Life Insurance Corp. of India Ltd (LIC) stock jumped over 7% on Wednesday to ₹936 despite its dull March quarter (Q4FY25) results. Perhaps, the Street’s focus shifted to the cheap valuation of the stock that trades at a price-to-earnings multiple of 12x, as per Bloomberg consensus FY26 estimates.
LIC’s Q4 performance was far from inspiring. Total annualized premium equivalent (APE) and value of new business (VNB) dropped 11% and 3% year-on-year to ₹18,853 crore and ₹3,534 crore, respectively. The only comforting factor was the 154 basis points (bps) increase in the VNB margin to 18.7%. A basis point is one hundredth of a percentage point.
Less transparency
Note that LIC had been a step ahead of its peers in terms of transparency, voluntarily disclosing VNB margins for each segment. However, it has changed its data presentation for Q4FY25 and FY25 by showing aggregate VNB data and not for participating, non-participating and group insurance products separately. The management justified the change as an alignment with widely followed industry practice.
In general, the VNB margin trajectory is likely to be higher over the longer run as the share of more profitable non-participating policies rises. Non-participating policies do not allow policyholders to share the company’s profit, effectively translating into more profit for shareholders.
The share of non-participating policies in individual APE was 27.7% in the quarter, with the rest coming from participating policies. But there is no linear trend in terms of policy mix improving in favour of non-participating policies as the metric has fallen from 31.6% in the December quarter due to faster growth of participating policies. In fact, this could have been a reason for the 70bps on-quarter drop in the VNB margin.
LIC’s presentation also quantifies the impact of the risk-free rate (RFR) on margin. RFR typically refers to the interest rate on government bonds. Every 100-bps drop in the RFR leads to an 800-bps impact on the VNB margin. As the RFR was lower by about 35bps, the VNB margin was lower by 280bps for FY25, assuming all other factors had remained constant. If there had been no change in the RFR, the VNB margin for FY25 would have been 20.4% versus the reported number of 17.6%.
The company is focused on overall business growth, with margins evolving as an outcome. It intends to sell the products that are demanded by customers and not necessarily the ones having high margins. LIC’s strategy is to have rider attachments, such as critical illness and accident benefits, with the policies being sold. This pushes up the profit margin even as the management admitted that the progress has not been satisfactory on this front.
Low valuation
LIC’s expenses of management as a percentage of net premium income declined nearly 500bps on-year to 11.2% in Q4FY25. The improvement is despite lower net premium income (i.e. denominator). The ratio looks better because of the absolute decline in commission and salaries paid. The management attributed a sharp fall in employee expenses to the wage revision in FY24 that had caused higher provisions for pension and other retirement benefits, which were not there in FY25.
LIC’s embedded value (EV) increased 6.7% on-year to ₹7.77 trillion at FY25-end. It would have been higher by ₹29,294 crore, had it not been for lower RFR and lower gains from the equity portfolio. Even though the growth in EV was moderate, the LIC’s market capitalization is at ₹5.88 trillion or 0.75x of EV. The low valuation could be owing to the low return on embedded value (RoEV). RoEV is similar to RoE.
According to Yes Securities, LIC’s RoEV is likely to remain stagnant at 11.3% for the next two years to FY27. The brokerage has maintained a target price of ₹1,000 for the stock.
