Life Insurance Corporation of India (LIC) filed its preliminary papers for its initial public offering (IPO) with the Securities and Exchange Board of India (SEBI) on Sunday. The government is looking to sell a 5 percent stake through the LIC IPO, according to the draft red herring prospectus (DRHP).

Share Market Live

NSE

LIC IPO will be entirely an offer for sale (OFS) of 316,249,885 shares by the shareholder, President of India, acting through the Ministry of Finance. At present, the government owns 100 percent in stake in the insurance company, whose total equity is around 632 crore shares.

“LIC has 66 percent market share in new business premiums with 283 million policies and 1.35 million agents as of March 31, 2021. Embedded value of LIC as on September 31, 2021, is Rs 5,39,686 crore (about Rs 5.4 trillion),” Tuhin Kanta Pandey, DIPAM Secretary (Department of Investment and Public Asset Management), tweeted.

Also Read | LIC DRHP FAQs: Which policyholders can apply for IPO and other questions answered

The company may allocate up to 60 percent of QIB (qualified institutional buyer) portion to anchor investors on a discretionary basis. One-third of the anchor investor portion shall be reserved for domestic mutual funds. Also, though not finalised policyholder reservation cannot exceed 10 percent. According to the DRHP, at least 35 percent of the offer is reserved for retail investors.

Here are some of LIC IPO’s key strengths and weaknesses as mentioned in its DRHP filed with SEBI:

STRENGTHS

Market leader: The insurance company was established as Life Insurance Corporation of India on September 1, 1956, under the Life Insurance Corporation Act. It has the largest home market share in the world with over 64.1 percent of the total gross written premium as of 2020, according to a report by rating agency Crisil. It also globally the third-largest in terms of life insurance premium.

Brand name: LIC was formed by merging and nationalising 245 private life insurance companies in India with an initial capital of Rs 50 million. It was identified by the Insurance Regulatory and Development Authority of India (IRDAI) as a Domestic Systemically Important Insurer (D-SII) on the basis of size, market importance and domestic and global inter-connectedness in September 2020.

Product portfolio: The insurance firm offers a wide range of products and services. The offerings range from insurance plans to whole life plans, money-back plans, endowment plans, LIC cards, .

No loan default: LIC has not availed of any term loans and/or other credit facilities and, accordingly, there have not been any defaults or rescheduling/ re-structuring of borrowings from financial institutions or banks, the DRHP said.

ALSO READ | LIC IPO: Company files DRHP with SEBI; govt to sell 5% stake

Return on equity: LIC offers the highest return on equity at 82 percent, according to Crisil's report.

Agent network: LIC has an enormous agent network of 1.35 million individual agents as of March 2021 accounting for 55 percent of the total agent network in the country and was 7.2 times the numbers of agents of the second-largest life insurer SBI Life has, the report said

WEAKNESSES

Competition: LIC is a market leader but of late the firm has lost 5 percent market share, i.e. 500 basis points to the private life insurance industry in the first 10 months of FY22. A brokerage report by IIFL Securities earlier pointed to better service provided by private companies as against LIC’s traditional way of doing business

Pandemic: The COVID-19 pandemic could adversely affect the ability of agents to sell products, increase expenses due to changes in laws and regulations, affect investment portfolio, affect operational effectiveness and/or heightening the risks in business.

Persistency ratio: The ratio reflects the number of policyholders who paid their renewal premium and is seen as an indicator of quality of sale as well as future growth. LIC’s persistency ratios decreased as of March 31, 2020, according to the DRHP.

(Persistency ratio is the proportion of business that is retained from the business underwritten and is measured in terms of the number of policies and premiums underwritten.)

Breach of mutual funds norms: LIC is in breach of SEBI MF Regulations 1996, which prohibit any shareholder from holding 10 percent or more of the shareholding or voting rights in any asset management company, or the trustee company of a mutual fund from holding, directly or indirectly, 10 percent or more of shareholding or voting rights in the asset management company or the trustee company of any other mutual fund.

Also Read: LIC files DRHP with SEBI: Here are the key risks to know before investing

OPPORTUNITIES

Scope: According to a Crisil report, the scope for LIC is very high given the $16.5 trillion protection gap in India as of 2019, which was much higher compared with its Asian counterparts. This protection gap was 83 percent as of 2019, the highest amongst all countries in Asia-Pacific.

Growth in near future: Crisil foresees growth rebounding in fiscal 2022 on the back of a very weak base, a countercyclical Union Budget for fiscal 2022 pushing investments and some benefit from a rising-global-tide-lifting-all-boats effect, the DRHP said.

Rapid urbanisation, rising consumer aspiration and increasing digitisation coupled with government support in the form of reforms and policies are expected to support growth, it said.

Technology initiatives: LIC has come up with several digital solutions but not as many as it private sector peers. An IIFL report suggests the company exploit advanced technologies such as blockchain and artificial intelligence to improve the business on a greater scale.

New-age customers: The report advised LIC to spend heavily on advertising and marketing to create new product offerings and cater to new-age customers.

New-age businesses: LIC has a high disposable income that can be invested in new-age companies, from which even LIC can benefit in terms of technology advancement and make a high return, the report said.

THREATS

Segregation of funds: The partition of LIC’s Life Fund into two separate funds —participating policyholders’ fund and a non-participating policyholders’ fund— effective September 2021, may adversely affect business, financial condition, results of operations and cash flows.

Assumptions may not materialise: If actual claims experienced and other parameters are different from the assumptions used in pricing the products and setting reserves for the products, it could have a material adverse effect on business, financial condition and results of operations, LIC said in its DRHP.

Interest rate: The fluctuations in interest rates may materially and adversely affect the profitability of the company.

Legal proceedings: According to LIC’s preliminary papers, as of February 6, 2022, the firm or its officials, agents and employees are involved in approximately 26,919 criminal, consumer, civil proceedings, tax proceedings and actions taken by statutory or regulatory authority. These legal proceedings are currently pending at different adjudication stages before various courts and tribunals across India.

LIC FINANCIALS

Net profit on sale/redemption of policyholders’ investments was Rs 23, 800 crore, Rs 19,387 crore, Rs 39,809 crore, and Rs 23,246 crore for FY19, FY20, FY21, and for the first six months of FY22, respectively.

Gross written premium on a consolidated basis increased at a CAGR of 9.21 percent from FY19 to FY21.

Market share of 62.5 percent and 62.9 percent for renewal premium for FY21 and the six months ended September 30, 2021

New Business Premium increased at a CAGR of 13.49 percent from FY19 to FY21.

Issued approximately 21 million individual policies in FY21, representing approximately 75 percent market share in new individual policy issuances.

Expense ratios as percentage of total premium for FY19 (8.4 percent), FY20 (9 percent), FY21 (8.7 percent), and six months of FY22 (10.1 percent) less than median of the top five private players’ operating expense ratio of 13.0-11.9 percent during same period.

Profit after tax on a consolidated basis increased from Rs 2,627 crore for FY19 to Rs 2,974 crore for FY21.

Also, catch all latest updates and trends from LIC IPO DRHP with CNBC-TV18's blog

(Edited by : Ajay Vaishnav)

First Published:Feb 13, 2022 10:25 PM IST