LIC and other life insurance players' premium growth
LIC's Key Operating & Financial Parameters
LIC IPO - Issue subscribed 1.79 times on day 5
The public issue of Life Insurance Corporation of India has subscribed 1.79 times till May 8, the fifth day of bidding. The offer has received bids for 29.07 crore equity shares against IPO size of 16.2 crore equity shares.
Policyholders remained at the fore as their reserved portion was subscribed 5.04 times, followed by employees who bid 3.79 times the allotted quota, and retail investors 1.59 times. Non-institutional investors have put in bids 1.24 times the portion set aside for them, while the portion reserved for qualified institutional buyers was subscribed 67 times.
Key Risk to LICs business: KR Choksey
• Under the IRDAI Investment Regulations, LIC is required to invest its investment assets forming part of its controlled fund incertain specified categories of assets and instruments, subject to thresholds prescribed for each category of investment. Given the prescribed limits on the way the company’s assets are held and in which its investments can be made, LIC may be unable tomitigate market risks, while making investments, in the same manner as non-insurance companies.
• The company faces limited liquidity risk due to the nature of its liabilities and business structure.
• Events such as changes in regulatory policies, volatility in capital markets, loss of customer confidence in the insurance industryor in the company, or sharp declines in its customers’ financial positions due to a severe deterioration in economic conditions,such as the economic deterioration caused by the COVID-19 pandemic, may cause discontinuations of its customers’ insurancepolicies.
• The strength of the brand ‘LIC’ could be adversely affected by changes in customers’ and market perceptions about thecompany, particularly in the insurance sector, where integrity, trust and customer confidence are paramount. LIC is exposed tothe risk that litigation, misconduct by its employees, agents or other distribution partners, operational failure and negativepublicity could harm its brand, reputation, customer trust and business
LIC: Key business strategies
Capitalize on the growth opportunities in the Indian life insurance sector
Further diversify the product mix by increasing the contribution of the non-participating portfolio
Reinforce the omni-channel distribution network and increase its productivity
Continue leveraging technology to aid growth, drive operating efficiencies and provide digital support
Maximize value creation through various commercial and financial levers as well as changes to LIC’s surplus
distribution policy
LIC's expense ratio is one of the highest in peers, however, operating expense ratio is in better condition compared with peers
Source: GEPL Capital, LIC IPO Note
LIC IPO : Subscription Update
Low free-float may push the price higher, says Religare Broking
Religare broking believes that the low free-float of LIC shares may push the prices higher. Given that the government is offloading only 3.5% of its 100%stake, the free-float would be low which could create demand-supply mismatch.
Sonam Srivasatava, smallcase manager and Founder – Wright Research
LIC IPO at 2.2 billion $ size is one of the world’s top ten most significant insurance IPOs to date. With other massive insurance and insure-tech IPOs like Policybazaar and Star Health, India has become a leader in the Insurance IPO market. Moreover, with major listed insurance players like LIC, General Insurance, New India, SBI Life, and HDFC Life, India is now a significant market for listed insurance players. What is also extremely attractive about the Indian insurance industry is that it is underpenetrated and multiplying for the massive Indian demographic. This critical size and growth prospect make Indian insurance a fairly attractive play.
LIC IPO Subscription Update
Parth Nyati, Founder, Tradingo
Even post listing, the government will still be the major shareholder and the key manager. Thus any future government intervention might be detrimental to shareholders.The company has made plans to address the issues pertaining to the company like losing market share to private players, lower profitability and revenue growth, compared to private players, lower VNB margins, and short-term persistency ratios.
LIC is 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.
Investors must be aware that the business of insurance is long-term in nature; therefore, we recommend this issue for the long-term only.
Life insurer’s rising appetite for passive investment products
The state-run insurer invested Rs 12,221 crore in exchange-traded funds (ETFs) in the first six months of the current financial year, higher than the Rs 10,062 crore it invested in all of 2020-21.The quantum of funds invested in passive products has increased nearly four times over the past two and a half years. In 2018-19, LIC invested Rs 3,080 crore in ETFs.However, the share of investments in venture funds, mutual funds and ETFs was only at 0.78 percent of the overall assets of LIC as of September 30, 2021. The rise in LIC’s investments in ETFs comes alongside rising interest in such products by investors as well as the increased use by the government of ETFs to sell stake in state-owned enterprises.
Protection gap is the highest in India at 83 percent
Mortality protection gap represents the difference between the cover typically required by a family and the resources they have available should a wage-earner pass away suddenly.
Source: IIFL Securities IPO Note
LIC IPO Subscription Update
Source: BSE India
LIC's future growth can negate the current lower than industry growth rates: Investmentz.com
There are concerns about losing market share to private players and having lower profitability and revenue growth when compared to private players. However, we believe that LIC’sdistribution advantage, increasing sales mix of direct and corporate channels, and a gradual shift to high margin Non- participating products could be possible drivers forLIC’s future growth, negating lower than industry growth rates.
Individual policies are mainly sold through agents while group policies are sold directly in India
Individual agents accounted for ~58% of the industry’s individual life insurance premium in FY21 due to the personal touch established with customers. Agents are preferred asthey can explain various features of a policy and also provide various customer services such as cheque collection.
Banks are important as evident from the rising share of the bancassurance channel, from 23.8% of NBP in FY16 to 29.0% in FY21 (individual business), driven majorly byprivate players which either have major holdings by banks or have empanelled banks as their corporate agents. With the push on the technology front, the direct channelaccounted for ~9% of individual life insurance premium in FY21.
LIC has a strong brand value - LKP Research
LIC was recognised as the third strongest and 10th most valuable global insurance brand as per the “Insurance 100 2021 report” released by BrandFinance. The strength of a brand means the efficacy of a brand’s performance on intangible measures relative to its competitors and is determined by looking at the brand’s marketinginvestment, stakeholder equity and impact of those on business performance. The brand ‘LIC’ was also recognised by WPP Kantar as the second most valuable brand in India in the report“BrandZ” Top 75 Most Valuable Indian Brands” for 2018, 2019 and 2020
LIC IPO Subscription Updates:
Key Matrix
Jainam recommends subscribe to LIC IPO issue on the following parameters:
This company has highest market share in the country in the life insurance business.
Due to its presence in this country for about 65 years now, it has created a goodwill which commands trust amongst the people.
The Life Insurance Industry is growing at 22.5% annually.
Special Reservation up to 10% of the issue size for policyholders along with the discount on the issue price.
GEPL Capital view on LIC IPO:
The Embedded value for LIC is Rs 5,39,686 and its post issue implied market capitalization is Rs 6,00,242 crore which is 11.2% premium to its IEV.
The Mcap to EV ratio for its listed peers it in the range of 1.5x to 2.5x, Hence we believe Valuations of LIC with its majestic size are priced reasonably.
As data suggest, its business is largely driven by agent based model (90%+), hence a larger digital on boarding of its network will be needed to pursue growth ahead.
However, with Rs 6 lakh cr market cap on a PAT of Rs ~3000 Cr makes a PE ratio of 200(x), In our view PE ratio is not comparable with Private players as LIC’s distribution policy is now changed and higher allocation towards shareholders account in upcoming future to rise and thereby cool-off in earnings multiple.
Company is losing its market share to private players, on which LIC could be focused on ahead.
With its majestic Networks and expected double digit growth the industry complied with attractive valuation compared with peers makes LIC IPO a lucrative Investment. We recommend “SUBSCRIBE” to the issue.
LIC has higher persistency over long tenures
LIC IPO Subscription Updates:
Ashika Research View on LIC IPO:
Going ahead, LIC will likely to strengthen its omni-channel distribution network for individual products and increase its productivity.
India’s life insurance penetration stood at 3.2% in CY 2020 compared to the global average of 3.3%. Besides, protection gap for India was 83% as of CY 2019, the highest amongst all countries in Asia-Pacific. Thus, clearly there's room for every player in the industry to grow without adopting cannibalism.
At the upper priced band of Rs 949, the issue is valued at 1.1x EV (Sep'21) which is at a significant discount to private sector valuations and investors are advised to 'SUBSCRIBE' to the issue
LIC grey market premium declines:
The premium for LIC IPO in the grey market has declined over the past few days. As per IPO Watch and IPO Wala, the sites that track grey market premium, the GMP for the IPO was quoting at Rs 65 per share earlier which has now fallen to Rs 60 as per IPO Watch and on IPO Wala the fall is much higher to Rs 50. Experts are attributing this decline in GMP to the global sell off that has been witnessed during the week.
LIC IPO - Subscription status at 1.00 pm
Source: BSE India
LIC has lost market share of retail APE over the years
Source: DRHP; Jefferies IPO Note
Implications of LIC listing on insurance sector:Jefferies
We believe, LIC’s listing will broaden investible universe and further raise sector’s relevance in investor’s portfolio. It will also help investors to better track sector dynamics as LIC disclosures become frequent. LIC has recalibrated its par and non par products ahead of the listing.
LIC IPO: Day 5 Subscription status at 12 noon
The IPO is subscribed 1.71 times till 12 noon with LIC policyholders leading the bout with 4.78 times subscription of their portion, Employees have reserved 3.63 times of their allocated portion, Retail investors have lapped up 1.50 times, NII portion 1.18 times and QIB portion is subscribed 0.67 times.
LIC is important for the government to meet its divestment targets: UBS
Besides SOE stock ownership, LIC is an important entity for the government in many ways. LIC owns over 19% of all government bonds (centre + states) making itbigger than the RBI, and surpassed only by the commercial banking system (who need to hold government bonds per regulations). Post listing, LIC would be the largestinvestment in the government's portfolio of listed equities—43% of US$377bn in AUM. This is important from the point of view of government budget financing throughdivestments. At its valuation, proceeds from LIC would help meet the budgeted divestment target for FY22 (Rs780bn). There would be further dilution in the comingyears (totaling US$8.6bn in two years and US$34bn in five years, at the current media-reported valuation). Assuming sufficient demand for this supply (not an easy assumptiongiven the scale of these numbers), a decent chunk of the government's divestment cash flows could be sustained by repeated dilutions in LIC.
Impact of pandemic on LIC
LIC was adversely impacted by the pandemic, especially in terms of sale of individual policies during all the three waves. For instance, sales ofindividual policies declined 22.7% to 6.35mn policies in Q4FY20 from 8.21mn in Q4FY19. Death claims also increased during the pandemic. For FY19, FY20, FY21and 9MFY22, claims by death (net) totalled Rs 170bn, Rs 173bn, Rs 235bn and Rs 293bn respectively (consolidated basis) – these amounted to 6.72%, 6.79%,8.14% and 12.49% of total benefits paid (net) respectively. Thus, any future Covid’19 waves could be detrimental to growth and normal operations.
LIC IPO: Day Subscription Status at 11:00 AM
Source: BSE India
LIC is the largest asset manager with a proven track record - BOB Caps
LIC was managing ~Rs 40 lakh crore in AUM (standalone basis) at end-9MFY22, which is 3.2 times that of all private insurers combined. Its policyholders’ funds have a well diversified investment portfolio. As of 9MFY22 (standalone basis), the policyholders’investment portfolio included 38.1 percent central government securities, 24.6 percent equity securities, 24.3 percent state government securities and 8.4 percent corporate bonds. Similarly,95.9 percent of debt AUM was invested in sovereign and AAA-rated securities. Over 90 percent of policyholders’ equity investments (standalone) are held in stocks that are apart of the Nifty 200 and BSE 200 indices. Net profit on sale/redemption of policyholders’ investments was Rs 23,900 croreat end-FY19, Rs 19,400 croreat end-FY20, Rs 39,800 crore at end FY21 and Rs 36,500 crore at end-9MFY22.
LIC IPO: Day 5 Subscription status
LIC IPO which opened for subscription on May 04, is open for subscription on Sunday as well. The issues is subscribed 1.68 times till 10:20 am with LIC policyholders leading the pack with 4.71 times subscription of their portion, Employees have reserved 3.57 times of their allocated portion, Retail investors have lapped up 1.47 times, NII portion 1.13 times and QIB portion is subscribed 0.67 times.
Key Operating Financial Matrix of LIC
Key operating parameters in insurance industry
VNB Margin: VNB stand for Value of new business, it is basically a profit margin of an insurance company and it is calculated as Ratio of VNB to APE (Annual Premium equivalent) for the relevant period and is a measure of the expected profitability of new business. The higher Is better for Company.
Total Cost Ratio: It sum of commission ratio and operating expense ratio. Ideally the lower is better for company.
Persistency Ratio: It is Proportion of business that is retained from the business underwritten earlier. It is calculated for each year's policy renewal. Foe e.g. LIC has 79 percent persistency ratio for 13th month which means 79 policies out of 100 are renewed after 1-year completion. The higher is better company. Keep in Mind that, Insurance business is long term contract where Policyholder pays Premium for several years unlike other business where customer’s purchase is limited to one time only. Hence higher Persistency ratio indicates strong relation of the company with policyholders.
Solvency Ratio: It is the amount of the available solvency margin, which is excess of value of assets to the amount of Required Solvency Margin. It should be at least above 1.5x. For LIC it is 1.8x as of 9MFY22.
Policy Mis-selling complaints: It is measured as mis-selling complaints filed by policyholders per 10,000. The lower is better for the company for LIC it is 2.1 per 10,000 complaints which is lowest in its peers.
Indian Life Insurance Industry
Life insurance premium has grown at an 11percent CAGR from Fiscals 2016 to 2021. The double-digit growth in premium can be attributed to expansion in the distribution network, introduction of different government schemes and financial inclusion drives. These factors have increased awareness about the need for
insurance and propelled industry growth. LIC holds a 64percent share by total life insurance premium and grew at 9percent CAGR from Fiscals 2016 to 2021. Private insurers grew at a 18percent CAGR growth during the same period.
New business premium has grown at 15percent CAGR in the past five years with LIC and private insurers growing at 14percent and 18percent CAGR, respectively. In Fiscal
2021, amid the COVID-19 pandemic, NBP grew approximately 7percent reflecting the impact of the economic slowdown. During the first nine months of Fiscal
2022, NBP growth remained low for the industry with y-o-y growth of 7.4percent.
Global Life Insurance Industry
Growth in the global life insurance industry was almost stagnant for a few years after the financial crisis in 2008. During CYs 2003-2007, the total premium of
the global life insurance industry grew at 4% CAGR (in nominal dollar terms). However, there was a revival in growth from CY 2014. During CYs 2014-2019,
global life insurance premiums grew at a CAGR of 1.7%. Growth in this period was primarily driven by emerging markets which grew at 8% CAGR compared
to a CAGR of 0.3% for advanced markets during the same period.
In CY 2020, the global life insurance market contracted by 3.1% to $2.79 trillion from $2.88 trillion in CY 2019 (in nominal terms) due to the impact of COVID19 and the consequent weakness in the life savings business, which represents 81% of the global life portfolio. Advanced markets were hit harder, contracting 3.9% as compared to approximately 0.3% for emerging markets. The reason for the resilience of emerging markets was China, where premiums rose
by 5.5% due to its strong economic recovery, solid demand for risk protection, quicker adoption of digital channels and insurers’ active approach to engage
with customers.
India’s life insurance penetration stood at 3.2% in CY 2020 compared to the global average of 3.3%. Among Asian countries, life insurance penetration in
Thailand, South Korea and Singapore were at 3.4%, 6.4%, and 7.6%, respectively, in CY 2020. The penetration of the Indian industry is not comparable to
developed markets, such as the United States and Australia, where mandatory pension contributions are not included in the insurance pie.
LIC IPO:GEPL Capital recommends a 'subscribe' rating to the issue
Retail investors should apply for IPO, as this opportunity brings you the combination of market leader at cheaper valuations operating in double digit growth industry. LIC is India's leading life insurance company with 66 years' history of operations. Its name 'LIC' is commonly used as synonym for life insurance.
India’s insurance market is not underpenetrated but it is under-covered. LIC has an opportunity to capture on its strong brand recall and LIC operates in growth industry as it estimated that life insurance industry is set to grow at 16-17 percent CAGR till FY26. Hence one should consider to apply in LIC IPO.
LIC aims to improve its productivity by focusing upon omni-channel distribution network
LIC's cost structure is lower than that of industry with total cost ratio (as % of total premium) at 14.2% (asof FY21) as against 15.1 percent for the industry and 16.9 percent for private players. Primary distribution channel for LIC'sindividual business is agency, which accounted for 96.2 percent of new business premium (NBP) for individual products as of Dec ‘21 while privateplayers rely heavily on corporate channels. LIC has 13.4 lakh individual agents, 72 banca partners and 174 alternatechannels. Its agent network accounted for 55 percent of total industry agent count as of FY21. Going ahead, LICwill likely to strengthen its omni-channel distribution network for individual products and increase its productivity.
Shift towards non PAR products and increased transfer to shareholders a/c to drive profit growth : Angel One
There has been more than an 800bps shift in product mix away from PAR products as a % of APE between FY2019 to 9MFY2022, which is expected to continue overthe next few years. LIC still has significant scope in terms of achieving a more balanced product mix relative to private players.
Against the current policy of transferring 5% of surplus in participating products to shareholders’ account, the company will start transferring 7.5% and 10.0% of
surplus to shareholders account from FY2023 and FY2025, which will bring LIC in line with other private players. For Non PAR products, LIC has already stated
transferring 100% of surplus to shareholders account from FY2022 (as compared to 5% earlier), which is in line with other private players.
LIC IPO subscription status till May 07: Issue subscribed 1.66 times
The issue is subscribed 1.66 times till the end of Day 4 (May 07) with the non-institutional investor portion also getting fully subscribed.
The portion reserved for eligible policy holders was subscribed 4.67 times, reservation for eligible employees was subscribed 3.54 times, Retail Category was subscribed 1.46 times; the non-institutional category witnessed subscription of 1.08 times and qualified institutional buyers category saw subscription of 0.67 times.
The offer has so far received bids for 26,83,16,685 shares against the offered 16,20,78,067 equity shares. Monday (May 09) is the last day to subscribe to the biggest IPO in the history of Indian markets.
