Life Insurance Corp. is set to launch India’s biggest initial public offering next week even as uncertainties over geopolitical tensions and foreign selloff prompted it to cut issue size and valuation.
The IPO, according to its red herring prospectus, will comprise an offer for sale of 22.13 crore equity shares at Rs 902-949 apiece. Employees and retail investors will get a discount of Rs 45 apiece, while policyholders will be able to buy at Rs 60 below the issue price.
The government is looking to raise up to Rs 21,000 crore by selling a 3.5% stake in the nation’s biggest life insurer.
The Securities and Exchange Board of India gave a special approval to lower the IPO size from 5%—that would have fetched the government close to Rs 70,000 crore—after volatility spiked because of Russia’s invasion of Ukraine, surge in crude and commodities prices and resurgence in coronavirus cases in China.
Still, LIC’s maiden offer will surpass Paytm’s more than Rs 16,000-crore issue in November 2021.
A reduced IPO size, however, is adding to risks threatening the nation’s budget gap. The government has missed its asset sale target in FY21 by a wide margin after monetisation plans, including LIC’s listing, got delayed.
LIC IPO Details
Issue opens on: May 4 (anchor investors can place bids starting May 2).
Issue closes on: May 9
Price band: Rs 902-949 apiece
Face value: Rs 10 apiece
Lot size: 15 equity shares and multiples
Listing on: BSE and NSE
Lead managers: SBI Caps, Kotak Mahindra Capital, ICICI Securities, Axis Capital, JM Financial, Goldman Sachs, JPMorgan, Citigroup, Nomura, and Bank of America Securities
Use Of Proceeds
The proceeds from the stake sale after deducting expenses and taxes will be paid to the government—the selling shareholder.
LIC expects that the proposed listing of its equity shares will enhance its visibility and brand image.
Business
LIC has been offering life insurance in India for more than 65 years. The insurer had a 61.6% and 61.4% market share by gross written premiums and new business premiums, respectively, for the nine months ended December 2021.
According to a Crisil report, LIC is ranked fifth globally by life insurance gross written premium and tenth by total assets.
The state-run company was the largest asset manager in India, as of December. Its assets under management—comprising policyholders’ investment, shareholders’ investment and assets held to cover linked liabilities—stood at Rs 40.1 lakh crore on a standalone basis. That’s 17% of India’s estimated GDP for fiscal 2022.
The behemoth was recognised as the third-strongest and tenth most valuable global insurance brand in the ‘Insurance 100 2021 report’ released by Brand Finance.
The insurer’s individual product portfolio in India comprises 32 products (16 participating and 16 non-participating including savings, term, health, annuity and unit-linked), and seven individual riders. Its group product portfolio comprises 11 products.
LIC has an omnichannel distribution network. As on Dec. 31, 2021, it had:
0.13 crore individual agents. This was 6.8 times the number of individual agents of the second-largest life insurer by agent network.
70 bancassurance partners (comprising eight public sector banks, five private sector banks, 14 regional rural banks, 42 cooperative banks, one foreign bank).
215 alternative channel partners (comprising 63 insurance marketing firms, 83 brokers, 69 corporate agents).
One portal on LIC’s website for digital sales.
2,128 micro-insurance agents.
4,769 point of sales persons - life insurance scheme.
2,048 branch offices and 1,559 satellites office in India.
In fiscal 2019, fiscal 2020, fiscal 2021 and nine months ended Dec. 31, 2021, LIC’s individual agents contributed 96.69%, 95.73%, 94.78% and 96.20% of its new business premium for its individual products.
LIC has a presence across India and distributes its policies in all states, covering 91% of districts in India as compared to 81% for the entire private sector combined.
It had 2,390 offices located in tier 3 and tier 4 centres as on March 31, 2021, and 177 offices located in tier 5 and tier 6 rural-centres.
LIC’s rural individual share new business as per percentage of its total individual new business in India was 20.76% in policies, 20.19% in number of lives, 13.06% in new business premium and 14.80% in sum assured for nine-months through December.
LIC’s mobile app for policyholders had more than 51.3 lakh registered users.
It spent Rs 177.4 crore, Rs 424.4 crore, Rs 361.4 crore and Rs 137.3 crore on information technology on a standalone basis in FY19, FY20, FY21 and the nine months ended Dec. 31.
Financials
LIC reported an after-tax profit of Rs 1,715.3 crore in the nine months through December. Its revenue stood at Rs 5.1 lakh crore. It has an investment of Rs 38.4 lakh crore towards policyholders’ funds and is debt-free as on Dec. 31.
The 13th and 61st month persistency ratio by premium stood at 76.84% and 61.91%, respectively, as on Dec. 31. The solvency ratio stood at 177%, well above the minimum requirement of 150%. It earned an investment yield of 7.26% for April-December.
LIC’s gross and net non-performing asset ratios stood at 6.32% and 0.04%, respectively, as on Dec. 31.
LIC saw its value of new business margin slip at the end of H1 FY22 over the year earlier. The VNB margin is the lowest among all listed peers.
Peers
LIC’s domestic listed peers include SBI Life Insurance Co., HDFC Life Insurance Co. and ICICI Prudential Life Insurance Co. Its major unlisted peers are Max Life Insurance Co. and Bajaj Allianz Life Insurance Co.
While LIC seems to be listing at a relatively lower price-to-EV ratio compared to domestic companies, it’s more appropriate to look at global peers considering its size.
Risks
The ongoing Covid-19 pandemic could adversely affect business aspects like agents’ abilities to sell products, increasing expenses due to changes in mortality, investment portfolio and operational effectiveness.
Volatility in capital markets, loss of customer confidence in the insurance industry or decline in customers’ financial positions due to a deterioration in economic conditions could lead to adverse persistency metrics.
Lesser shareholder rights under LIC Act instead of the usual Companies Act.
Inability to retain and recruit individual agents on a timely basis and at reasonable cost could lead to adverse impact as individual agents procure most individual new business premiums.
Interest rate fluctuations may adversely affect profitability since LIC is governed by the IRDAI Act and insurance laws. Matching the duration of assets and liabilities could be difficult due to legal restrictions.
Changes in key assumptions could impact VNB and embedded value.
Consolidation among competitors, including acquisitions of insurance companies in India, could result in additional or more established competitors.
Penalties by SEBI for delays in divesting stake in asset management company and reducing stake in bank and housing finance company.
Occurrence of natural or man-made disasters and catastrophes, such as the Covid-19 pandemic, could materially increase liabilities for claims by policyholders and result in losses in investment portfolios.