Tracking The LIC IPO Frenzy

After a flurry of IPO (initial public offerings) through FY22, the subscription for one of the most awaited and India’s biggest IPO in recent years has begun. We are talking about none other than the Indian insurance behemoth LIC (Life Insurance Corporation), which is looking to raise close to Rs 21,000 crore via the IPO.

At the close of May 6, 2022, the second day for application, it was fully subscribed with the position in each of the investor categories as follows.

 

Employee and Policyholder category got oversubscribed by about 3 and 4 times respectively by 6th May 2022

 

Key highlights

• LIC IPO Date: The IPO will open for applications on May 4 and close on May 9, 2022.
• LIC IPO Price: The price band is between Rs 902-Rs 949 per equity share. Applications to be done in lots of 15 shares each.
• LIC IPO Valuation: The valuation of the company, as per analysts is expected to be around Rs 5.4 lakh crore.
• LIC IPO Amount: The government is aiming to sell 3.5 per cent of its stake in the company for Rs 21,000 crore. For this, it will sell 22 crore shares of LIC.
• LIC IPO Listing date: The issue will be listed on the stock exchanges on 17th May 2022.

LIC remains the undisputed leader in India’s life insurance sector, commanding a market share of over 60% in both NBP and gross premium despite intense competition from private players. LIC is expected to benefit from upcoming growth opportunities given its strong branding, large agency workforce and new strategic roadmap aimed at increasing bancassurance, enhancing the product mix, and tapping into cross-sales.

 

 

Proven track record as largest asset manager: 

LIC has proven its mettle over the years with its NBP growing from Rs 70 billion at end of FY01 to Rs 1.8 trillion at end of FY21. The company manages India’s largest AUM of around Rs 40 trillion (3.2 times that of private insurers combined). Net profit on sale/redemption of policyholders’ investments was Rs 398 billion at end of FY21 and Rs 365 billion at end-9MFY22.

 

LIC received more premium in FY21 than all other life insurers combined

 

LIC IPO to remain open on Saturday, Sunday

LIC public offer will remain open for subscription even on weekend to enable people to participate in the mega IPO. This is perhaps for the first time the special consideration is granted to any IPO. The issue period also includes bidding on Saturday, May 7, 2022 and Sunday, May 8, 2022. To facilitate this, Reserve Bank of India (RBI) directed all ASBA-designated bank branches to remain open for public on Sunday to facilitate processing of applications for LIC’s initial public offering. The offer will close on May 9 (Monday).

Some red flags need action

While the IPO has generated a lot of excitement in the market, there are some red flags as well. Variation in persistency metrics could influence LIC’s financial performance in coming quarters. LIC is highly dependent on individual agents. If LIC is unable to retain and recruit individual agents on a timely basis and at reasonable cost, there could be an adverse effect on its operations.

 

Individual Agents contribute more than 90% of sales. Break up of the different channels for distribution for LIC

 

More than 90% of LIC’s policies are sold through its agents. The other channels have a negligible share of sales. However, with rapid digitalisation, scaling up on the digital front is something that LIC must actively look at. While the private insurance companies have made rapid strides in digital strategy and technology, LIC will need to catch up here.

Other negative impact would be in case the actual claims experienced and other parameters are different from the assumptions used in pricing its products and setting reserves for its products, it could have an impact on LIC business.

A significant proportion of LIC’s total new business premiums are generated by participating products and single premium products, and any significant regulatory changes or market developments that adversely affect sales of such products could affect its business. The private sector insurance players are also competing fiercely and LIC needs to act on protecting its market share.

 

LIC enjoys the lowest reinsurance costs amongst life insurers. Higher reinsurance costs hit private players harder than LIC

 

One area where LIC enjoys an advantage is the reinsurance costs. Due to the pandemic, most reinsurance companies have increased their costs, and this has caused an increase in the pricing of some insurance products. LIC has a reinsurance cost ratio of 0.1% per policy as against the ratio of 2.1% per policy. This clear advantage to LIC helps it maintain profitability levels higher than others.

Short-term and long-term prospects

LIC continues to be a leader with a lion’s share in the Indian life insurance space. The IPO is already oversubscribed on the third day. The next few days promise a lot of action in the LIC IPO, and investors are looking for a bumper opening on listing day. A lot of investors are looking to exit on listing with superior listing gains. While these investors are likely to meet their expectations on the short-term gains, there are long term prospects which investors should be aware about.

 

India has large potential for growth given its low penetration. Penetration of life insurance for different economies

 

India, as a country has a low penetration of life insurance. The pandemic was a blessing in disguise for the insurance industry and the awareness for life insurance has increased since then. This is also reflected with the growing sales of life insurance companies over the last two years. LIC as the market leader also has the opportunity and ability to increase the penetration faster than others. Investors who chose to look beyond the listing gains may see the emergence of a sector leader making its position even stronger in the coming years with superior returns on their investments.