Goldman Sachs (NYSE:GS) recently released its report on the Life Insurance Corporation (NS:LIFI) of India (LIC), shedding light on the company's performance in the fourth quarter (4Q). LIC reported an Annualized Premium Equivalent (APE) of INR 212 billion, reflecting an 11% year-over-year (yoy) growth, which was in line with Goldman Sachs' estimates.
However, the Value of New Business (VNB) declined by 1% yoy to INR 36 billion, resulting in a VNB margin of approximately 17%, a decrease of 201 basis points (bps) yoy.
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The report highlighted several key areas of LIC's performance:
Par Segment Weakness: The traditional participating (Par) segment saw a 20% yoy decline, continuing its trend of underperformance.
Non-Par and Group Business Growth: In contrast, the non-participating (Non-par) and group business segments experienced significant growth. Non-par segment saw an impressive 185% growth, driven by new product launches such as Jeevan Utsav and Jeevan Kiran.
Margin Decline Factors: The overall margin decline was attributed to a better product mix being offset by higher risk-free rates and increased rates in annuity products.
Future Expectations: LIC's management is optimistic about the future, expecting Non-par products to drive topline growth and improve VNB margins steadily.
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The financial health score of the stock makes it a good portfolio stock, with a rating of 3 out of 5. This is the primary check investors should do before further analysis. The health check analyses over 100 financial parameters and gives them each a score out of 5. Then all parameters are combined to arrive at a final score. If this score falls below 3, then investors can think of avoiding the counter, from the fundamental standpoint.
Key Call Highlights:
- Non-par Outperformance: Significant growth from a low base and successful new product launches.
- Retail Protection Pressure: Higher prices have impacted volumes, but efforts are ongoing to introduce more product varieties and reprice existing ones.
- Group Business Growth: Strong 65% growth, though margins were impacted by higher benefits to annuity customers.
- Composite License: LIC is eyeing opportunities in the health insurance space, particularly standalone health insurers (SAHIs), pending composite license approval.
- Solvency Improvement: The solvency ratio improved to 198% from 177% yoy.
Goldman Sachs has revised its earnings estimates for FY25E-FY26E upwards by around 7% to incorporate the 4Q results and a slightly better topline growth outlook. Consequently, the 12-month target price for LIC has been adjusted to INR 950 from INR 855, maintaining a Neutral rating.
Key risks include the potential for faster market share gains in higher-margin term and non-par products, which could positively affect LIC’s performance. Conversely, an inability to scale up these products and over-reliance on lower-margin Par products could pose downsides.
Despite LIC's position as the largest life insurer in India, its less favorable product mix and historical challenges in selling higher-margin products, coupled with slower growth compared to private players, remain areas of concern. Nevertheless, the current valuation is deemed fair compared to peers, justifying the Neutral stance by Goldman Sachs.
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