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LIC’s upcoming IPO is possibly India’s biggest and, in this backdrop, we look at the insurer—synonymous with insurance in the country. The behemoth’s decades of dominance is seen in: i) market share: 66% by NBP, 3x next largest; ii) largest asset manager: 80% market share, >15x next largest; iii) agency channel: >7x of private and most efficient (>3x of private); and iv) deep reach: 75% market share on policy basis.

Even as its embedded value (EV) has shot up, LIC’s RoEV (10–12%) is sub-private peers (18–25%). This along with a high par skew, market share loss (individual segment) and a PSU badge calls for a discount to private peers. And competition and profitability squeeze overhang the sector at large, not to mention stake sale uncorking a huge supply.

Dominant force, but a few key pockets flagging

LIC’s decades of dominance is reflected in its 60%-plus market share by premium and 75% by policy—a dominance not seen elsewhere globally. This dominance rests on its largest (>7x of private) and efficient (>3x of private) agency channel. That said, the dominance is mainly in the group segment (80% share); it continues to lose market share in individual segment (down from 59% in FY17 to 50% now). A few aspects need a close watch: i) profitability cushion given high par/group business; and ii) ability to ramp up non-protection business with bifurcation of funds.

Embedded value reinstated; a few caveats that warrant a look

One of the major deliberation points has been >4x rise in EV to INR5.4tn after reset. This is potentially due to: i) bifurcation of par and non-par funds and a change in shareholders’ interest to 100% (from 5% earlier); ii) par funds, which have a 95%:5% sharing would move to 90%:10%; iii) movement of MTM investment in non-par; and iv) revaluation of other assets such as real estate. While bifurcation has led to onetime benefits, one must be mindful of challenges: i) ability to grow the capitalintensive non-par business might be limited (par funds could be dipped into earlier); and ii) guarantees were higher as they had access to legacy investments, which would no longer be the case, thereby hurting competiveness somewhat.

Takeaway: Investors admit USP, but lower returns warrant discount

LIC reported a strong RoEV, but off a low base. Adjusting, its RoEV profile is likely to be closer to 10%-odd. Even if the high-margin non-par mix rises, we reckon the returns could come off given a distinctly lower contribution of VNB to EV at sub-1% versus 10–15% for private peers. On top of it, sustained market share loss in individual segment and a PSU badge would warrant a discount to private peers. The sector too has been underperforming (5–25% over last nine months), with market apparently already pricing in increased competition from LIC. Besides, given LIC’s intent to go for non-par could pressure profitability pool for private peers. Technically too, LIC’s IPO could result in a sustained supply, given statutory requirement to dilute stake to a public shareholding of 10% within two years and 25% within five years. This would be formidable overhang for the sector for a while.

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