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A pioneer in life insurance industry... KEY CHANGES: TARGET

Life Insurance Corporation of India Ltd (LIC), incorporated on September 1, 1956 is formed by merging and nationalizing 245 private life insurance companies in India. LIC has been providing life insurance in India for 65 years and is the largest life insurer in India. The brand LIC is recognised as the 3rd strongest and 10th most valuable global insurance brand according to Brand Finance. In addition to Indian operations, LIC has global presence with branches in Fiji, Mauritius, UK, etc

• Total premium of the industry grew by a CAGR of 11% over FY16-21 and estimated to grow by 14-15% over next five years.

• LIC is the largest asset manager in India with asset size of Rs.36.8tn as of March 2021 which is 3x higher than total AUM of all private life insurance players.

• Embedded Value of the company stands Rs.5,39,686cr as on Dec 2021 which is 16x of the second largest player.

• LIC enjoys a strong market share of 61.6% based on Total Premium and 61.4% based on New Business Premium as on 9MFY22.

• However, LIC has been witnessing drop in market share to private players. LIC’s market share (based on premium) in group business declined from 81% in FY16 to 74% in Q3FY22 while in individual business, declined from 56% to 43%.

• LIC has lower short term persistency ratios (13th Month-76.8%) compared to its private peers showing lower customer stickiness. However, the company’s long term persistency ratio (61th Month– 61.9%) is at a premium to its competitors.

• Unlike private players, LIC has high mix (99.7%) of non-linked to equity market policies and within non-linked, participating schemes (distribution of bonus) constitutes 61%, reducing company profitability.

• Due to higher mix of non-linked and participating policies, LIC has lower margin of 9.9% as on FY21 compared to private players in a range of 20-25%.

• LIC’s new surplus distribution rule about participating policies, will allocate higher surplus to shareholder at 10% in-line with private players instead of 5% earlier, improving the profitability of the company.

• At the upper price band of Rs.949, LIC is available at P/EVPS (Embedded Value Per Share) of 1.1x which is at a discount of 65% compared to the average valuation of private life insurance players. Even though headwinds like declining market share, lower short-term persistency ratios and sub-par margins demand a discount to private players, the current valuation is attractive considering its strong market presence, improvement in profitability due to changes in surplus distribution norms and strong sector growth outlook. Hence, we assign a “Subscribe” rating on a short to medium term basis.

Purpose of IPO

At the upper price band, total issue size stands at Rs21,008.5cr. The issue consists of only offer for sale (OFS) wherein the government will divest up to 22.14cr equity shares, constituting ~3.5% of equity share capital. Although the company will not receive any proceeds from this offer, yet the prime purpose of the issue is to achieve the benefits of listing shares on stock exchanges.

Key Risks

• LIC is facing high competition from private insurance players, especially in the urban areas.

• Lower short term persistency metrics.

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