By Emkay Research
State-run insurance giant Life Insurance Corporation (LIC) reported a mixed performance, where 36.7% y-o-y APE (annualised premium equivalent) growth and VNB (value of new business) margin of 14.6% were better than our estimates, but the EV of Rs 5.44trillion was 3% below our estimates and largely flat. Profit after tax was at Rs 16,600 crore was way above our estimates, as LIC chose to transfer surplus Rs 14,300 crore from its non-par fund to shareholders’ fund. On net basis, LIC’s H1FY23 numbers do not change our opinion on the fundamental challenges of slower growth and sticky cost leading to gradual market share loss in the retail segment and subpar profitability reflecting in poor embedded value (shareholder value) compounding. To reflect first half developments, we adjust our estimates, leading to 6-8% cut in FY23-25e EV (enterprise value) estimates. Currently, LIC is trading on FY23 estimates P/EV of 0.7x. LIC’s valuation is undemanding, but we do not see catalysts to drive a material re-rating of LIC’s shares. We reiterate our Hold rating with our revised TP of Rs 750.
Favourable base and superior growth in group drives APE
Annualised premium equivalent for H1FY23 grew at 36.7% to Rs 25,230 crore, led by strong 67.5% growth in the group business and Covid-19 Delta wave, which affected lower retail APE base of H1FY22. Strong growth in Group APE was driven by robust growth in the annuity product. VNB margins expanded to 14.6% for H1FY23 versus our expectation of 13.8%. Y-o-Y improvement in VNB margin was driven by a combination of factors, including higher interest rates, increased annuity in group business, change in profit sharing in PAR, and growing non-par in the retail business mix. H1FY23 PAT of Rs 16,600 crore was largely driven by Rs 14,300 crore of surplus transfer from non-par funds to shareholders’ fund, as enabled by accounting policy change post fund bifurcation done from H2FY22.
Embedded value growth reflects muted shareholders’ value creation: H1FY23 EV of Rs 5.44 trillion was largely flat vs. FY22 EV of Rs 5.41 trillion and H1FY22 EV of Rs 5.39 trillion. For H1FY23, the embedded value grew by 0.85% y-o-y to Rs 5,44, 300 crore, delivering a muted show for the past one year. This poor EV growth is the culmination of multiple factors: (i) Flat equity market at H1FY23-end vs. FY22 and H1FY22 would have impacted EV negatively as LIC’s EV remains highly sensitive to the equity market; (ii) Rise in bond yields would also have had some negative impact on EV; (iii) VNB’s contribution to EV remains poor for LIC – 1.7-1.8% of EV and; (iv) The Rs 11,50,000 crore additional provision related to retirement benefits on account of wage revision would have led to negative operating variance. On net basis, LIC’s operating RoEV trend of ~10% will remain subpar.
Operating parameters broadly stable: Given its massive size and legacy book, operating parameters such as persistency, commission ratio, individual product mix, and opex ratios were broadly stable adjusted for one-offs. H1FY23 saw a spike in the opex ratio, led by Rs 11,500 crore additional provision for retirement benefits. Improvement in commission ratio was an outcome of higher group business. On 13th-month persistency, LIC at 77.6% remains poorer vs. private peers and 61st -month persistency of ~61% is slightly better than private peers; but adjusted for negligible ULIP in LIC’s portfolio, the difference is not material.
Adjust estimates to reflect H1 developments: To reflect H1FY23 developments, we have tweaked our FY23-25 estimates, leading to slightly higher APE growth, stable VNB margin, lower EV, and higher PAT and dividend. We expect LIC to continue transferring surplus from non-par fund to shareholders’ fund to boost PAT and net worth to support a higher dividend and/or bonus share issuance. However, we continue to see the growth and cost challenges at LIC leading to inferior shareholder value creation, reflecting in lower EV growth and inferior operating RoEV.