Embedded Value makes the offer attractive but, as private insurers gain market share, what happened to GIC and NIA can happen to LIC sooner or later. 

LIC OFFER AT A GLANCE
Offer Type	Book Built
Platform	Main Frame
Offer Size	Rs 20,557 Cr
Fresh Issue	Nil
Offer for Sale	22,13,74,920 equity shares (Rs 20,557 Cr)
Face Value	Rs 10
Price Band	Rs 902 – 949
Min Quantity	15 Nos.
Implied M-Cap	Rs 6,00,242 Cr
Equity Cap	Rs 6,325 Cr
Free Float	3.5%
Lead Manager	Kotak Mahindra Cap, Axis Cap, BofA Sec, Citigroup Global, Nomura Fin, Goldman Sachs, ICICI Sec, JM Fin, JP Morgan and SBI Cap
Registrar	KFin Technologies
Listing	BSE, NSE

 

INDICATIVE ISSUE SCHEDULE
Opening          : 4-May-2022	Closing       : 9-May-2022
Allotment       : 12-May-2022	Refunding  : 13-May-2022
Demat Credit : 16-May-2022	Trading      : 17-May-2022

 

The Offer

Government of India is offloading 22,13,74,920 shares (3.5% equity capital) of the country’s foremost life insurance provider, Life Insurance Corporation of India (LIC). Thus, for the first time, the six and a half decades old corporation is going to have a public stake. The offer is being made through the book-building route with a price band of Rs 902-949 for Rs 10 paid-up share. Of the total offer, 15,81,249 shares have been allocated for LIC’s employees with a discount of Rs 45 on the offer price, and 2,21,37,492 shares have been reserved for Policy holders with a discount of Rs 60 on the offer price.

The objects of the offer are to carry out the Offer for Sale by the Government and achieve the benefits of listing on the stock exchanges. Applicants for the IPO should bid for a minimum quantity of 15 shares and multiples thereof. The shares are proposed to be listed on the main frame of BSE and NSE on May 17, 2022.

As many as ten investment bankers namely Kotak Mahindra Capital, Axis Capital, BofA Securities, Citigroup Global Markets, Nomura Financial Advisory, Goldman Sachs (India), ICICI Securities, JM Financial, JP Morgan India and SBI Capital Markets have been roped in as book running lead managers to the offer. Karvy’s new avatar, Kfin Technologies, will play the role of registrar to the issue. The bidding opens on Wednesday, May 4 and closes on Monday, May 9, 2022.

 

Lineage

Established on September 1, 1956  under the Life Insurance Corporation Act, LIC is the largest life insurer in the country, with 61.6% market share in terms of premiums (GWP), 61.4% market share in terms of New Business Premium (NBP), 71.8% market share in terms of number of individual policies issued, 88.8% market share in terms of number of group policies issued for the nine months ended December 31, 2021, as well as by the number of individual agents, which comprised 55% of all individual agents in India as at December 31, 2021.

LIC was formed by merging and nationalizing 245 private life insurance companies. The Corporation was started with an initial capital of Rs 5 Cr which was subsequently increased to Rs 100 Cr. In September 2021 capital bulged to Rs 6,325 Cr through bonus issues. From the Corporation’s incorporation until 2000, it was the only life insurer in India. Currently, there are 24 life insurance companies in the country, LIC being the sole public player.

 

Stakeholder & Cost

At present, the entire equity capital (6,324,997,701 shares) is held by the Government of India at an average cost of is Rs 0.16 a piece.  Post-offer for sale, GoI will continue to hold 6,103,622,781 shares (96.5%) at a negative cost. As against the total investment cost of Rs 101 Cr, it will be collecting more than Rs 21,000 Cr by selling just 3.5%.

 

Assets Under Management

LIC is the largest asset manager in India as at December 31, 2021, with AUM (comprising policyholders’ investment, shareholders’ investment and assets held to cover linked liabilities) of Rs 40.1 trillion on a standalone basis, which was (i) more than 3.2 times the total AUM of all private life insurers in India, (ii) approximately 15.6 times more than the AUM of the second-largest player in the Indian life insurance industry in terms of AUM, (iii) more than 1.1 times the entire Indian mutual fund industry’s AUM and (iv) 17.0% of India’s estimated GDP for Fiscal 2022.

 

Financial Standing

In terms of premium collected, LIC is more than 6.5 times bigger than the second largest insurer SBI Life. Its gross income is 8 times bigger than SBI Life.  Nevertheless, as private players grow aggressively, LIC is feeling the pinch of late. In fact, in terms of Shareholder Account’s gross revenue, ICICI Prudential and SBI Life have moved ahead of LIC. In net worth too, despite having a large equity capital, which is more than six times of SBI Life, LIC stands below HDFC Life and SBI Life.

 

LIC CONSOLIDATED FINANCIAL PERFORMANCE (Amount in Cr)
PERIOD ENDED	31-Dec	Mar-21	Mar-20	Mar-19
Gross Written Premium	285730	405851	382811	340295
Net Earned Premium	285342	405398	382476	339972
Income from Investments	226254	285520	242836	225044
Other Income	684	12786	20288	5792
Total Income	512279	703709	645605	570810
Total Expenses	510636	699848	655754	573226
Surplus or Deficit	1643	3862	-10149	-2416
Share Holder Account:
Transferred from Policyholder A/C	1638	2963	2696	2599
Income from Investments	120	23	35	46
Total Income	1757	2986	2731	2645
Profit/Loss after tax	1715	2974	2710	2627
Equity Capital	6325	100	100	100
Reserves	2499	6705	892	798

Valuation

Whereas the second largest life insurance player (SBI Life), whose business volume is relatively smaller, is currently priced about Rs 1160 in the secondary market, the country’s insurance behemoth has kept a surprisingly lower price band of Rs 902-949. The cap price discounts LIC’s Embedded Value (present value of future profitability) only 1.1 times as compared to HDFC Life’s 3.8x, SBI Life’s 2.8x and ICICI Prudential’s 2.3x.

The reason for LIC’s relatively cheaper valuation is not far to fetch. At the end of fiscal 2021 LIC’s Embedded Value was put at Rs 95,605 Cr which has pole-vaulted more than five times in just three quarters! It’s worth noting here that there is significant technical complexity involved in embedded value calculations and the estimates used in the Embedded Value Reports could vary materially if key assumptions are changed or if the actual situation differs from the assumptions used for calculating the Embedded Value.

 

HOW LIC COMPARES WITH SELECT LIFE INSURANCE PEERS  (Amt in Cr)
COMPANY NAME	LIC		SBI LIFE	ICICI PRU	HDFC LIFE
YEAR/PERIOD ENDED	31-Dec	Mar-21	Mar-22	Mar-22	Mar-22
EMBEDDED VALUE (EMVAL)	539686	95605	39630	31625	30048
Premium Income (PI)	285342	405398	58432	36321	46801
Gross Income (GI)	512279	703709	83027	63565	67060
Insurance Surplus/Deficit	3868	4579	1884	2190	1043
Transfer from Insurance Business	1638	2963	1732	2160	1106
Shareholder Acct Gross Revenue (GR)	1757	2986	2721	3186	1938
Profit/Loss after tax	1715	2974	1506	759	1327
Equity Capital	6325	100	1000	1437	2113
Reserves	2499	6705	10418	7555	13413
NET WORTH (BV)	8824	6805	11418	8992	15525
PRICE	949	949	1120	500	538
MARKET CAP	600242	600242	112061	71830	113712
Face Value (Rs)	10	10	10	10	10
Price/EMVAL	1.1	6.3	2.8	2.3	3.8
P/E	262.4	201.8	74.4	94.6	85.7
P/BV	68.0	69.7	9.8	8.0	7.3
P/PI	1.6	1.5	1.9	2.0	2.4
P/GI	0.9	0.9	1.3	1.1	1.7
P/GR	256.2	201.0	41.2	22.5	58.7

 

At the macro level, the industry’s total premium has grown at 11% CAGR in the five years ended fiscal 2021. CRISIL Research forecasts the industry’s total premium to grow at 14-15% CAGR over the next five years, to reach close to Rs 12.4 trillion by fiscal 2026. Nevertheless, as the life insurance field is getting crowded, the competition will significantly squeeze the market share of the industry leader. Will PSUs stand against the onslaught of the private players in a cutthroat competition? The experience of BSNL and MTNL in telecom services, GIC and NIA in non-life insurance, makes one skeptical. Also, the plight of the once venerated PSUs like BHEL, GIC, NIA, Engineers India, etc. after listing continues to daunt the investing public.

 

POPULAR PSU PUBLIC OFFERS THAT FAILED TO SUSTAIN POST-LISTING
SCRIP NAME	OFFER DATE	OFFER PRICE	CURRENT  PRICE	Loss*
GIC*	11-Oct-17	912	131	-71
New India Assurance*	1-Nov-17	800	118	-70
Engineers India*	27-Jul-10	290	64	-56
NMDC	10-Mar-10	300	161	-46
HUDCO	8-May-17	60	35	-41
Coal India	18-Oct-10	245	183	-25
* after adjusting bonus issues

 

Moreover, LIC’s implied market cap is discounting the corporation’s shareholder account revenue more than 200 times which is 10 times higher than ICICI Prudential, 6times higher than SBI Life and 4 times higher than HDFC Life. In terms of price-earning and price-book value too, in view of LIC’s large equity capital, the ratio is unfavorably high as compared to the industry peers.

 

Concern

Statutory demands/tax liabilities in dispute not provided amount to Rs 28,080 Cr. Also, as on December 31, 2021, LIC had other investments of Rs 12,143 Cr (Rs 878 Cr in equity and Rs 11,265 Cr in debt instruments) forming part of the pension and group and life annuity funds that had not been transferred after 90 days of becoming other investments which is a violation of IRDAI guidelines.  The market value of the equity investments of Rs 878 Cr was Rs 201 Cr. Out of the debt investments of Rs 11,265 Cr, Rs 5,914 Cr was standard debt. The remaining Rs 5,351 Cr comprises non-performing assets, which stands fully provisioned in the policyholders’ funds as at December 31, 2021.

The loss that would have accrued in the profit and loss account (Shareholders’ Account) had these investments been transferred to the Shareholders’ funds at amortized cost was Rs 6,028 Cr. LIC is required to ensure that these investments are transferred to the Shareholders’ funds at amortized cost, which it has yet to undertake. The market value of the applicable other investments may decrease and the loss that will accrue in the profit and loss account (Shareholders Account) when these investments are transferred to the Shareholders’ funds at amortized cost may be more than the loss noted above and to such extent Shareholders’ funds would stand reduced.