Should first-time investors opt for LIC IPO? Key things to consider

NEW DELHI: India’s largest initial public offering (IPO) by state-owned Life Insurance Corporation of India (LIC) opened for anchor investors on 2 May. For the general public, it will be open between May 4 and May 9. The government is expecting to raise around Rs 21,000 crore by diluting 3.5 percent stake.

The price band has been fixed at Rs 902- Rs949 per equity share, and the IPO will be listed on the share market on May 17. Here are key things investors to know before investing: Issue details:10% of its IPO shares are reserved for the eligible policyholders, 35% shares are reserved for the retail investors while 50% are reserved for the Qualified Institutional Buyers.

The remaining is reserved for non-institutional buyers. The issue is priced at around 1.1 times (EV) Embedded Value, which is at discount compared to its Indian and global peers.

LIC IPO Date: The LIC IPO will open on May 4 and close on May 9. LIC IPO Size: LIC IPO size will be around Rs 21,000 crore. Despite the reduced size, LIC IPO will still be the largest ever IPO in the country till date.

LIC IPO Price Band: The price band of LIC IPO is set at Rs 902 to Rs 949 per equity share. A discount of Rs 60 will be given to policyholders and Rs 45 for employees. The intent is to encourage participation and ensure reasonable allotment. Brokerages also expect the IPO to bring in new customers, since many first-time investors would open demat accounts solely to participate in the issue.

LIC IPO Lot Size: Lot size of the IPO is 15 which means a bidder can invest in a minimum of 15 shares, or in multiples of 15 thereafter. LIC has set an investment limit of Rs 2 lakh for one investor. So the maximum 14 lots can be applied. LIC IPO Share Allotment date: The expected allotment date is May 12 LIC IPO Listing Date: Shares will list on May 17 Here are key facts you need to know about LIC

1. Life Insurance corporation of India (LIC) is the largest insurance player in India and has a market share of 66% in new business premium. The company is promoted by the government of India & offers participating insurance products and nonparticipating products like unit-linked insurance products, saving insurance products, term insurance products, health insurance, and annuity & pension products. LIC had an 81.1% and 88.8% market share of group policies issued in India in Fiscal 2021 and the 9 months ended December 31, 2021.

2. As of 30 Sep 2021, it has a total assets under management to the tune of Rs 39 lakh crore, which is greater than entire domestic mutual fund industry of India.

3. LIC has the highest number of individual agents, which comprised 55% of all individual agents in India, as of FY21. 81% of LIC’s agents in India recruited in Fiscal 2021 were within the 18 to 40 years old group

4. As per a CRISIL Report, as at September 30, 2021, LIC’s investments in listed equity represents around 4% of the total market cap of NSE as at that date. Policyholder’s funds have a well-diversified investment portfolio.

5. The investments of LIC are mostly into top graded equity/debt instruments: 95.9% of LIC’s debt AUM on a standalone basis was invested in sovereign and AAA rated securities. Over 90% of policyholders’ equity investments on a standalone basis are held in stocks that are a part of the Nifty 200 and BSE 200 indices.

6. LIC had 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 (in 2020 for the other players and in Fiscal 2021 for the LIC.

7. In addition to LIC’s life insurance operations in India, LIC has one branch each at Fiji, Mauritius and the United Kingdom and subsidiaries in Bahrain (with operations in Qatar, Kuwait, Oman and the United Arab Emirates), Bangladesh, Nepal, Singapore and Sri Lanka in the life insurance industry. For Fiscal 2019, Fiscal 2020, Fiscal 2021 and the 9 months ended December 31, 2021, on a consolidated basis, their premium from outside India represented 0.93%, 0.99%, 0.73% and 0.69%, respectively, of their total premium.

8. The brand ‘LIC’ was recognised as the 3rd strongest and 10th most valuable global insurance brand in 2021, as per the “Insurance 100 2021” report released by Brand Finance. The brand value of LIC in 2021 was US$8,655 million, with a Brand Strength Index (BSI) score of 84.1 out of 100.

9. The trust in the brand ‘LIC’ is evidenced by the 27.91 crore in force policies under individual business being serviced in India as as of December 31, 2021. Aproximately 75% of individual policies sold by LIC in India in the 9 months ended December 31, 2021 were sold to customers who had not purchased any life insurance policies from LIC prior to April 1, 2021.

10.Changes to the Corporation’s surplus distribution policy is expected to benefit shareholders: Prior to 30th Sept, 2021, the Corporation had one fund – a participating fund. However due to an amendment to the LIC Act notified on June 30, 2021, the Corporation can now have a participating fund and non-participating fund. Previously LIC transferred only 5% of the valuation surplus to the shareholders account while the remaining 95% was distributed in the form of bonus to the participating policyholders.

However, the government, vide letter dated November 13, 2013, allowed the Corporation to continue with the existing surplus distribution pattern of 95:5 between policyholders and the shareholders, while retaining the flexibility to reduce it to 90:10 between policyholders and the shareholders in the future.

“Both these changes- allowance of non-participating fund and change in distribution corpus of the participating fund will result in a higher allocation of the surplus to shareholders,” said brokerage Ventura in a note. Biggest advantage:”Life Insurance Corporation (LIC) is the largest life insurer in India, with 61.6% market share in terms of premiums (or GWP), and 71.8% market share in terms of the number of individual policies issued as of December 31, 2021.

LIC is synonymous with insurance in India and enjoys a phenomenal brand recall. We believe India’s highly underpenetrated life insurance space is still at a nascent stage and is attractively positioned to capture the huge growth opportunity. LIC enjoys many competitive advantages like strong brand value, extremely large scale of operations, a huge network of agents, and an envious distribution network. The issue is priced at 1.1 times Embedded Value, which is at a steep discount compared to its Indian & global peers.

Nevertheless, first-time investors must be aware that the business of insurance is long-term in nature; therefore we recommend this issue for the long term only,” said Parth Nyati, Founder, Tradingo. Moreover, with an IPO, LIC’s profile will get a boost and investors can trade in its shares or keep them long-term.

Don’t forget the risks:

Competition with private players- LIC is the sole public sector life insurer in India. However, as on FY21 there are 23 other private insurance companies. LIC’s main competitors are SBI Life Insurance Company Limited, HDFC Standard Life Insurance Company Limited and ICICI Prudential Life Insurance Company Limited.

However, given LIC’s scale, there is no other life insurer in India that is directly comparable to LIC. Changes in interest rates- Interest rate fluctuations may materially and adversely affect LIC’s profitability. In addition, the limited amounts and types of long-term fixed income products in the Indian capital markets and the legal and regulatory requirements on the types of investment and amount of investment assets that insurance entities are permitted to make can limit LIC’s ability to closely match the duration of assets and liabilities.

Government will still be major shareholder despite listing: Even post the listing, the government will still be the major shareholder and key manager. ”

Any future government intervention might be detrimental to shareholders. Insurance is a complex business for novice investors to understand as many terms are based on lots of estimates and assumptions, new investors will take time to get used to insurance terms like embedded value, value of new business margins, APE, GWP, etc” said Nyati. Other key concerns include lower profitability & revenue growth compared to private players, lower VNB margins, and short-term persistency ratios.

“However, the company has made plans to address these issues and planning to take steps like increasing up-selling and cross-selling, increasing direct sales of their individual products on their website, designing products for the millennials, focusing more on non-par products, and protection based products, and linked products,” added Nyati.

“LIC has lower new policy growth rate as they continue losing market share to private insurance players, especially in urban areas. Moreover individual agents procure most of LIC’s individual new business premiums(~97%). If LIC is unable to retain and recruit individual agents on a timely basis and at reasonable cost, there could be a material adverse effect on their results of operations,” said Asit C Mehta Investments Intermediates.

Effects of Covid-19 “LIC’s first-year premiums decreased by 41.24% for Fiscal 2021 on a consolidated basis. While the primary reason for this decrease was because of a higher base in Fiscal 2020 due to a first-year premium of ₹23,160 crore from a superannuation scheme with one of the state governments completed in May 2019, COVID-19 also adversely affected LIC’s distribution partners’ ability to distribute their products due to lockdowns and social distancing measures limiting in-person interactions,” said Axis Bank in a note.

Should you subscribe?

Analysts have largely recommended investors to subscribe to the public issue. “We believe that LIC’s distribution advantage, increasing sales mix of direct and corporate channels, and a gradual shift to high margin Non- participating products could be possible drivers for LIC’s future growth, negating lower than industry growth rates,” brokerage firm said in a note.

“At the upper price band of Rs.949, LIC is available at P/EVPS (Embedded Value Per Share) of 1.1x which is at a discount of 65% compared to the average valuation of private life insurance players. Even though headwinds like declining market share, lower short-term persistency ratios, and sub-par margins demand a discount to private players, the current valuation is attractive considering its strong market presence, improvement in profitability due to changes in surplus distribution norms, and strong sector growth outlook. Hence, we assign a “Subscribe” rating on a short to medium term basiS,” said Geojit in their note.

” The new investor can apply it for the long term only as the insurance business is long-term in nature. LIC is having strong brand value, huge network of agents and extremely large scale of operations are the positive points,” said Akhilesh Jat, Senior Research Analyst, CapitalVia Global Research Limited.