 21% YoY. Per management, IRDAI’s proposed distribution reform is favorable, given its low expense ratio.
Retain Buy with an unchanged TP of INR 635: We cut FY27E/28E/29E APE estimates by 1.2%/0.9%/0.5% and VNB estimates by 4.8%/2.5%/1.7%, building in VNB margins of 23.7%/23.5%/23.9% given the moderation in the yield curve, and lower FY27E/28E/29E EV by ~9/5/5% as a result of mark to market losses in EV. Our DCF-based TP stays at INR 635, implying 0.8x Sep-28E EV and 56% upside. Key risks are a further fall in the yield curve, a prolonged ULIP slowdown, premium-based persistency slippage and adverse IRDAI commission changes
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SEBI Registration number is INH000000933
