The domestic brokerage JM Financial iterates its buy call on Life Insurance Corporation of India and believes that non-participating book at the company which is its key focus area now provides growth opportunity to the company. The brokergae maintains a 'buy' on the stock and has pegged the target at Rs 1222 per share.

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Here are the 3 key reasons why the brokerage has turned bullish on the counter and initiated coverage with a 'buy':

Strong embedded value (EV) growth expected in FY24 numbers on the back of gains in equity book:

The company has an AUM of over INR 50 trillion, with 25% invested in equities – this is likely to provide a kicker to its EV reporting in FY24. This vast book allows the company to take risk in equities and report higher returns on in-force business, in line with private players at above 8% while it had reported 7.4% returns in FY23.

Build-up of non-par business looks on track:

The company's agents are now aiming to sell a new product, the non-participatory `business, visible through x growth in 9MFY24, on a low base. "While 4x growth may not sustain, we expect the company to grow the non-par book at 20%+ YoY through the 2020s. This will drive VNB margins above 20% levels and provide stability to EV returns," noted the brokerage.

Lowest mortality risk on book provides resilience:

The company's sum assured to embedded value remains lowest in the listed space – at just under 20x. This provides resilience against tail risks, and enables the insurer to take on return risks on its vast book, which it has so far refrained from, having predominantly sold par products.

The brokerage sees the leading insurer to grow at 9%/11% over FY25/FY26, led by its growing non-par business.

Furthermore, the brokerage states that as the company has shown strong growth in non-participatory products (4x YoY in 9MFY24), beating decades of business-as-usual. There is offered a strong runway for margin expansion through launch of protection and non-par products, which provide a sovereign guarantee, in addition to competitive returns.

It is underappreciated that LIC of India had an embedded value of 12.6x the largest private insurer in FY23. Embedded value or EV is a common valuation measure used mainly by life insurance companies for arriving at the consolidated value of shareholders' interest in an insurance company.

Even accounting for consistent 3x company-level growth in non-par products, VNB margins on new business are likely to remain below that of private peers by FY30. Similarly, operating returnson EV will trail the private industry, even if it enhances dividend payouts in the medium term, the brokerage held.

However, with buoyant equity markets, we expect the company to report strong, 24% YoY, growth in embedded value as on 31st Mar’24. Its core business is priced at under 0.7x on its FY26e embedded value. At these valuations, the company offers a large margin of safety.

While embedded value growth will fluctuate with equity market movements, improving new business margins will provide consistency to its growth. Value unlocking in the banking subsidiary provides an additional upside potential.