Growth, lower valuations to drive gains in LIC stock in near term

The VNB margin expanded 80 basis points Y-o-Y to 17.6 per cent at end FY25. The VNB margin expansion is primarily on account of focus towards the profitable non-par products

Life Insurance Corporation of India’s (LIC) annualised premium equivalent (APE) growth remained weak in the fourth quarter of the financial year 2024-25 (Q4FY25) and flat in FY25, but management expects growth to rebound in FY26.

 

The focus remains on improving product mix by increasing share of non-participating or non-par products in the individual APE. Value of new business (VNB) is expected to clock double digit growth over FY25-27. The emphasis is growth via the agency channel, though the bancassurance and alternate channels also registered good growth.

 

The VNB margin expanded 80 basis points year-on-year (Y-o-Y) to 17.6 per cent at the end of FY25. The VNB margin expansion is primarily on account of focus towards the profitable non-par products. VNB grew 5 per cent Y-o-Y to ₹10,000 crore in FY25. The VNB may see 11 per cent annual growth over FY25-27 to ₹12,300 crore. 

 

LIC’s APE remains flat at ₹56,800 crore at the end of FY25. However, at the end of Q4FY25, it was a decline of 11 per cent Y-o-Y. APE may clock 7 per cent annually over FY25-27 to hit ₹65,300 crore. The management expressed optimism that FY26 would be a stronger year because regulations had slowed the growth of par products in FY25, which is now anticipated to resume. LIC’s individual APE market share saw a decrease of 287 basis points Y-o-Y to 28.7 per cent at the end of Q4FY25. On quarter-on-quarter (Q-o-Q) basis, it was up 389 basis points.

 

LIC's sustained focus on profitable products can be seen in the share of non-par products, which accounted for 27.7 per cent of individual APE at the end of FY25, compared to 18.3 per cent at the end of FY24. At the end of FY25, the share of par products in overall APE declined to 49 per cent compared to 55 per cent in FY24, a 12 per cent decline Y-o-Y. 

 

The savings contribution to APE increased from 7 per cent at the end of FY24 to 8 per cent in FY25. The strong growth in unit linked insurance products (ULIP) continued with 166 per cent Y-o-Y growth to constitute 7 per cent of APE at the end of FY25 vs 3 per cent at the end of FY24.

 

The bancassurance and alternate channels continue to expand faster than overall growth, with 58 per cent Y-o-Y to ₹3,500 crore, constituting 6 per cent of the individual new business premium (NBP), compared to 4 per cent in FY24. LIC's positioning in the agency channel persisted, with 94 per cent of individual NBP at the end of FY25.

 

An estimate suggests that LIC suffered negative economic variance in H2FY25, with embedded value (EV) dropping. The company reports EV annually, so this is based on assumptions, given market corrections. However, subsequent market recovery after March 25 has pulled EV up again.

 

LIC has now started to hedge interest rate risks in its investment book. The cost of the hedge will lower and normalise the VNB margin of its non-par book. Thus, while an increasing share of non-par will boost margins, lower segment-level margins (reflecting the cost of hedges and falling rates) may reduce the difference.

 

The stock is trading at around 0.75 times the FY25 EV, which is at very significant discount to its private sector competitors. If growth rates improve and expanding VNB margins are sustained, positive rerating is possible, so these variables could be key monitorables. Even if the valuation of LIC remains at a discount to peers, faster growth should translate into higher price targets. Analysts see this as a valuation play with a good risk to reward equation since either a rerating or better growth could push the price up.