The Government of India filed the draft red herring prospectus (DRHP) for the insurance behemoth Life Insurance Corporation of India (LIC) with the market regulator Sebi on Sunday, February 13, 2022. The IPO of the insurance major is likely to be launched before March-end, in this current financial year.
As per the papers filed with Sebi, the issue is a 100 percent offer for sale for around 31.6 crore shares or a 5 percent stake of the firm. No fresh shares will be issued for the IPO.
The objective of the offer is to achieve the benefits of listing and carrying out the offer for sale of up to 31.6 crore shares by the shareholder. The DRHP added that the selling shareholder (President of India acting through the Ministry of Finance, Government of India) will be entitled to the entire proceeds of the offer after deducting the offer expenses and relevant taxes thereon. LIC will not receive any proceeds from the offer.
As per the papers, the company's net worth stands at ₹8,019 crore as of the six months ended September 30, 2021. Its net profit for the same period stood at ₹1,504 crore while total income from policyholders at ₹3.3 lakh crore.
Let's look at the key strengths and risks of the IPO.
Brand: LIC of India is one of the oldest and most trusted firms in India in terms of brand awareness. Since its incorporation in 1956, LIC has been selling and soliciting life insurance and is the largest life insurer in India. This can be easily seen via the firm's market share. It has a market share of 66.2 percent in New Business Premium, 74.6 percent in the Number of individual policies issued and 81.1 percent in the number of the group policies issued. The AUM of LIC also increased from ₹16.8 lakh crore in FY20 to ₹36.7 lakh crore in FY21 on a standalone basis.
Product Portfolio: LIC has a wide variety of product offerings of life insurance plans, endowment plans, whole life plans, moneyback plans, term insurance plans and insurance riders, each having multiple schemes and plans within for catering to the various age groups and types of investments for the customers. LIC also has 2 subsidiaries and 4 associate companies which look after the pension fund, housing finance, banking, mutual funds and cards business.
Financials: The company’s net premium income has increased at a CAGR of 9.30 percent from 2019 to 2021. The profit after tax increased at a CAGR of 3.87 percent in the same period. The insurer's profit has risen over 13 percent from ₹2,627 crore in FY19 to ₹2,974 crore in FY21. Meanwhile, its revenue from policyholders during the same period is up nearly 23 percent from ₹5.7 lakh crore in FY19 to ₹7 lakh crore in FY21, the prospectus noted.
Inorganic Growth: Another means of growth for the life insurer is via multiple investments in various firms. This entails LIC to grow inorganically as well as provide the other firms with capital support. Among listed firms, it has a 49 percent stake in IDBI Bank, and over 10 percent equity in firms like ITC, L&T, TIL, Grasim, as of September 2021 quarter.
Integrated network: As of March 31, 2021, LIC has 13.53 lakh individual agents scattered across the country and covering rural and urban customers. This is much higher than its peer firms.
COVID Pandemic: As per the DRHP, the ongoing COVID-19 pandemic could adversely affect all aspects of the firm's business, including (i) restricting the ability of LIC's agents to sell their products; (ii) significantly increasing expenses due to changes in laws and regulations and investing in new methodologies to overcome the restrictions brought in to address the spread of COVID-19 and the adverse changes in population mortality/morbidity or utilization behaviours; (iii) adversely affecting the firm's investment portfolio; (iv) adversely affecting its operational effectiveness; and (v) heightening the risks it faces in its business.
"The extent to which the pandemic will continue to affect our business, financial condition, results of operations and cash flows in the future will depend on future developments, which are highly uncertain and cannot be predicted, including the scope and duration of the pandemic and actions taken by governmental authorities and other third parties in response to the pandemic," it stated.
Brand: Secondly, the firm stated that its brand name, reputation and perception are critical in maintaining our leading position in the Indian life insurance industry and any unfavourable publicity concerning them could have an adverse effect on their brand name and consequently adversely affect our business, financial condition, results of operations and cash flows.
"We are exposed to misconduct and fraud by our employees and intermediaries and any such instances could adversely affect our reputation, business, financial condition, results of operations and cash flows. Failures of or inadequacies in our information technology systems could have a material adverse effect on our business," the firm further said.
Persistency Ratio: Adverse persistency metrics or an adverse variation in persistency metrics could have a material adverse effect on the firm's financial condition, results of operations and cash flows. The persistency ratio is an important benchmark for life insurers as it reflects the number of policyholders who paid their renewal premium. It is widely seen as an indicator of the quality of the sale as well as future growth.
Events such as changes in regulatory policies, volatility in capital markets, loss of customer confidence in the insurance industry or in LIC, or sharp declines in our customers’ financial positions due to a severe deterioration in economic conditions, such as the economic deterioration caused by the COVID-19 pandemic, may cause discontinuations of its customers’ insurance policies.
In addition, if the insurer does not achieve satisfactory investment returns or underperform in relation to its competitors, or if the market environment changes such that its products become less attractive thus making it a huge risk.
Interest rate: Interest rate fluctuations may materially and adversely affect the firm's profitability.
"Depending on the nature of our asset and liability portfolio, our results of operations could be materially and adversely affected either by rising interest rates or decreasing interest rates," the firm noted.
Competition: "We face significant competition and our business, financial condition, results of operations and cash flows could be materially harmed if we are unable to compete effectively," the life insurer pointed out.
As per a CRISIL report, private sector insurance companies have been growing faster than LIC and gaining market share since their entry into the Indian insurance industry in 2001. From Fiscal 2016 to Fiscal 2021, the total premium for life insurance private sector players in the life insurance industry in India increased at a CAGR of 18 percent while LIC's total premium in India increased at a CAGR of 9 percent for the same period, the report noted.
Government Policies: Change in government policies, be it tax fluctuations or insurance act could change trends in the insurance industry, thus hurting the profitability of the life insurer. Further, the inability to obtain regulatory approvals or licenses in the future, or maintaining or renewing its existing regulatory approvals or licenses could also have adverse effects on the firm.
Also, the shareholding of its promoter (Government of India) is at 100 percent which will allow the Promoter to continue to exercise significant influence over the firm. The firm's investment in different firms is subject to credit risks, concentration risks and liquidity risks, which could have a material adverse effect on its financial condition, results of operations and cash flows.
These are some basic strengths and risks that are associated with the upcoming LIC IPO. Make sure the firm fits your portfolio before deciding to invest in it.