LIC IPO: Finally, The Time Has Arrived

By: Tavaga Research

Users who have an LIC Policy now have a reason to be optimistic. In its impending IPO, LIC has introduced a special category for policyholders. Users who are LIC policyholders can apply for the IPO in this category, up to a maximum of INR 2,000,000.

The Government of India has declared that policyholders would be entitled to up to 10% of the issue amount in the LIC IPO. For this group of investors, a reduction in the base price is also expected (Exact pricing details are still not out yet). 

In its 2020 budget, the government announced intentions to undertake an initial public offering (IPO) of Life Insurance Corporation of India (LIC). The LIC IPO DRHP was filed on February 13th, 2021. According to a filing with the Securities and Exchange Board of India, the government is issuing 31.62 crore shares, or 5% of the equity, in the IPO. By March 2022, the center hopes to have an initial public offering (IPO) and subsequent listing of LIC on stock exchanges.

LIC OVERVIEW

The Life Insurance Corporation of India (LIC) is a statutory insurance and investment company with its headquarters in Mumbai, India.

On September 1, 1956, the Indian Parliament passed the Life Insurance of India Act, which nationalized the Indian insurance industry. The state-owned Life Insurance Corporation of India was formed through the merger of over 245 insurance firms and provident societies.

The Life Insurance Corporation of India, which had a monopoly on soliciting and selling life insurance in India, had significant surpluses from its inception and contributed roughly 7% of India’s GDP by 2006. With 8 zonal offices, 113 divisional offices, and over 4,700 branch and satellite offices, LIC has a strong network. Individual agent strength, of course, accounts for a staggering 55 percent of the insurance industry.

Retail, developers loan sector, LAP, and fee-based revenue are the four verticals in which LIC operates.

LIC individual products are divided into two categories: participating insurance products and non-participating insurance products. Savings insurance products, term insurance products, health insurance products, annuity and pension products, and unit linked insurance products are among the non-participating products.

LIC group products includes (i) group term insurance products; (ii) group savings pension products; (iii) group savings insurance products; and (iv) group annuity products

An initial public offering (IPO) may be a significant milestone for a corporation since it allows it to boost significant funds. This improves the firm’s ability to develop and expand. The increased transparency and validity of its stock listing might also help the firm get better conditions when it comes to borrowing money.

In India’s economy, a new Initial Public Offering (IPO) or an IPO is very essential. A new IPO listing welcomes new public investors into the primary financial market and fosters the sharing of information among all stakeholders since the listed business disseminates necessary information about itself throughout the listing process.

A new IPO also provides the listed company with additional capital at the best possible price. A new IPO is an important stage in the process of generating new equity shares for secondary market trading. New IPOs, on the whole, serve to keep the primary market afloat even when the secondary market is tumultuous.

KEY TAKEAWAYS FROM LIC DRHP

LIC Overview and Strength 

According to the DRHP, LIC’s assets under management (AUM) amounted to Rs. 39.6 lakh crores as of September 2021. LIC has a 66 percent market share in new business premiums (NBP) and 64.1 percent of overall premium, but it sells more than 74.6 percent of policies, demonstrating that it continues to dominate the mass insurance industry. This was accomplished by the sale of 28.30 crore life insurance policies to 25 crore policyholders, which were distributed by 14 lakh agents on the street.

LIC controls a large portion of the individual and group life insurance markets. In FY21, for example, LIC had a 74.6 percent market share of individual policies issued and an incredible 81.1 percent market share of group policies issued. According to IRDA, the LIC individual agent network accounts for 55% of the total agent network in India.

LIC continues to dominate India’s life insurance market despite the existence of private insurers for over two decades. It has a 76.28 percent market share in terms of total policies and a 71 percent market share in terms of first-year premiums. However, market share alone does not dictate values, as evidenced by the fact that, despite being several times smaller, Bajaj Finance has a larger market cap than SBI.

In terms of life insurance premiums, LIC is rated fifth in the world, and tenth in terms of total assets. It is the only Indian insurer among the world’s top ten.

Industry Overview

As financial literacy improves, the share of financial assets as a percentage of net household savings will rise from Fiscal 2020 to Fiscal 2025, encouraging investments in assets like insurance and mutual funds.

There has been an increment in the share of life insurance funds in household financial savings, which is expected to grow more especially due to rising awareness in the post Covid era.

An uptick can be seen in the amount of claims received and disbursed over the years. This is also due to increasing enrolments in government schemes to boost insurance and financial inclusion. This is slated to improve in the years to come.

Financials of LIC

LIC collected Rs. 187,000 crore in net premiums in the first six months of FY22. It also generated Rs.124,000 crore in interest and dividends in the first quarter, as well as Rs.23,246 crore in capital gains on the sale of investments. LIC recorded a net profit of Rs. 2,908 crore in FY21, and a net profit of Rs.1,504 crore in the first half of FY22.

The debt portfolio’s gross nonperforming assets (NPAs) decreased from 7.78 percent in FY21 to 6.57 percent in H1-FY22. Net NPAs of 0.05 percent, on the other hand, suggest that the NPA risk is adequately covered.

What’s in it for Government?

The LIC was established by the Act of Parliament, and there is a separate LIC Act that governs the formation and operation of the LIC. LIC was envisioned as a government-owned enterprise with an implicit sovereign guarantee when it was founded. To facilitate the IPO, a modification to the LIC Act would be required, which must be approved by both chambers of Parliament.

The government is expected to gain between Rs 62,000 crore and Rs 65,000 crore from the IPO, which will help it meet its divestment target of Rs 78,000 crore for fiscal 2022, which was reduced from Rs 1.75 lakh crore in the previous budget.

Why is LIC issuing an IPO?

The goal of this IPO is to bring greater discipline and transparency to the company’s operations while also allowing individual investors to participate

Since privatization and listing are two separate things, a public offering does not imply that LIC will be privatized. Through this IPO, the government intends to sell a portion of its stake and help achieve disinvestment targets to fund capital expenditure projects and reduce the fiscal deficit.

Value of Largest Life Insurer

In the draft red herring prospectus submitted with the SEBI for its IPO, India’s largest life insurer revealed its embedded value for the first time. The IPO is expected to be the largest by an Indian firm. The embedded value is calculated using the life insurer’s adjusted net worth, which includes free surplus and capital, as well as the discounted value of future revenues from in-force policies. According to the filing, the embedded value was Rs 5.4 lakh crore as of September 30. It has increased by 4.6 times since March 31, when it was Rs 95,605 crore. This is because LIC changed its fund distribution strategy to match that of publicly traded private insurers.

Other Details of the IPO

Other details of the IPO are summarized below: 

Particulars	IPO related details of LIC
Total shares on offer	316.25 million shares
Dilution of equity by GOI	5%
Reservation for LIC Policyholders	10% of the issue size (3.16 million shares)
Total AUM of LIC	Rs.39.60 trillion ($527 billion)
New Business Premia (NBP) Market share	66%
Market share of new policies sold	72%
Estimated embedded value	Rs.5.40 trillion
Benchmark valuations over EV	2.60 times to 4.00 times

Source: Tavaga Research

Potential for Growth in Insurance Business

In India, life insurance is a narrative of unmet potential. Take a look at some of the Swiss Re report’s statistics:

• In India, total insurance penetration is low. For example, India’s overall insurance penetration (premiums/GDP) was 4.2 percent in FY21, compared to a global average of 7.4 percent, which is much lower. When compared to industrialized countries, it is far lower

• Intriguingly, India’s life insurance penetration rate of 3.2 percent is close to the global average of 3.3 percent. India trails behind the global average of 4.2 percent in non-life insurance penetration, at 1 percent

• However, India continues to fall behind in terms of insurance density, or premiums per capita. For FY21, India’s number was $78 compared to a global average of $809 for the same period. In terms of life and non-life density, India trails behind the worldwide average

• The best part is that life insurance penetration in India has increased from 2.82 percent to 3.2 percent in the last year, owing partly to the increased insurance awareness produced by the COVID epidemic during the previous two years.

Risks Involved

The mentality issue will be the most significant stumbling factor for the LIC IPO. Investors were dissatisfied with the way ONGC’s financial reserves were reduced over time as a result of huge dividends and the use of reserves to buy out government stakes, as was the situation with HPCL. The government has historically relied on LIC to fund many of its programs, not simply to sustain equities markets on rainy days. Following the ONGC experience, this could be a major concern for investors as the LIC IPO approaches. While the LIC IPO appears to be low-hanging fruit, it is likely to be loaded with significant risks in the future. Here are five pointers to which investors should be vigilant:

• Angry Unions: The proposed privatization has already enraged LIC unions, and it will be difficult to persuade them to support the concept. Unions’ powers are also weakened as a result of shareholder accountability.

• NPA Fears: The sharp increase in gross non-performing assets (NPAs) is a major source of concern. LIC has traditionally kept its gross nonperforming assets (NPAs) between 1.5 and 2 percent. However, LIC’s gross nonperforming assets (NPAs) have reached a fresh high of 6.1 percent this year. This is likely to raise concerns about the quality of their portfolio as well as the insurer’s underlying worth.

• Bailing out PSUs: In recent years, LIC has increased its investments in assets that are either long-term commitments or of dubious quality. The LIC was compelled to take over IDBI Bank. LIC also owns a large interest in IL&FS and has been investing in numerous infrastructure projects by purchasing bonds. It’s uncertain how many of these efforts will be implemented or what the consequences will be.

The fact that all LIC insurance comes with a sovereign guarantee creates a tricky situation. The government may have to make a provision for such off-balance-sheet vulnerabilities at some time. If the government withdraws its sovereign guarantee, it’s uncertain if LIC insurance will still be sought.

Important to remember…

While LIC IPO is a significant achievement for the entire PSU ecosystem, but it is also important to remember that IPOs that come during a bull run must be dealt with extra caution.

History suggests that market had made tops during the IPOs of Reliance Power and Coal India and both these companies have failed to live upto their expectations. In fact, we all know what has happened to Anil Ambani controlled Reliance Power and where does Coal India stand today compared to its IPO price.

That doesn’t mean that LIC IPO will fail to live up to its expectations, in fact, it could do very well in the near term due to the increased participation by almost all categories of investors, but in terms of market share and other fundamentals, it is surely losing out to private insurers like HDFC Life, ICICI Prudential Life, and SBI Life.

Hence, before investing your hard earned money in the LIC IPO, it is advisable to take a view of your SEBI Registered Investment Adviser (RIA). Remember – #AdvisorZarooriHai