The much-talked-about LIC IPO, for which the government was preparing for a couple of years, is finally around the corner. It seems no less than a festival for the stock market participants. The largest IPO of India is all set to hit Dalal Street by mid-March.
Here are some positives and negatives about LIC, followed by recommendation whether one subscribe to the issue or not.
The Positives
A Giant
3 out of 4 life insurance policies in India are sold by the LIC. It is the largest insurance company in India and the fifth-largest in the world. The life insurer has a 64 percent market share in terms of premiums. The company also has a network of 1.34 million insurance agents who have made LIC what it is today. In these aspects, LIC has truly made a mark in the Indian life insurance industry.
Goldmine of Investments
LIC manages assets amounting to Rs 39 lakh crore, which is more than the amount that the entire mutual fund industry manages. The amount is also equal to 18.5 percent of India's annualised GDP for FY22 and 16.2 times more than the AUM of the second-largest Indian life insurance player. As of September 2021, LIC’s investments in the listed equity segment equalled 4 percent of the total market capitalisation of the NSE! That’s the kind of strategic importance that the company holds for the Indian economy.
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A Huge Network
The corporation leverages on a huge network of 1.34 million individual insurance agents, 3,400 active micro insurance agents, and 72 bancassurance partners. Also, the trust in the brand 'LIC' can be observed by 282.5 million active policies in India as of six months ending September 2021!
The Negatives
Lower Persistency Ratio Although LIC has a significant presence in the life insurance industry, it is losing market share to private players. This is evident from the persistency ratio, which stood at 78.8 percent for the 13th month, 70.9 percent for the 25th month, and 60.6 percent for the 61st month for H1 FY22. These figures are much better for private life insurance players. Also, LIC’s new business premiums (NBP) have grown at a 14 percent CAGR over the last five years as compared to 18 percent CAGR for the private insurers over the same tenure.
Also read - What is LIC IPO’s employee quota?
Lender of Last Resort
If a company or a financial institution faces bankruptcy due to financial distress, the government can use the LIC to bail out these important institutions to prevent contagion. This is evident from the IDBI Bank scenario where LIC infused Rs 4,743 crore in the bank after having already infused Rs 21,600 crore for a 51 percent stake, using policyholder funds in October 2019. Such events may happen in the future as well. The Indian government might ask them to take actions that may be against shareholder interests, states the company's IPO prospectus.
Low VNB Margins
LIC’s VNB (value of the new business) margins are not that impressive in comparison to its competitors. For FY21, LIC's VNB margins were 9.9 percent, whereas, for 6M FY22, they were 9.3 percent. These figures are lower as compared to other insurers, whose VNB margins are in the range of 20-25 percent.
Also read - LIC IPO | Watching geo-political situation carefully, keen on listing in March, says Chairman MR Kumar
Balancing Between Policyholders and Shareholders
After becoming a listed entity, the insurer will have to keep a balance between its policyholders and the shareholders. LIC previously shared 95 percent of its surplus profits with policyholders, but some amendments have been made now, wherein the profit-sharing ratio with the policyholders has been reduced. But going forward, the company will always have to keep both parties in sync!
Should You Subscribe?
Despite its huge size and visibility, I would recommend staying away from the company's IPO as other listed life insurance players have better metrics compared to the LIC. Be it persistency ratio, VNB, ROEV (return on embedded value), margin or growth rates, LIC scores lower on all these metrics and have been losing market share to its peers. The company cannot take the advantage of operating leverage due to its high agent base.
Also read - LIC IPO | The headwinds that could dampen the listing
Although subscription from retail investors would be good considering a large number of policyholders have opened Demat accounts to subscribe to the company's IPO, I expect participation from individual investors to be lacklustre. On these grounds, LIC may not command premium valuations on the listing.
Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
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