The Street gave a thumbs-up to Life Insurance Corp.’s (LIC) June quarter (Q1FY26) results, with the stock rising 4% on Friday. In a seasonally weak quarter, a 150-basis-point (bps) year-on-year increase in the value of new business (VNB) margin to 15.4% came as a comfort. This was largely driven by a higher share of non-participating products.
The annualized premium equivalent (APE) of non-participating (non-par) policies rose by ₹526 crore to ₹2,142 crore. Of this, the APE of unit-linked insurance plans (ULIPs) increased by ₹496 crore to ₹927 crore, contributing nearly the entire growth.
In the profitability hierarchy of non-participating products, term (protection) insurance ranks at the top, followed by non-ULIP savings products, with ULIPs at the bottom. Despite this, the overall VNB margin rose, suggesting that even ULIPs may now be yielding higher margins than participating policies. Until Q3FY25, when LIC disclosed separate data, the VNB margin on participating policies was just about 10%.
The VNB bridge—i.e., the year-on-year breakdown of the change in VNB margin—shows a 190 bps gain from changes in the business mix. This reflects a shift in APE towards non-participating policies. Unlike participating policies, non-participating policies do not allow policyholders to share the profits of the life insurance company, which makes them more profitable from the shareholders’ point of view.
LIC’s share of non-participating policies increased to 30% of APE from 24% year-on-year, with the rest coming from participating policies. However, it is worth noting that the same metric (share of non-participating policies) for private life insurance companies is 70% and above. So, there is ample scope for LIC to catch-up.
The management said it continues to strategically focus on growing non-par products to drive an improvement in VNB margins. Remember, it has guided in the past that it aims to have a VNB margin at 20% plus.
Apart from the business mix, economic and operating assumptions also influence VNB margin. Economic assumptions are mainly interest rates or yield on investment and inflation; operating assumptions are mortality (death rate), expense assumptions, and persistency, i.e. how long policyholders continue to keep their policies alive by paying premiums.
LIC lost about 230bps in VNB margin due to the change in economic assumptions. However, this was mostly offset by a 190 bps gain from operating assumptions, helped by lower overall expenses.
Margin tends to gradually pick-up in the subsequent quarters after a typically weak Q1. YES Securities estimates margin for the full year at 19.4% for FY26 and has raised target price by 5% to ₹1,050. Even at the revised target price, the stock will still be below the embedded value per share (sum of book value per share and present value of future profits in existing policies) of ₹1,363 per share for FY26 based on estimates of YES Securities.
In contrast, other listed life insurance companies are trading at a premium to embedded value. One of the reasons for LIC trading at a discount to embedded value could be low return on embedded value (RoEV), a metric similar to RoE, at 11.3% for FY26. Another technical factor limiting gains in LIC share price could be the overhang of future stock supply.
The government holds a 96.5% stake in LIC and must bring it down to 90% by May 2027 to meet the public shareholding regulations of the Securities and Exchange Board of India. LIC listed more than three years ago. The stock is trading below its IPO price of ₹949, although it hit a new 52-week high of ₹1,160 earlier this year.
