LIC IPO : The Most Awaited IPO
LIC LIMITED IPO DETAILS :
IPO Date: 4th May 2022 – 9th May 2022
Total Shares for subscription: ~22 Crore
IPO Size: ~Rs. 21,000 Cr
Lot Size: 15 shares
Price Band: Rs. 902-949/ share ( Rs.60 discount for policyholders)
Market Capitalization:~Rs. 6 Lakh Cr
Recommendation: Subscribe
So, I'm sure everyone has been anticipating the launch of this IPO. After All India's Biggest IPO is now Live. You had all invested in LIC's policy to earn a return, but now you will all invest in the company itself. Isn't it Incredible?
So Let's Jump on the Topic and have a look at the Quick Analysis.
About Life Insurance Industry
As of FY21, India's life insurance industry had a total premium of around Rs. 6.2 trillion. According to Swiss Re Group data, India has the world's tenth largest life insurance industry in terms of total premium. In 2019, India's share of the global life insurance market was 2.73 percent.
About LIC of India
LIC is India's largest life insurer, with a market share of 64.1 percent in terms of premiums and a market share of 66.2 percent in terms of New Business Premium. The company provides both participating and non-participating insurance products, such as unit-linked insurance products (ULIPs), saving insurance products, term insurance products, health insurance, and annuity and pension products.
LIC accounts for 60 percent or more of new life insurance premiums and 40 percent or more of retail APE (Annual Premium Equivalent), with 13.5 lakh agents driving 95 percent of that. It also has 72 Banca partnerships. It is the largest asset manager among life insurers, with INR40 trillion (US$527 billion) in AUM. The Government of India, which currently owns 100% of LIC, proposes to sell 3.5 percent of its equity in an offer for sale.
Financials of LIC of India
LIC’s Embedded Value (EV) stood at INR5.4 trillion (US $72bn) for Sep-21 which is up from Rs.956 billion in Mar-21- as it is now allocating 100% profits of non-par products to shareholders. Sep-21 Embedded Value of top 3 listed players was in the range of Rs.290bn - 350bn. Peers like HDFC Life, SBI Life, ICICI PRU Life trade at 2.4x-3.9x Sep’21 Embedded Value and have steady-state Return on Embedded Values between ~16%-19% with higher VNB margins.
As per DRHP, in a circumstance of 10% surplus sharing in Par products, LIC’s FY21 VNB margin could expand to 12.3 Percent, ceteris paribus. This compares to a 25%-26% comparable margin for listed industry peers.
Insurance companies have a separate business model and do not report Financial Statements as others. Do not consider Return On Embedded Value, or P/E ratio type ratios as a basis of analysis.
Let's Understand Some Basic Terminology :
APE: Annual premium equivalent (APE) is a measure used for comparison of life insurance revenue (Income) by normalizing the policy premiums into the equivalent of regular annual payments.
Embedded Value (EV): Embedded value is the summation of all future premiums to be received from existing policies. This can be taken as a fixed component in terms of valuation.
Value of New Business (VNB): This is the summation of future premiums of this year’s policies (using the same persistency and profit assumption). This has to be estimated for the future and added to Embedded Value. It is nothing but the EV in the future for every year.
Persistency: The persistency ratio is the proportion of life insurance policies that received timely premium payments during the year to the total number of net active policies. A longer-term persistency ratio, such as 5 years, is more important in determining whether a policyholder will keep their policy. A persistency ratio of 50% for the fifth year (or 61 months) means that only 50% of policyholders have continued to pay their premiums, while the rest have stopped.
Market share dynamics
Over FY15-till date, its new business premium market share has declined from 69% to 61%
LIC Product Mix vs Peers
Participating products (PAR) contribute 92 % of individual APE, which accounts for 71% of total APE; group savings is the major component, accounting for 96% of group APE. Other players, as seen above, have a more balanced mix.
- Leading insurance provider in India and the world's fifth largest insurer by GWP.
- A range of life insurance products to meet the varied insurance needs of individuals.
- 1.34 million agents, 3463 active Micro insurance agents, 174 alternate channels, and so on.
- The largest asset manager in India, with a proven track record of financial performance.
- Management team with extensive experience and qualifications.
- Decrease in the attractiveness of recalibrated par products,
- lower perseverance and higher surrender rates
- Possible unanticipated intensity in mortality claims as a result of the ongoing pandemic,
- Sharp changes in interest rates cause a change in Embedded Value.
- Individual agents are unable to be retained or recruited.
- Any union unrest, slowdown, wage increases, and so on.
Valuation:
The value of an insurance company is calculated as [EV + P/VNB or DCF of Value of New Business]. The use of P/EV is not the correct way to value an insurance company and should only be used as a reference against other peers.
The embedded value of the future premium, denoted by EV, is valuable to shareholders. We include the present value of New Business, which is nothing more than future EV. This gives us the company's market capitalization. This is then referred to as P/EV by analysts.
Currently listed players like SBI Life, HDFC Life, and ICICI Pru Life trade at an average P/EV multiple of 2.5X.
TradEx Opinion:
We believe that LIC's distribution advantage, increasing sales mix of direct and corporate channels, and a gradual shift to high margin Non-Par products are potential drivers of LIC's future growth, which could offset lower-than-industry growth rates.
We recommend Subscribe to policyholders, employees, and retail investors. The total position/application should not exceed 5% of the total portfolio.
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| Application | Lots | Shares | Amount |
|---|---|---|---|
| Minimum | 1 | 15 | ₹ 14,235 |
| Maximum | 14 | 210 | ₹ 199,290 |
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