LIC's VNB margin falls short of medium-term target, say analysts

LIC's VNB margins improved by 20 basis points (bps) to 13.90 per cent in Q1 FY25 over the same period last year due to a change in the business mix of the insurer

Despite state-owned Life Insurance Corporation (LIC) reporting an improvement in value of new business (VNB) margin in Q1FY25, analysts believe the growth has not been satisfactory in the context of the insurer’s medium-term targets on margins. VNB margin is a measure of profitability of life insurance companies.

LIC’s VNB margin improved by 20 basis points (bps) to 13.9 per cent in Q1FY25 over the same period last year due to a change in the business mix of the insurer. Its share of individual non-par products in total annualized premium equivalent (APE) has increased to 14 per cent in Q1FY25, up 759 bps over last year. Additionally, the share of non-par products in the individual APE-mix has gone up to 23.94 per cent in the quarter from 10.22 per cent in the year ago period.

According to Suresh Ganapathy, managing director, Macquarie Capital Securities, even as margins declined across all product segments, aggregate VNB margin for Q1FY25 improved 20bps to 13.9 per cent. This was driven by improvement in non-par mix, even as non-par margins declined 350 bps year-on-year (Y-o-Y).

“The VNB margin increase was further offset by decline in group business and par margins, down 220 bps Y-o-Y. Management highlighted that it has cut down on pricing, implying higher IRR (internal rate of returns) to customers, in the non-par segment and increased benefit payouts in par segment to drive growth,” Ganapathy said.

Shivaji Thapliyal, head of research, Yes Securities, said: “VNB margin has improved on a Y-o-Y basis but the desired improvement is not entirely satisfactory in the context of LIC’s medium-term target.”

“While there was a positive impact of business-mix change amounting to 370 bps, there was a negative impact of 120 bps and 230 bps due to product benefits and assumptions, respectively. Of the impact due to assumptions, the major negative impact on VNB margin has been due to decline in risk-free rate,” Thapliyal said.

Commenting on the impact of revised surrender value regulations on margins, LIC’s management has stated that the impact will be less due to the limited exposure to policies with less than 5-year term, with the rules being different for policies having term of 5 years or longer. Also, the insurer has several alternative measures to mitigate the impact, including changing the ticket size and product structure, the management said.

Additionally, the management has stated that they are aiming to have an upward trajectory in VNB margin to be in line with other key players in the industry. Also, there will be focus on market-linked products, and the growth in non-par savings will be even faster.

“While there was no explicit guidance on margins, the management said it is targeting strong VNB growth driven by strong APE growth and product-mix improvement, for which it is willing to sacrifice margins,” Ganapathy said.