This PSU behemoth set to float as Life Insurance Corp, government looking at listing, says Jefferies

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LIC IPO date 2021: As the government reinvigorates dates and plans for Life Insurance Corp (LIC) IPO, Jefferies looks at its franchise, profitability and valuation range. LIC has built a strong brand but has been steadily losing market share to private peers. It is large in terms of premiums (+$ 50 bn) & AUM ($ 400 bn), but shareholder profit ($ 370 mn) & capital ($ 100 mn) are low as profit is redistributed to policyholders & dividend payout is high. Thus, Jefferies range of indicative valuations is wide – Jefferies await clarity on EV & VNB. LIC IPO launch date will be sometime in FY22. This was announced by Finance Minister Nirmala Sitharaman in her Budget 2021 speech. The DIPAM, which is looking after the issue has said LIC IPO launch date will be after October, 2021

LIC IPO: Implications and range of valuations

As part of the last budget, the government announced plans to divest some of its stake in LIC and list it through an IPO, says Jefferies. This was delayed by COVID-related issues, but progress is now being made once again. In the absence of an embedded value figure (to this end, actuarial consultants have been appointed), we use industry benchmarks including price/AUM, premiums, profit, and net worth to review a range of indicative valuations. The range is very wide because, as discussed, LIC is large in terms of AUMs and premiums, but small in terms of profit and net worth. Details on EV and VNB might offer a better basis for judging profitability and valuations.

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The LIC brand is synonymous with Insurance for a large swathe of Indian consumers:

LIC was formed in 1956 through the nationalization of about +200 insurance companies and provident societies. Backed by sovereign guarantee and a strong agency force of >1.2m, LIC has built an enviable brand. This is reflected in the fact that the overall life insurance segment has garnered 20-25% of households’ financial savings.

LIC conceding market share to private players:

Jefferies said that LIC has 40% market share in new premiums but has been losing share in the retail segment to private players, reflecting expansion among the latter. LIC can also benefit if it can ramp-up digital platforms and the protection business. It will be interesting to see whether LIC pushes for aggressive growth in the savings/protection business ahead of a potential listing.

Large AUMs & premiums, but small profit & net worth:

Jefferies says that even as LIC mobilises US $50 bn of premiums annually and manages US$ 400 bn in AUM, it reported only US $ 370 mn of profit for the shareholder. This reflects the high share of participating products sold by the company for which it shares 95% of profits with policyholders leaving only a small pool of profits for the shareholder (government of India). Moreover, LIC’s net worth is small, at just US$100mn, as its sponsorship by the government allows it to operate with lower capital, and with almost all profits distributed as dividends to the government, retention of profit has been low.