LIC IPO - Everything You Need to Know About

5paisa Research Team 5paisa Research Team 15th December 2022 - 01:59 pm

On Sunday, 13th February 2022, the government of India announced the first actionable details about the LIC IPO by filing the draft red herring prospectus for the LIC IPO. As per the DRHP filed with the regulator, the government of India will offer 5% of its equity in LIC to the public via an offer for sale. There will be no fresh issue component in the LIC IPO and the entire issue will be an offer for sale.

Gist of LIC IPO

Particulars	IPO related details of LIC
Total shares on offer	316.25 million shares
Dilution of equity by GOI	5%
Reservation for LIC Policyholders	10% of the issue size (3.16 million shares)
Total AUM of LIC	Rs.39.60 trillion ($527 billion)
Market share of new business premia (NBP)	66%
Market share of new policies sold	72%
Estimated embedded value by Milliman	Rs.5.40 trillion
Benchmark valuations over EV	2.60 times to 4.00 times

How LIC IPO fits into the government Disinvestment program?

In the Union Budget 2021, the government had set a disinvestment target of Rs.175,000 crore. This was to include some major divestments like LIC IPO, BPCL sale of government stake, Air India strategic sale etc. The Air India sale has been completed but the net inflow to the government has been very small. In the case of BPCL, the sale of the 52.98% stake of the government has been most likely put off to the next fiscal year FY23. How does LIC fit into the disinvestment plan for FY22?

In the Union Budget 2022, the government downsized the disinvestment target for FY22 from Rs.175,000 crore to just Rs.78,000 crore. Till date, the government has already raised Rs.13,000 crore in FY22 via disinvestments so the residual amount to be raised via the LIC IPO is approximately Rs.65,000 crore to meet this disinvestment target for the full year. Also, the disinvestment target for FY23 has been toned down to Rs.65,000 crore, which means the BPCL sale of stake is being, most likely, moved to the next fiscal year.

How will the LIC IPO raise Rs.65,000 crore for the government?

As of now the price band of the IPO is yet to be announced and it is likely to be announced closer to the actual issue. While the actual valuation is not yet known, there is the actuarial valuation (embedded value) estimates prepared by Milliman Advisors.

The embedded value is a popular metric used for life insurance firms which represents the sum of present value of all future profits from the existing business and shareholder net worth. As per the estimates of Milliman Advisors and as explained in the DRHP of LIC, the embedded valuation of LIC as on 30th September 2021 works out to Rs.539,686 crore.

How LIC will rank vis-à-vis the 5 biggest IPOs in history?
Saudi Aramco (Dec-2019)	Alibaba (Sep-2014)	Softbank (Dec-2018)
$25.60 billion	$21.8 billion	$21.3 billion
NTT Mobile (Oct-1998)	Visa Inc (Mar-2008)	LIC (Mar-2022) – Estimated
$18.10 billion	$17.4 billion	$9-10 billion

The global benchmark for valuing life insurance companies varies at a multiple between 2.60 times Embedded Value and 4.00 times embedded value. Considering the stiff competition in the Indian life insurance market and the risk of substantial government ownership as well as fairly large illiquid debt portfolio, we can assume valuations at the lower end of the valuation spectrum of 2.60 times embedded value. That would work out to an overall valuation of around Rs.14,03,184 crore for LIC or translated as $186 billion.

With a conservative valuation benchmark of $186 billion, a 5% stake sale by the government would translate into an OFS size of $9.3 billion or Rs.70,000 crore. If one looks at comparable valuations of private sector insurance players, this also leaves returns on the table for investors, apart from meeting the divestment target.

Potential of the Life Insurance sector in India

Life insurance in India is a story of untapped opportunity. Look at some of the statistics provided by the Swiss Re report.

1) Insurance penetration overall is fairly low in India. For instance, as of FY21, the overall insurance penetration (premiums/GDP) stood at 4.2% for India, against the global average of 7.4%, which his substantially lower. It is much lower if you compare with the developed countries.

2) The life insurance penetration in India, interesting, at 3.2% is comparable with the global average of 3.3%. It is in non-life insurance penetration that India at 1% lags behind the global average at 4.2%.

3) However, India still lags in insurance density, which is premium per capita. This figure stood at $78 for India against a global average of $809 for FY21. India lags the global average in life and non-life density.

4) The good news is that life insurance penetration has improved in India over last 1 year from 2.82% to 3.2%, largely on account of the insurance awareness created by the COVID pandemic over the last 2 years.

The total insurance premium pool currently stands at Rs.620,000 crore in FY21, clocking 11% CAGR growth in the last 5 years. In fact, CRISIL has forecast total premium of the insurance segment as a whole to grow at 14-15% CAGR over next 5 years with the pool doubling to Rs.12,40,000 crore by FY26.

How LIC dominates the Insurance Market

Being the pioneer in the life insurance space in India, LIC obviously dominates market share. What is interesting is that it has maintained leadership even after nearly 25 years of private sector competition. Here are some numbers that underlie the LIC story.

a) LIC enjoys 66% market share in new business premiums (NBP), 64.1% of overall premium, but the share of policies sold is more than 74.6%, indicating that LIC still dominates the mass insurance market. This has been achieved via 28.30 crore life policies across 25 crore policyholders and marketed by 14 lakh feet-on-street agents.

b) LIC has a dominant share of the individual life and group life business. For instance, LIC has a 74.6% market share of number of individual policies issued and a whopping 81.1% market share of number of group policies issued in FY21. The LIC individual agent network is 55% of the all-India agent network as per IRDA.

c) In the first 6 months of FY22, LIC earned Rs.187,000 crore as net premium. In addition, it earned Rs.124,000 crore in H1 from interest and dividends plus another Rs.23,246 crore from capital gains on sale of investments. In FY21, LIC had reported net profits of Rs.2,908 crore and for H1 FY22, the net profits stands at par at Rs.1,504 crore.

d) Gross NPAs of the debt portfolio have fallen from 7.78% in FY21 to 6.57% in H1-FY22. How, net NPAs at 0.05% indicate that the NPA risk is substantially provided for.

e) LIC has a formidable network of 8 zonal offices, 113 divisional offices and over 4,700 branch and satellite offices. Of course, its individual agent strength constitutes a whopping 55% of the insurance market.

f) Total AUM of LIC as of H1-FY22 stands at Rs.39.6 trillion. This is 3.3X the AUM of the rest of the private insurers combined and more than 16 times the AUM of SBI Life, the second largest life insurer in India. More importantly, the AUM of LIC is more than the entire Mutual Fund industry in India.

Pre IPO placement and discounts

The LIC will not be doing any pre IPO placement although 60% of the QIB portion is likely to be reserved for anchor investors to avoid uncertainty in the IPO. The LIC IPO has a 10% reservation for policy holders. In addition, there is likely to be a special discount for policyholders, employees and retail investors. Details of the same will be announced closer to the IPO opening date.

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