LIC IPO opens on May 4th: Should you invest?

Life Insurance Corporation of India (LIC) IPO opens for subscription on the 4th May. The company is looking to raise up to Rs 20,557 crore through the public issue. 

Life Insurance Corporation of India IPO Details:

LIC IPO Date: 4 May - 9 May 2022

LIC IPO Price band: Rs 902 - Rs 949

LIC IPO Issue Size: Rs 19,517 crore - Rs 20,557 crore (Offer for sale of 221,374,920 Equity shares)

Reservation: QIB 50%, Retail - 35%, NII 15%

Post Issue Implied Market Cap: Rs 5,70,515 crore - Rs 6,00,242 crore

Minimum Investment: Rs 14,234

Retail & Employee Discount: Rs 45 per share

Policyholder Discount: Rs 60 per share

Bid lot: 15 shares, and in multiples of 15 shares

LIC IPO: Objects of the Issue

The net proceeds from the IPO will be utilized for the following purposes:

• To achieve the benefits of listing the equity shares on the stock exchange.
• To carry out an offer for sale of 221,374,920 shares by selling shareholders.

LIC IPO: About the company

• The company was established in 1956 under the LIC Act by merging and nationalizing 245 private life insurance companies in India.
• They have been providing life insurance for more than 65 years and are the largest life insurer in India with a market share of 61.6% in terms of premium.
• It has the highest gap in market share by life insurance GWP relative to the 2nd largest life insurer in India as compared to the market leaders in the top seven markets globally.
• LIC is ranked 5th globally by life insurance GWP and 10th in terms of total assets.
• LIC is the largest asset manager in India as of December 31, 2021, with an AUM of Rs 40.1 lakh crore on a standalone basis which is 1.1 times the entire Indian mutual fund industry’s AUM.
• It operates globally in Fiji, Mauritius, Bangladesh, Nepal, Singapore, Sri Lanka, UAE, Bahrain, Qatar, Kuwait, and the United Kingdom.

Also read what benefits policy holders will get.

LIC IPO: Industry Overview

• According to the National Financial Literacy and Inclusion Survey (NCFE- FLIS) 2019, only 27% of the Indian population is financially literate, indicating a huge gap and potential for the financial services industry.
• Post FY16, the industry witnessed a paradigm shift with the awareness of insurance growing at an accelerated phase. 
• Total life insurance premiums grew at a robust 12% CAGR from FY16 to FY20, which was much faster than the 6% annual growth witnessed in India’s nominal GDP during this period. 

LIC's Products

Some of its products include:

• Participating products: Participating products are contracts of insurance where the policyholders have a contractual right to receive a guaranteed sum insured, and a discretionary benefit in the form of bonuses or loyalty additions.
• Term Insurance Products: Individual non-participating term insurance products offer a guaranteed lump sum benefit on the occurrence of death of an individual during the period of coverage.
• Annuity and Pension Products: Annuity and pension products provide for annuity payments to start from the beginning of the policy or after the completion of the chosen accumulation period.
• Unit-Linked Insurance Plans: These products provide insurance coverage for death where investment decisions and the risks and rewards associated with such investments are directly attributable to the policyholders and non-investment risks.

LIC IPO: Financials

• The company reported total assets of Rs 33.66 lakh crore, Rs 34.14 lakh crore, and Rs 37.46 lakh crore in FY19, FY20, and FY21, respectively. The company's assets have grown at a good rate in the last three financial years.
• The total revenue for the same period was Rs 2644.99 crore, Rs 2730.96 crore, and Rs 2985.57 crore, respectively.
• The company reported Profit After Tax (PAT) of Rs 2627.38 crore, Rs 2710.48 crore, and Rs 2974.14 crore in FY19, FY20, and FY21, respectively.
• The average EPS (Basic and Diluted) and RoNW for the last three financial years are 4.38% and 228.35%, respectively.
• Gross Written Premium (GWP) on a consolidated basis increased at a CAGR of 9.21% from FY19 to FY21.
• New Business Profit (NBP) on a consolidated basis increased at a CAGR of 13.49% from FY19 to FY21.
• For FY19, FY20 and FY21, and December 31, 2021, the company's operating expenses as a percentage of the total premium (Operating Expense Ratio) on a standalone basis were 8.4%, 9.0%, 8.7%, and 9.6%, respectively.
• The company’s total cost as a percentage of the total premium (Total Cost Ratio) on a standalone basis was 14.4%, 14.7%, 14.2%, and 15.0% respectively.

LIC IPO: Listed Peers

LIC is the sole public sector life insurer in India’s market, and it has 23 private insurance companies as its competitors in India ( March 31, 2021). The listed peers are SBI Life Insurance Company Ltd, HDFC Standard Life Insurance Co Ltd, and ICICI Prudential Life Insurance Co Ltd. 

• In terms of the total premium, none of the listed peers come close to LIC. LIC has a total premium of Rs 4.05 lakh crore in FY21, and the second-best on the list is SBI Life Insurance with a Total Premium of Rs 50,250 crore.
• Comparing the companies on Net Worth, SBI Life Insurance is on top of the list while LIC is at the bottom with a Net Worth of Rs 6514.64 crore.
• LIC has the highest net profit among the listed peers. It has double the net profit of the best player on the list - SBI Life.
• LIC is last in terms of EPS with an EPS of 4.70. SBI Life tops the list with an EPS of 14.55.
• All the players have a high P/E ratio around 80, but LIC is getting listed with a P/E of 201.
• LIC has the highest RoNW among all listed players followed by HDFC Life.

USPs

Fifth largest life insurer globally by GWP - They are ranked fifth globally in terms of life insurance GWP, and 10th globally in terms of total assets (comparing the company's assets as of March 31, 2021, with assets of other life insurers as of December 31, 2020).

Trusted brand and a customer-centric business model - It was incorporated in 1956, and up to 2000, they were the only life insurance provider in India, which made LIC, as a brand, synonymous with life insurance in India. The brand ‘LIC’ was also recognized by WPP Kantar as the second most valuable brand in the report “BrandZ™ Top 75 Most Valuable Indian Brands” for 2018, 2019, and 2020.

Cross-cyclical product mix - Their policies address consumers’ needs through the four principal stages of life, namely, beginning of savings, career, and marriage, family needs and retirement planning, and retirement and asset drawdown. Its individual product portfolio in India comprises 32 individual products and seven individual optional rider benefits. Their group product portfolio in India comprises 11 group products.

Presence across India - The company has the largest agent network among life insurance entities in India. They have an omnichannel distribution platform for individual products currently comprising individual agents, bancassurance partners, alternate channels, digital sales, Micro Insurance agents, and Point of Salespersons.

Growth potential

Capitalise on the growth opportunities - The GWP for life insurers in India is forecasted to grow at 14-15% CAGR from FY21 to FY26. With the kind of scale, size, reach and scalability the Corporation has achieved over the years, it is well-positioned to capitalize on the expected growth of the Indian life insurance sector. 

Further diversify product mix - The COVID-19 pandemic has created increased awareness of the need to be properly insured, particularly for term insurance and health insurance. They have been putting more focus on selling ULIPs, which resulted in a 729.34% increase in the company’s NBP from ULIPs in India.

Continue leveraging technology - It plans to continue to implement various technological and digital initiatives to increase productivity, train agents and employees, improve cost efficiencies, provide a better customer experience, provide a seamless customer onboarding process and enhance digital channels for payments.

Reinforce omnichannel distribution network - They intend to continue strengthening their omnichannel distribution network for individual products and increase its productivity. They plan to strategically expand individual agency networks, improve agents’ productivity and maintain focus on improving the quality of agents the company recruit and their longevity.

Risks

Impact on brand name - Company's business to a large extent, is reliant on the strength of the brand ‘LIC’. The company is exposed to the risk that litigation, misconduct by employees, agents, or other distribution partners, operational failure, and negative publicity could harm LIC's brand, reputation, customer trust, and business.

Not in companies Act - The Corporation is governed by the Life Insurance Corporation Act and the rules and regulations framed thereunder and it is not subject to the Companies Act. A company's shareholders have fewer rights as compared with the shareholders of a company under the Companies Act. 

Dependency on individual agents - At the end of FY19, FY20, FY21 and December 31, 2021, the company had 1,179,229, 1,208,826, 1,353,808 and 1,329,448 individual agents in India. The company's individual agents procure most of their individual new business premiums. If they are unable to retain and recruit individual agents on a timely basis and at a reasonable cost, there could be a material adverse effect on the business.

LIC IPO: review

• Steady rise in premium income: Premium earned increased at a steady 9% CAGR  between FY19 and FY21. The premium earned stands at Rs 4.05 lakh crore in FY21, highest in the industry. 
• Stable Profits: Despite its vast size, the company has seen a stable 6% annualised rise in profit between FY19-21, reflecting the strength of its business. LIC posted a profit of 2,974 crore in FY21. In the Apr-Dec 21 period, the profit dropped to Rs 1,715 crore on the back of higher payouts due to Covid deaths. 
• Steep rise in Embedded Value: LIC’s latest reported embedded value (EV at Sep ’21) stands at Rs 5.4 lakh crore, increasing by 4.6x since March ‘21, driven by the change in the company’s surplus distribution policy. 
• Reasonable valuations: At the higher end of the price band, LIC IPO is priced at 1.1 times Sep-21 Embedded Value. This is significantly cheaper as compared to private Life Insurers such as HDFC Life and SBI Life which trade at 2.4 - 4.1 times Embedded Value. However, since these peers have a better financial profile they are expected to trade at a premium. 
• Final recommendation: Given factors such as strong market presence, improving profitability, stronger sector tailwinds and attractive valuations, analysts remain “Positive” on the long-term prospects of this issue.