Life Insurance Corporation of India (LIC) is expected to come up with the largest Initial Public Offer (IPO) of India in March 2022. LIC has already filed the Draft Red Herring Prospectus on Sunday 13th February 2022. So, let’s discuss how is LIC as a business and whether one should apply for the IPO or not in the article as we move ahead.
- The IPO of LIC is going to be the biggest in India. Before this, the biggest IPO of the country was Paytm’s IPO whose size was around Rs. 18, 000 Cr. LIC IPO size is estimated to be in the range of Rs. 50,000 Cr. to Rs. 90,000 Cr.
- LIC was formed in the year 1956 with the merger and then nationalization of 245 Life Insurance Companies. Since then, the company enjoyed the status of ‘Monopoly’ market until the year 2000. But LIC started facing competition post-2000 when the private and foreign players were allowed to enter the Insurance market.
- Now, let’s talk about the Embedded Value of LIC. But first, let’s understand the meaning of EV in brief. Embedded Value or EV refers to the current value of the future profits of the company. LIC is having an EV of around Rs. 5.39 Lakh Cr.
- Here, one thing should be kept in mind that, earlier 95% of the earnings of the company from its assets were going to the policyholders, while the rest 5% goes into the account of promoters i.e., Government of India. Now, this ratio has changed to 90:10 which means 90% of the profits will go to the policyholders, and the rest will go to 10% shareholders, as now the company is going to be public.
- LIC can receive a market valuation of 2-3 times over its Embedded Value. And hence the market value can be around Rs. 11 Lakh Cr. to Rs. 16 Lakh Cr.
- In the Insurance sector, LIC is the 5th Largest company in the world in the terms of Gross Written Premium. Since it’s leading position in the world market, the company or the IPO might give some comfort to the foreign institutional investors.
- And on terms of Asset Under Management (AUM), LIC is the 10th largest company in the world with an AUM value of Rs. 39.55 Lakh Cr. The AUM size of the company is 3.3 times larger than the AUM of all the private insurance companies in India. And if we look at the AUM of Mutual Funds in India, then, here again, LIC’s AUM is at least 1.1 times larger in size.
- One interesting figure about LIC is that it has invested around 4% of the total market capitalization of the Nifty Stock Exchange (NSE).
- Out of the total AUM of LIC, 37.45% of the investment of the company is in Central or State Government securities. Whereas the company has invested around 24.78% of its AUM size has been invested in Equities which sizes around Rs. 9.78 Lakh Cr.
Weaknesses of LIC:
i) Business Source:
- More than 95% of the business of LIC comes from its agents which shows the high dependency of the company on agents for the business and lack of alternate distribution network of companies policies.
- The company has also accepted that it is struggling on the digital front.
- LIC is having more than 13.5 Lakh Individual agents which are far more than any other competitor.
- The Agent Commission was Rs. 22, 358 Cr. in FY21 and the same was in the levels of Rs. 9,500 Cr. in H1FY22.
2) Losing Market Share:
- The losing market share on individual policies as well as group policies is a worrisome situation for the company.
- In the context of individual policies, LIC was having a market share of around 56% in 2016, which has gone down to 44% in 2022
- And on the group policies front, LIC’s market share has not gone much down. It was 81% in 2016, which has now gone down to 77% in 2022.
3) High Growth Potential for Private Players:
- The earnings visibility and growth prospect are good enough for the overall industry. But the expected growth rate in the private insurance players is between 15% to 20% in the case of new premium collection, while the same is 10% to 11% for LIC.
- After a few quarters of Listing, LIC may soon make its entry to the index, and hence it will get some passive inflow of funds.
What Should Investors Do?
The insurance sector is a high growth sector in terms of industry growth prospects wherein there are many private listed players like HDFC Life, SBI Life, etc. have a presence. But now LIC, the largest life insurance player is coming with its IPO which is expected to be the biggest till now in the country. From the facts and figures viewpoint, LIC as a business looks quite strong, but it needs to focus highly on its weaknesses or threats visible in the industry especially digital strength to maintain its leadership in the industry.