LIC’s dominance is unparalleled in the country’s life insurance sector, domestic brokerage firm Kotak Institutional Equities (KIE) said while initiating coverage on the public sector behemoth with a buy rating.
The insurer’s stock jumped 3.41% to close at 733.70a share following the report.
“The margin expansion, driven by the shifting of product mix by its unparalleled agency force, should boost VNB growth, even as overall medium-term APE growth will likely be lower than private peers,” Kotak said.
Despite ceding share to private players, LIC has retained a ~37% market share in individual APE in FY22. Its enormous agency franchise remains the cornerstone of its success, driving 96% of individual NBP in FY22, KIE said.
“Moreover, the high productivity of its agency force, coupled with the benefits of scale, drives cost leadership, while listed private peers largely depend on banks (44-65% of individual NBP) to drive their business. We remain positive about LIC’s ability to steer
the product mix to the high-margin, non-par segment from the large share of the participating business (29% of APE in FY2022),” the brokerage said.
KIE expects LIC to deliver a VNB CAGR of 18% in FY2023-25E owing to an APE CAGR of 13% and 180 bps margin expansion. The bifurcation of funds led to a sharp increase in EV, a large part of which reflects unrealised gains in the equity book, thereby compressing RoEV (operating RoEV of ~10% for FY2023-25E), the report said.
“Better economics for shareholders due to the 100% share in the non-par book and 10% (5% earlier) in the par book will likely support high growth in earnings (`25,800 crore in FY25E versus `4,100 crore in FY22),” KIE said.
According to the brokerage, the key risks to LIC’s business stem from competition from private players that have a more diversified product mix and sourcing. A correction in the equity market can pose a significant risk to EV because of its large equity investment book, especially in the non-participating segment.
“We remain confident about LIC’s ability to steer product mix to high-margin non-par segments from a large share of the participating business (66% of APE in FY22) and sustain its market-leading, dominant position in the group business (29% of APE in FY2022).
On global comparison, LIC is the fifth largest life insurer in terms of overall written premiums (CY2020/FY21), and the third largest in terms of net earned premium (CY2020/FY21). LIC also has the tenth largest asset base among life insurance companies globally.