IPO Analysis: Life Insurance Corporation of India Ltd

IPO Rating: Invest for long-term

About the issue:

The wait is now over! Finally, the LIC IPO is here for which investors, policy holders and market participants have long been waiting for. Not so long ago, Paytm was the largest IPO in India by issue size. Now LIC will be the biggest IPO by issue size, market value, and by numerous other parameters. India’s largest life insurance company is coming out with its initial public offering (IPO) of equity shares of the face value of Rs 10 per equity share. The maiden offer comprises offer for sale of Rs 21,008.48 crore, according to its red herring prospectus. The President of India owns 100% stake in the company through Ministry of Finance. The government would be offloading about 3.5% stake in LIC. The price band of the issue has been fixed at Rs 902 to Rs 949 per equity share. Policyholders would get a discount of Rs 60, while retail investors and employees would get a discount of Rs 45. The IPO opening date is May 4, 2022, and it will be closing on May 9, 2022. For anchor investors, the IPO will open on May 2. The issue will be listed on the exchange on May 17, 2022. The IPO market lot size is 15 shares. A retail-individual investor can apply up to a maximum of 14 lots (210 shares or Rs 199,290).      

The objects of the offer are:        

• To achieve the benefits of listing the equity shares on the stock exchange.
• To carry out an offer for sale of 316,249,885 shares by selling shareholders.

LIC IPO Details:

About the company:

LIC is the largest insurance provider company in India. It has a market share of above 66.2 per cent in new business premium. The company offers participating insurance products and non-participating products like unit-linked insurance products, saving insurance products, term insurance products, health insurance, and annuity & pension products.

As of December 31, 2021, it has a total AUM of Rs 40.1 lakh crore. LIC operates through 2048 branches, 113 divisional offices, and 1,554 satellite offices. It operates globally in Fiji, Mauritius, Bangladesh, Nepal, Singapore, Sri Lanka, UAE, Bahrain, Qatar, Kuwait, and the United Kingdom.

Key positive factors

LIC is a part insurance and part investment products company. Their plans are a combination of insurance and investment with a guaranteed return.

LIC has over 13.5 lakh agents who bring most of the new business. LIC plans offer 'fixed returns' along with life insurance coverage. This makes it easy to sell by agents and brings peace of mind to the insurers.

LIC has high trust in the public for both life insurance as well as investment done with them. LIC is synonymous with insurance in India.

LIC manages assets of Rs 40.1 lakh crore. That is more money than the entire mutual fund industry combined. They invest these funds across stocks and bonds. They own 4% of all listed stocks in India and more government bonds than the RBI.

It is the leading insurance provider company in India and fifth largest global insurer by GWP.

A range of life insurance products to meet varied insurance needs of individuals.

Key challenges

LIC has poor new policy growth as they continue losing market share to private insurance players, especially in urban areas.

The margin in insurance + investment products is low.

Company Financials:

Net premium grew with a CAGR of 9.2 per cent from Rs 3,399,716.34 million in Fiscal 2019 to Rs 4,053,984.98 million in Fiscal 2021. Persistency Ratio measures the percentage of the issued business that remains in force and premium paying after a certain period of time. A high level of 49th month and 61st month Persistency Ratios reflects the success of products with a long-term horizon. A focus on this metric helps in averting high surrenders and retaining customers by reaffirming the insurance decision made at the time of sale of the policy. Its AUM increased with a CAGR of 6.25 from FY19 to FY21 primarily due to increases in policyholders’ investments, which was primarily due to conducive market conditions, coupled with the net premium, investment income from fixed income securities and realised gains.

For measuring capital adequacy of insurance companies, solvency ratio is popularly used. The minimum solvency ratio required to be maintained is the control limit of 1.50, as set by the IRDAI. LIC’s solvency ratio is strong at 1.76 as of FY21. 

Recommendation:

Industry overview - The Indian life insurance industry had only one player – LIC – from CY 1956 to CY 2000. However, post-privatisation in CY 2000, private players started entering the industry and by 2000-01, four private players had set-up operations. This is one of the reasons why LIC has a high market share in the industry. The size of the Indian life insurance industry was Rs 6.2 trillion based on the total premium in Fiscal 2021, up from Rs 5.7 trillion in Fiscal 2020. The industry’s total premium has grown at 11 per cent CAGR in the last five years ending in Fiscal 2021. New business premiums (NBP) grew at 15 per cent CAGR during Fiscals 2016 to 2021, to approximately Rs 2.78 trillion. In fact, in Fiscal 2021 – a year impacted by the COVID- 19 pandemic, the NBP of the industry rose by 7.5 per cent.

Company specific factors - LIC is ranked fifth globally in terms of life insurance gross written premiums (GWP). LIC, as a brand, is synonymous with life insurance in India. The brand ‘LIC’ was recognized as the third strongest and 10th most valuable global insurance brand in 2021, as per the “Insurance 100 2021” report released by Brand Finance.

The strong and dominant presence is reflected by high market share in various segments as follows. According to CRISIL Report, for fiscal 2021, it issued approximately 21 million individual policies in India, representing approximately 75 per cent market share in new individual policy issuances. Its market share in the Indian life insurance industry was 66.2 per cent based on new business premium (NBP), and its NBP was 1.96 times the total private life insurance sector. It has a market share of 64.1 per cent in terms of GWP.

Talking about the valuation of the company, market participants were expecting LIC to come out with market valuation of over Rs 10-15 lakh crore. On a positive note, it has come out with a valuation of about Rs 6.07 lakh crore. LIC will be valued at a price-to-embedded value od 1.12x. Embedded value in insurance world refers to the sum of the net asset value and present value of future profits of a life insurance company. Comparing this metric with peers, HDFC Life a price-to-embedded value of 3.1x, SBI Life of 2.6x, and ICICI Prudential Life of 2.1x.

Conclusion

Overall, the IPO looks attractive. The financials of the company are strong. Although the competition from private players cannot be ignored, the whole insurance industry is set to grow at a decent CAGR. The relative valuation of the offer looks attractive. Hence, we recommend to invest in the IPO for the long term.