Life Insurance Corporation of India

A life insurance behemoth

Decent valuations, discounts and right-sizing make issue attractive

Life Insurance Corporation of India (LIC), owned by Government of India, is India's largest life insurance company with the history of more than 65 years and a 61.6% market share in terms of premiums, 61.4% in New Business Premium, 71.8% in number of individual policies issued, 88.8% in number of group policies issued for 9MFY2022. LIC has largest base of individual agents, which comprised 55% of all individual agents in India end December 2021.

LIC is ranked fifth globally by life insurance GWP and 10th globally in terms of total assets. It is the largest asset manager in India with AUM of Rs 40.1 lakh crore on a standalone basis end December 2021, which is 17.0% of India's GDP. Its investments in listed equity represented around 4% of the total market capitalization of NSE.

LIC was formed by merging and nationalizing 245 private life insurance companies in India on 1 September 1956.Until 2000, LIC was the only life insurer in India, and it is identified by IRDAI as a Domestic Systemically Important Insurer (D-SII).

The brand, LIC, was recognized as the third strongest and 10th most valuable global insurance brand as per the 'Insurance 100 2021 report' released by Brand Finance.

LIC has a broad, diversified product portfolio covering various segments across individual products and group products. An omni-channel distribution platform for individual products currently comprises (i) individual agents, (ii) bancassurance partners, (iii) alternate channels (corporate agents, brokers and insurance marketing firms), (iv) digital sales (through a portal on Corporation's website), (v) Micro Insurance agents and (vi) Point of Salespersons-Life Insurance scheme.

LIC has the largest individual agent network among life insurance entities in India, comprising approximately 1.33 million individual agents end December 2021. It has 2,048 branch offices and 1,559 satellite offices in India, covering 91% of all districts in India.

In addition to domestic operations, LIC has one branch in each of Fiji, Mauritius and the United Kingdom and subsidiaries in Bahrain, Bangladesh, Nepal, Singapore and Sri Lanka in the life insurance industry. The premium collection from outside India represented 0.69% of total premium in 9MFY2022.

The subsidiaries include LIC Pension Fund, which is one of the three companies appointed as a pension fund sponsor and LIC Cards Services Limited, which operates a credit card business.

The premium collection in India increased at a CAGR of 9% from Rs 337127.58 crore in FY2019 to Rs 402886.22 crore in FY2021. LIC has posted net profit of Rs 1715.31 crore in 9MFY2022, after Rs 2974.14 crore in FY2022.

Offer and its objects

The initial public offer (IPO) consists of an offer for sale of 22.14 crore equity shares to raise Rs 19516.77 crore post discounts at lower price band of Rs 902 and Rs 20557.23 crore at higher price band of Rs 949. A discount of Rs 45 per equity share is being offered to the retail individual bidders and the eligible employees. Also, a discount of Rs 60 per equity share is being offered to the eligible policyholders. The offer includes a reservation of up to 1581249 equity shares for employees, 22137492 equity shares for policyholders and 69179663 for retail investors.

Price band for the IPO is Rs 902 to Rs 949 per equity share of face value Rs 10 each.

The selling Shareholder President of India, acting through the Ministry of Finance, Government of India has offered to sale 21,374,920 Equity Shares.

The object of the Offer is to achieve the benefits of listing the Equity Shares on the Stock Exchanges. Corporation expects that the proposed listing of its Equity Shares will enhance visibility and brand image as well as provide a public market for the Equity Shares in India.

The issue, through the book-building process, will open on 04 May 2022 and will close on 09 May 2022.

Strengths

LIC is fifth largest life insurer globally by GWP and the largest player in the fast growing and underpenetrated Indian life insurance sector. The Indian life insurance market is the 10th largest life insurance market in the world and the fifth largest in Asia in terms of life insurance premium. Indicators such as insurance penetration, insurance density and protection gap point to the fact that the Indian life insurance market is still underinsured thereby presenting a huge potential for growth.

LIC brand is a trusted brand with a customer-centric business model. The trust in the brand 'LIC' is evidenced by the 27.91 crore in force policies under individual business being serviced in India end December 2021.

LIC has a broad, diversified product portfolio covering various segments across individual products and group products and caters to diverse consumer needs. The cross-cyclical business mix is also dominated by participating life insurance policies.

The company has presence across India through an omni-channel distribution network with an unparalleled agency force.

LIC has developed technological capabilities that help to provide a great customer experience and drive operating efficiencies.

LIC is the largest asset manager in India having AUM of Rs 40.1 lakh crore with an established track record of financial performance and profitable growth.

The company also has a risk management framework where risk identification, risk measurement and risk mitigation are undertaken through structured procedures and various Board-approved policies and controls.

Weaknesses

The ongoing COVID-19 pandemic could adversely affect business by impacting agent productivity, raising expenses, affecting investment portfolio etc.

LIC's surplus distribution policy revision may reduce the attractiveness of its products. Prior to the revision, surplus was distributed amongst policyholders and Shareholder in the ratio of 95:5. Post revision, 100% of the surplus generated out of the non-participating business is available for distribution to the shareholders and the surplus from the participating business shall be distributed amongst policyholders and Shareholder in the ratio of 95:5, which ratio is being modified as 90:10, in a phased manner.

A significant proportion of total new business premiums are generated by participating products at 69.7% and single premium products 82.5%, and any significant regulatory changes or market developments that adversely affect sales of such products.

The company faces significant competition from private insurers. From FY2016 to FY2021, the total premium for private sector players in the life insurance industry increased at a CAGR of 18% while LIC's total premium in India increased at a CAGR of 9% for the same period.

Investments portfolio is subject to credit risks, concentration risks and liquidity risks, which could have a material adverse effect on financial condition.

There is mark-to-market loss of Rs 6028.16 crore on certain investments of pension and group and life annuity funds which have been re-classified as other investment and have not been transferred to the shareholders funds at amortized cost in compliance with the IRDAI Master Circular. The company needs to dispose of the other investments in the pension and group and life annuity funds by 31 January 2023, and how the company adjusts these investments would be monitored.

Valuation

LIC is the largest life insurance company in India with diversified product base and widespread presence across the country with omni-channel distribution platform. LIC was the life insurance company in India until the opening of the second in 2000. The company has grown below industry average, but still maintains a market share of above 60% of total premiums after over two decades since the opening of the sector.

The long-awaited IPO of the company is finally hitting the market in early May 2022. The issue size has been trimmed to 3.5% of equity compared to 5.0% as proposed earlier. The company has been valued at Rs 6.00 lakh crore at upper price band.

An embedded value (EV) per share of LIC stood at Rs 853.3 end September 2021 and the offer is made at P/EV multiple of 1.1 times at upper price band.

Among the comparable peers, SBI Life Insurance Company, the largest private life insurer is trading at 3.1 times its EV end September 2021. The second largest private life insurer, HDFC Life Insurance Company is trading at 4.1 times EV end September 2021. Further ICICI Prudential Life Insurance Company is trading at 2.5 times and Max Financial Services is trading at 2.0 times EV end September 2021.

LIC IPO issue looks to be decently valued in the backdrop of its size and dominance of the insurance market. There will be continuous pressure on market share of LIC due to sharp competition from aggressive private life insurers. The lower margins and weak profitability are some of the concerns. However, the LIC is still dominant player with wide reach and lower penetrated insurance market in India provides enough growth opportunities. Also, the current pricing, discounts, right size and revision in surplus distribution policy towards shareholders mitigates some of the investor concerns.