Last Updated on May 2, 2022 by Neera Bhardwaj

Harsh Vora is a proprietary investor and day trader with more than 10 yrs of experience in financial markets and is interviewed on ET NOW.

India’s largest life insurance company, the Life Insurance Corporation of India, will be launching its Initial Public Offer (IPO) starting 4 May to 9 May 2022. But, before we analyse the company’s fundamentals and its public offer, let’s quickly run through the offer details.

Offer details

Through this IPO, the government, which owns 100% of the company, aims to offload about a 3.5% stake for a total value of about Rs 21,000 cr. The issue price has been pegged at Rs 902 to Rs 949 per share with a discount of Rs 45 for retail investors and Rs 60 for policyholders.


LIC’s beginnings

India’s life insurance was a very fragmented industry before independence, comprising as many as 245 Indian and foreign insurers. However, in 1956 the government nationalised this industry to provide adequate financial coverage against death in rural and urban areas at an affordable cost. Thus, from 1956 to 2000, India’s life insurance industry had only one player: LIC. In 2000, the private players, starting with HDFC Standard Life, were allowed to foray into this business. HDFC was then followed by ICICI Prudential Life, Max Life, and Aditya Birla Sunlife. Today, there are a total of 24 players competing in this industry.

Thanks to this first-mover advantage enjoyed by LIC, the company continues to be the largest life insurer in India in terms of the gross written premium (GWP), new business premium (NBP), and many individual policies and group policies issued. LIC had 28.6 cr policies in force as of last year – for perspective, note that this is greater than the 4th largest country in terms of population.

Fading market power

These statistics, however, mask an underlying shift in the structure of India’s life insurance industry. With the entry of private companies in 2000, LIC’s first mover advantage seems to be fading, as evident in its market share trajectory. As of 2021, LIC’s market share in total premium was only 64%. Between 2007 and 2011, when the share of private players in total premium climbed from 18% to 30%, a significant portion was eaten away. This happened on the back of private companies’ aggressive growth strategies and ULIP (unit-linked insurance plan) sales.

LIC’s diminishing strength is evident in market share loss over the years and on the growth front. LIC was hit harder than many private players whenever a slowdown hit the life insurance industry.

After 2010, when the insurance regulator IRDAI brought down the upfront commission charged by middlemen on linked products (products whose returns are linked to the performance of financial markets), LIC witnessed a sharper fall in the growth in total premium. Between 2011 to 2014, while the total premium of private players declined at a 4% compounded growth rate (CAGR), LIC’s total premium fell by 5% CAGR.

What’s more? While the industry’s total premium has grown by 11% CAGR from 2016 to 2021, LIC’s total premium grew at a lower rate of 9%. On the other hand, private companies grew their total premium at 18% CAGR over the same period.

In all likelihood, the company may continue to grow slower than the industry going forward as it grapples with its legacy agency network and higher base in market share. In contrast, private companies grow through omnichannel routes, especially bancassurance (using banking channels to cross-sell life insurance products).

What could benefit LIC?

However, what does work in LIC’s favour is its still-dominant market share — even compared to other insurers in their respective countries. In China, for instance, the top two insurance companies, Ping An Insurance Company and China Life Insurance Company have a market share of 21.3% and 20%, respectively, in China. Similar figures can be found in Malaysia, South Korea, Japan, and other countries.

Back home in India, LIC accounts for 64% of gross premiums, while the second-largest insurer SBI Life accounts for only 8%. So the difference between LIC and the second-largest insurer is staggering. This and India’s life insurance penetration is still quite low at 3.2%, giving LIC some headway for future growth despite a higher base. Also, the company’s brand equity and a stable promoter may favour the IPO. To sum up, LIC dominates the life insurance industry in India in terms of market share but is lagging behind its peers in terms of growth.


A quick review of LIC’s valuation

Given that the value of any stock is the present value of expected future cash flows, if the growth in future cash flows is expected to be slower than the broader industry (like in LIC’s case), then the valuation would also be lower. In the case of life insurance companies, the valuation metric that matters is called “embedded value”. We do not weigh the price-to-earnings ratio simply because life insurers, unlike banks or non-banking companies, do not distribute 100% of their profits to shareholders. As much as 90%, a major part is distributed as a bonus to policyholders. Using a price-to-earnings ratio to gauge an insurer’s valuation would provide a false picture.

What is embedded value?

Since the profits of life insurance companies come from premiums that policyholders pay in the future, the value of the life insurance business lies in the present value of these future premiums and the shareholders’ net worth (which means accumulated net profits of previous years). In other words, the present value of future premium from current policyholders plus accumulated net profits of earlier years equals embedded value. 

As seen in the image below, LIC’s embedded value computed by Milliman Advisors is Rs 539,686 cr.

LIC’s listing valuation as per the upper end of its IPO issue price range of Rs 904 to Rs 949 comes to approximately Rs 6 lakh cr. (This is 100%*21000 crore divided by 3.5%). So LIC is listing at 1.1 times its embedded value, which looks pretty reasonable compared to its peers. For instance, SBI Life’s and HDFC Life’s price to embedded value is 3.3. Most private insurers are trading at a price-to-embedded value range of 3 to 5. So LIC is the cheapest among its peers.

Post listing, however, depends on whether LIC can leverage omnichannel push to reach a larger share of the population (especially through banks and fintechs), improve its product mix, and leverage digitisation to reduce costs garner an increasing share of the new business premium.

Harsh Vora
Subscribe
Notify of
guest
0 Comments
Inline Feedbacks
View all comments

The blog posts/articles on our platform are purely the author’s personal opinion and do not necessarily represent the views of Anchorage Technologies Private Limited (ATPL) or any of its associates. The content in these posts/articles is for informational and educational purposes only and should not be construed as professional financial advice. Should you need such advice, please consult a professional financial or tax advisor. The content on our platform may include opinions, analysis, or commentary, which are subject to change, without notice, based on market conditions or other factors. Further, the use of any third-party websites or services linked on the website is at the user's discretion and risk. ATPL is not responsible for the content, accuracy, or security of external sites. Investments in the securities market are subject to market risks. Read all the related documents carefully before investing. Registration granted by SEBI, membership of BASL (in case of IAs) and certification from NISM in no way guarantee performance of the intermediary or provide any assurance of returns to investors. The examples and/or securities quoted (if any) are for illustration only and are not recommendatory. Any reliance you place on such information is strictly at your own risk. In no event will ATPL be liable for any loss or damage including without limitation, indirect or consequential loss or damage, or any loss or damage whatsoever arising from loss of data or profits arising out of, or in connection with, the use of this website.

By accessing this platform and its blog section, you acknowledge and agree to the Terms and Conditions of this website, Privacy Policy and Disclaimer.