Life Insurance Corporation of India (LIC)

About the company:

Issue details

Objects of the issue

To achieve the benefits of listing the Equity Shares on the Stock Exchanges and carrying out the Offer for Sale.

About the company

LIC was formed by merging and nationalizing 245 private life insurance companies in India on September 1, 1956, with an initial capital of INR 5 crore. Life Insurance Corporation of India (LIC) has been providing life insurance in India for more than 65 years and is the largest life insurer in India, with a 61.6% market share in terms of Gross weighted premium (GWP), 61.4% market share in terms of new business premium (NBP), 71.8% market share in terms of number of individual policies issued, 88.8% market share in terms of number of group policies issued as of December 31, 2021, as well as by the number of individual agents, which comprised 55% of all individual agents in India as at December 31, 2021. LIC is ranked fifth globally by life insurance GWP and tenth globally in terms of total assets.

Key Strengths

Trusted brand name

LIC was incorporated in 1956 and up to 2000, they were the only life insurance provider in India, which made LIC, as a brand, synonymous with life insurance in India. The brand ‘LIC’ was recognized as the third strongest and 10th most valuable global insurance brand in 2021. The government’s involvement in the company boosts the consumers' trust. Life Insurance as a product is such where the customers pay premiums to the company for a long period of time and therefore it is important for the customers to have trust in the company for the safety of their premiums and the claim settlement. Additionally, the fact that the company is government-backed the insolvency risk also takes a back seat. These factors give LIC an upper hand over its competitors.

Growing Market size and a huge protection gap

Based on life insurance premiums, India is the tenth-largest life insurance market in the world and the fifth-largest in Asia, as per Swiss Re. The size of the Indian life insurance industry was INR 6.2 lakh crore based on the total premium in FY21. The industry’s total premium has grown at 11% CAGR in the last five years ending in FY21. New business premiums (NBP) grew at 15% CAGR in FY16-21 to ~INR 2.78 lakh crore. India’s life insurance penetration was at 3.2% in CY20 compared to the global average of 3.3%. Among Asian countries, life insurance penetration in Thailand, South Korea, and Singapore was at 3.4%, 6.4%, and 7.6%, respectively, in CY20. The premium per capita for India stood at USD 55 which is actually higher than most countries with GDP per capita below USD 6,000. This is due to the higher share of savings than protection in life insurance premiums in India. Thus, the protection gap in India is as high as 83% which is much higher than its Asian counterparts. Hence, India more than being underpenetrated is a story of being underinsured.

Pan India presence

LIC’s omnichannel distribution platform for individual products currently comprises (i) individual agents, (ii) bancassurance partners, (iii) alternate channels (corporate agents, brokers, and insurance marketing firms), (iv) digital sales (through a portal on our corporation’s website), (v) Micro Insurance agents and (vi) Point of Sales Persons-Life Insurance scheme. The Corporation’s individual policies are primarily distributed by its individual agents. In Fiscal 2021, their individual agents were responsible for sourcing 94.78% of their NBP for their individual products in India. Their individual agency force accounted for 55% of the total agent network in India. Additionally, they also have 70 bank partners covering 51,633 branches and 215 alternate channels. They have offices in 91% of the district in India compared to 81% of the entire private sector combined.

Cross cyclical product mix

Unlike its private peers, the share of ULIP in LIC’s total product mix is at 0.8% as of FY21. While its private peers such as SBI Life, ICICI Prudential and HDFC Life has a ULIP share of 66%, 48%, and 22% respectively. As ULIPs are linked to equity markets, the demand for ULIPs would fluctuate depending upon the performance of the equity market. In the period when the equity market is on a bull run, the ULIPs would enjoy high demand whereas in a situation where the equity markets are underperforming the demand for ULIPs would accordingly fall. This makes ULIP cyclical in nature and as LIC has a lower share of ULIP its product demand is less affected by equity market fluctuations.

Key Risks

Lower Value of new business margins (VNB)

The VNB margin of LIC as of FY21 stands at 9.9% which is the lowest in the industry. The VNB margins of its private peers HDFC Life, SBI Life, and ICICI prudential stand at 26.1%, 23.2%, and 25.1% respectively. The low VNB margin is majorly attributed to the product mix of the company. The protection and the annuity products are the margins accretive whereas the participating and ULIP products are the less margin accretive. Out of its total APE, the company sells 96.97% of Participating products, 0.42% of non-participating products, 0.36% of protection products, 1.36% of Annuity, and 0.65% of ULIPs. Thus, the company’s higher dependence on low-margin products has been a drag on its margins.

Bancassurance as a distribution channel has been gaining momentum

The Private life insurance players have significantly leveraged banking channels to market their products from Fiscal 2018 onwards. Share of bancassurance channel rose from 23.8% of NBP in Fiscal 2016 to 29.0% of NBP in Fiscal 2021. Private players have a relatively higher dependence on bancassurance for new business, with their share increasing from 52% in Fiscal 2016 to 55% in Fiscal 2021. LIC’s dependence on the bancassurance channel is 2.56% as of FY21. The only distribution channel that has the capability to challenge the vast distribution reach of LIC’s agency network is the Banca channel, as it assists the company to reach a vast set of customers in an efficient manner. Owning to Private players’ greater dependence on bancassurance they have been gaining market share rapidly.

High Competition from private peers

Private sector insurance companies have been growing faster than LIC and gaining market share. For FY19, FY20, FY21, and nine months ended December 31, 2021, LIC has been losing its market share from 66.4%, 66.2%, 64.1%, and 61.6%, respectively, in terms of total premium in the Indian life insurance sector. Apart from the growing market share the private peers also have a better product mix. The protection mix of private peers which offers superior margins to the company range from 11% to 17%, whereas the protection mix of LIC stands at 1.36%. The private peers’ greater focus on distribution, product mix, and digital initiatives are a major threat to LIC’s market share.

Regulatory overhang

The government of India is selling a 3.5% stake in LIC and raising around INR ~21,000 crores. The government is expected to come up with an additional FPO in the near future and thus there is going to be more supply of the shares of LIC. There are two ways to look at this situation the first is the fact that the market is expecting more supply of shares in the future this may discourage a lot of investors to subscribe to the IPO or purchase the shares post listing as they would want to wait for the stock to move its course and not be in a hurry to buy. The second way to look into this situation is although it’s just a 3.5% stake the size is humongous at INR 21,000 crore. Thus, a lot of DIIs and FIIs who would have purchased and allotted some weightage to LIC in their portfolio might not come back post the FPO resulting in a huge supply and less demand. This uncertainty in the demand and supply should be closely monitored by the investors. Additionally, LIC has bailed out a lot of companies in the past, they invested 21,000 cr in IDBI bank and bought an 8% stake in new India assurance and general insurance corporation.  LIC has also helped HAL the country’s largest defence public sector firm whose share sale would not have subscribed if LIC did not interfere and helped it raise the funds. If the government continues to use LIC as a tool to bail out inefficient companies it would prove to be detrimental to its shareholders. 

Financial Summary

The company's net Premium Income has increased from INR 3,37,130 crores in 2019 to INR 4,02,888 crores in 2021 at a CAGR of 9.30% contributing to the increase in Total Revenue from INR 5,60,784 crores in FY19 to INR 6,82,204 crores in FY21. The Profit After Tax increased from INR 2,627 crores in FY19 to INR 2,974 crores in FY21 at a CAGR of 3.87%. The company's 13-month Persistency ratio increased to 79% in FY21 from 77% in FY19 indicating growth in the policyholders who paid their renewal premium. LIC saw 25% YoY growth in total APE (Annual Premium Equivalent), with retail APE up 22% YoY. LIC saw a growth of 12% YoY in the sum assured and reflecting to an increase in the market share to 18% in FY 21 from 17% in FY20. The LIC’s new business premium from FY19 to FY21 grew at a CAGR of 8.8%, whereas the industry has been growing at a CAGR of 14% indicating that the company has been losing market share to private peers.

Samco’s Stance

The demographical tailwinds, a moderate penetration of life insurance in India, and a massive protection gap will fuel the Indian life insurance industry's multi-decadal growth. LIC, being the market leader, both in terms of GWP and NBP, is poised to benefit from this growth opportunity. While the fact that LIC has been losing market share, as well as it’s lower than industry VNB margins, do instill apprehension, LIC has indicated its plans to improve the two. The insurance behemoth aims to protect its market share through increased focus on bancassurance and enhancing direct sales of its products on its website. Further, by improving its share of non-participating products and protection plans, it aspires to improve its margins. The long-term direction of LIC’s business and financial performance does hinge on the good execution of these plans.

From a valuation standpoint, at the upper band of the issue price, LIC is priced at 1.1x embedded value, which is at a significant discount to peers. Given the attractive valuation, the downside from here seems limited. Further, the fact that a discount has also been offered to retail investors is the cherry on the cake. Taking into account all these factors, we have a SUBSCRIBE rating on this IPO.