LIC Q1 Results Review: Analysts See Upside Despite Concerns Over Margins, Growth

Analysts see a potential upside for shares of Life Insurance Corp. after its first-quarter premium and revenue rose even as margin narrowed.

The insurance behemoth has all the levers in place to maintain its industry-leading position and ramp up growth in highly profitable product segments, Motilal Oswal said in its note.

Emkay Global, however, expressed concerns on its ability to offer competitive products or gain market share in the mass-affluent and high-net-worth buyer segments.

The state-owned life insurer’s net profit jumped 231 times year-on-year but declined 71% sequentially in the quarter ended June. That could be attributed to a change in its distribution policy in September last year.

Its overall premiums rose 20% and revenue was up 10% year-on-year.

Value of new business—present value of the future profits associated with new business written during the period—stood at Rs 1,861 crore. VNB margin was at 13.6%. It's lower than what the insurer reported for entire FY22.

The earnings were announced after market hours on Friday and Monday was a holiday.

Shares of LIC were trading 2.46% higher at 12:26 p.m. on Tuesday compared with a 0.60% rise in the BSE S&P Sensex.

Of the six analysts tracking the company, four maintain 'buy' and two suggest 'hold', according to Bloomberg data. The return potential of the stock is 19%.

Here’s what brokerages have to say about LIC’s Q1 FY23 performance:

• Maintains ‘buy’ with a target price of Rs 830 apiece, implying an upside of 22%.

• LIC has all the levers in place to maintain its industry-leading position and ramp up growth in the highly profitable product segments (mainly protection, non-participating, and savings annuity).

• However, changing gears for such a vast organisation requires a superior and a well-thought-out execution.

• The management said it continuously increased its market share in CY22.

• LIC launched two new non-participating products in 1QFY23. The management said it will focus on the launch of non-par products only.

• Growth in the agency channel remains strong (up 35% year-on-year) and constitutes 97% of the mix.

• Agents are being continuously trained to sell non-par products. This will play an essential role in driving sales of the same.

• Sales (Individual new business premium) in the bancassurance channel grew 135% year-on-year. However, this was on a low base.

• Both annuity or pension and unit-linked insurance plans saw a strong growth in Q1FY23.

• Expect momentum to sustain, led by the introduction of new products.

• The 150 basis points sequential decline in VNB margin driven by higher annuity rates and higher sales of lower-margin business. It was offset by an assumption change (up 80 basis points).

• Expect LIC to deliver ~13% CAGR in annualised premium equivalent during FY22-24, while VNB margin is likely to improve to 14.6%.

• Estimate operating return on embedded value to remain modest ~12.4% given its lower margin profile than private peers.

• LIC’s valuation, at 0.7x FY24E embedded value, appears reasonable.

• Maintains ‘neutral’ reiterating hold with a target price of Rs 800 apiece, implying an upside of 17%.

• LIC’s Q1 growth has come on a favourable base and will moderate as the macroeconomic environment is seen hurting growth in the near term.

• The strong APE growth of 47.6% year-on-year comes on a favourable base, when new business sales were acutely affected in Q1FY22 on account of the severe Covid-19 delta wave.

• The 13th month policy persistency of about 63% and premium persistency of around 75% fail to make a convincing case about sales and servicing process of LIC, as the 13th month lapse would lead to complete forfeit of the customer’s first-year premium in a non-ULIP dominant policy base.

• The relatively-better returns of the LIC participating product (for persistent policyholders) have been helped by 95:5 surplus sharing (including complete surplus from the non-par book) and lapses.

• Now with fund segregation in place and the surplus sharing ratio having gradually improved to 90:10, the return on par product (bonus rates) is likely to come under pressure.

• On the individual non-par front, the indicative top-end internal rate of return for recently-launched products is currently around 5%, 50-80 basis points lower than large private peers’.

• Given the cost dynamics of LIC, the brokerage is still not convinced about its ability to offer competitive products or gain market share in the mass-affluent and HNI segments.

• Given the moderation in the group business margin and competition putting non-par savings margin under pressure, FY23 margin should be largely similar to FY22 levels.

• Keeps FY23-25 estimates unchanged.

• Given the inherent volatility in LIC’s EV (owing to a fairly high equity in the non-par asset mix) and the sub-par RoEV, the brokerage maintains neutral view.

• LIC Q1 results highlights management focus on non-par segment.

• Overall VNB margins declined 150 basis points sequentially to 13.6% led by faster growth in low margin group segments.

• APE growth was 48% year-on-year on an impacted Covid-base and as private players saw steeper uptick.

• LIC's premium market share came off by 200 basis points to 65.2%. However, market share in policies increased around 4% to >70%.

• Share of non-par inched up to 7.8% of individual APE, with healthy performance of the revised guaranteed products where management hiked IRR offerings after a long period.

• Products like 'Jeevan Akshay' and Jeevan Shanti' remain top two performers where management had hiked rate offerings to compete with private sector and reduce the large gap in rates.

• Given a slowdown in protection volumes (30-50% below pre-Covid levels), private insurers continue to rely on guaranteed products for incremental growth which contributed 30-40% of incremental individual APE in Q123.

• While LIC's execution has so far been slow, ramp-up in this segment can add to rising competitive intensity, impacting margins over the medium term.