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LIC the opportunity. The challenge.
Global equity markets are likely to remain under pressure in near term. Anchor appetite will be elemental in success of the IPO, but low free float may bring liquidity concerns in the secondary market
Life Insurance Corporation of India (LIC) was established in 1956 as a result of merger and nationalization of 245 private life insurance companies post enactment of The Life Insurance of India Act.
The state-owned behemoth dominates the Indian life insurance industry with a c. 66% slice.
Presenting a unique ‘Stakeholder friendly’ offering
LIC is a 100% state owned entity. In order to fulfill this fiscal year’s divestment target, the govt. plans on selling a 5% stake (i.e., 31.62cr shares) of the company. Around 5%/10% of the issue will be reserved for employees/eligible policyholders, who are expected to get shares at a 5% discount through an IPO touted as India’s largest ever public issue (expected in March 2022).
Industry is growing rapidly and a 9% CAGR growth is expected in coming years
Based on life insurance premiums, India is the 10th largest life insurance market in the world and the 5th largest in Asia. The size of the Indian life insurance industry was INR6,200bn in FY 2021. Total premium has grown at 11% CAGR while New Business Premiums (NBP) grew at 15% CAGR during FY 2016-2021. Further, the industry is projected to grow at c. 9% CAGR to reach INR8,000bn by 2024.
Biggest in India, 5th largest globally in terms of GWP
LIC has the largest agent network among life insurance entities in India, comprising approximately 55% (1.35mn) of all individual agents in India as at March 2021. Globally LIC is ranked 5th in terms of gross written premium after German insurer Allianz SE, China’s Ping An Insurance, China Life Insurance and Italy’s Assicurazioni Generali S.p.A. LIC is also the largest asset manager in India and the 10th largest globally, having an AUM of c. INR39,600bn. This is c. 3.3x the total AUM of all private life insurers in India and c. 1.1x the entire Indian mutual fund industry!
Strong foothold, meaningful growth, and significant value unlock thanks to IPO
Net premium for FY21 stood at INR4,053bn, growing at a CAGR of 9% during FY 2019-2021 while APE was INR455bn, growing at 6% CAGR during the same period. Investment yield declined marginally from 7.4% as at FY 2021 to 7.17% as at September, 2021 and solvency ratio improved from 176% to 183% during the same period.
VNB as at FY 2021 stood at INR42bn resulting in a VNB margin of c. 10%. This has slightly declined to 9.3% as at September, 2021 with a VNB of c. INR16bn. NPA profile has slightly improved albeit worse than other private insurers, with Gross NPA reducing from 7.78% as at FY 2021 to 6.57% as at September, 2021 while Net NPA remained stable at 0.05%.
ROE has declined from 317% in FY 2020 to 46% in FY 2021 owing to increase in networth by c. INR56bn.
Embedded value1 has also increased from INR956bn to INR5,390bn during this period. This is mainly on account of changes in surplus sharing2 in line with private life insurers. EPS as at FY 2021 stood at INR4.70. SBI Life Insurance, the 2nd largest life insurance player in India reported an EPS of INR14.56 for the same period. Heavy dependency on agents is one of the downside factors although recent tie-up with Policybazaar is expected to mitigate it to some extent.
Embedded value multiple in the range of 2-2.5x gives comfort around valuation
Private insurance companies usually trade at a multiple of 3x-4x embedded value. Considering the dominant position with c. 66% market share, LIC’s growth rate may not match up with other private insurers. Considering an expected issue price range of INR2,000-2,100 would imply a reasonable embedded value multiple of 2.34x-2.46x.
Primary market liquidity will be the key to the success of LIC’s IPO
Equity markets around the world are likely to remain under pressure in the near term on account of increasing inflation, interest rate hikes, rising tensions between Ukraine and Russia. Anchor appetite will be elemental in the success of the IPO since the issue size could be well above INR500bn.
However, considering the IPO is purely an offer for sale comprising 5% of total shares outstanding - indicating low free float - may bring liquidity concerns in the secondary market.
Embedded Value of a life insurance company is the present value of future profits plus adjusted net asset value.
LIC will now be sharing the entire non par policyholder surplus with shareholders and increase shareholder allocation within the in par category surplus.
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Disclaimer: The views expressed above are the views of Arkvega Partners LLP, and are subject to change at any time based on market and other conditions. This is neither an offer nor solicitation for the purchase or sale of any security, and should not be construed as such. References to specific securities and issuers are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendations to purchase or sell such securities. We strongly advise you to do your own research and consult an accredited investment advisor before investing based on what you read in a newsletter. Arkvega Partners LLP or its employees may have exposure in the financial instrument discussed above and can close positions in the future without prior intimation.