LIC has lost market share of retail APE over the years
Source: DRHP; Jefferies IPO Note
Implications of LIC listing on insurance sector:Jefferies
We believe, LIC’s listing will broaden investible universe and further raise sector’s relevance in investor’s portfolio. It will also help investors to better track sector dynamics as LIC disclosures become frequent. LIC has recalibrated its par and non par products ahead of the listing.
LIC IPO: Day 5 Subscription status at 12 noon
The IPO is subscribed 1.71 times till 12 noon with LIC policyholders leading the bout with 4.78 times subscription of their portion, Employees have reserved 3.63 times of their allocated portion, Retail investors have lapped up 1.50 times, NII portion 1.18 times and QIB portion is subscribed 0.67 times.
LIC is important for the government to meet its divestment targets: UBS
Besides SOE stock ownership, LIC is an important entity for the government in many ways. LIC owns over 19% of all government bonds (centre + states) making it bigger than the RBI, and surpassed only by the commercial banking system (who need to hold government bonds per regulations). Post listing, LIC would be the largest investment in the government’s portfolio of listed equities—43% of US$377bn in AUM. This is important from the point of view of government budget financing through divestments. At its valuation, proceeds from LIC would help meet the budgeted divestment target for FY22 (Rs780bn). There would be further dilution in the coming years (totaling US$8.6bn in two years and US$34bn in five years, at the current media-reported valuation). Assuming sufficient demand for this supply (not an easy assumption given the scale of these numbers), a decent chunk of the government’s divestment cash flows could be sustained by repeated dilutions in LIC.
Impact of pandemic on LIC
LIC was adversely impacted by the pandemic, especially in terms of sale of individual policies during all the three waves. For instance, sales of individual policies declined 22.7% to 6.35mn policies in Q4FY20 from 8.21mn in Q4FY19. Death claims also increased during the pandemic. For FY19, FY20, FY21 and 9MFY22, claims by death (net) totalled Rs 170bn, Rs 173bn, Rs 235bn and Rs 293bn respectively (consolidated basis) – these amounted to 6.72%, 6.79%, 8.14% and 12.49% of total benefits paid (net) respectively. Thus, any future Covid’19 waves could be detrimental to growth and normal operations.
LIC IPO: Day Subscription Status at 11:00 AM
Source: BSE India
LIC is the largest asset manager with a proven track record – BOB Caps
LIC was managing ~Rs 40 lakh crore in AUM (standalone basis) at end-9MFY22, which is 3.2 times that of all private insurers combined. Its policyholders’ funds have a well diversified investment portfolio. As of 9MFY22 (standalone basis), the policyholders’ investment portfolio included 38.1 percent central government securities, 24.6 percent equity securities, 24.3 percent state government securities and 8.4 percent corporate bonds. Similarly, 95.9 percent of debt AUM was invested in sovereign and AAA-rated securities. Over 90 percent of policyholders’ equity investments (standalone) are held in stocks that are a part of the Nifty 200 and BSE 200 indices. Net profit on sale/redemption of policyholders’ investments was Rs 23,900 crore at end-FY19, Rs 19,400 crore at end-FY20, Rs 39,800 crore at end FY21 and Rs 36,500 crore at end-9MFY22.
LIC IPO: Day 5 Subscription status
LIC IPO which opened for subscription on May 04, is open for subscription on Sunday as well. The issues is subscribed 1.68 times till 10:20 am with LIC policyholders leading the pack with 4.71 times subscription of their portion, Employees have reserved 3.57 times of their allocated portion, Retail investors have lapped up 1.47 times, NII portion 1.13 times and QIB portion is subscribed 0.67 times.
Key Operating Financial Matrix of LIC
Source: RHP
Key operating parameters in insurance industry
VNB Margin: VNB stand for Value of new business, it is basically a profit margin of an insurance company and it is calculated as Ratio of VNB to APE (Annual Premium equivalent) for the relevant period and is a measure of the expected profitability of new business. The higher Is better for Company.
Total Cost Ratio: It sum of commission ratio and operating expense ratio. Ideally the lower is better for company.
Persistency Ratio: It is Proportion of business that is retained from the business underwritten earlier. It is calculated for each year’s policy renewal. Foe e.g. LIC has 79 percent persistency ratio for 13th month which means 79 policies out of 100 are renewed after 1-year completion. The higher is better company. Keep in Mind that, Insurance business is long term contract where Policyholder pays Premium for several years unlike other business where customer’s purchase is limited to one time only. Hence higher Persistency ratio indicates strong relation of the company with policyholders.
Solvency Ratio: It is the amount of the available solvency margin, which is excess of value of assets to the amount of Required Solvency Margin. It should be at least above 1.5x. For LIC it is 1.8x as of 9MFY22.
Policy Mis-selling complaints: It is measured as mis-selling complaints filed by policyholders per 10,000. The lower is better for the company for LIC it is 2.1 per 10,000 complaints which is lowest in its peers.
Indian Life Insurance Industry
Life insurance premium has grown at an 11percent CAGR from Fiscals 2016 to 2021. The double-digit growth in premium can be attributed to expansion in the distribution network, introduction of different government schemes and financial inclusion drives. These factors have increased awareness about the need for
insurance and propelled industry growth. LIC holds a 64percent share by total life insurance premium and grew at 9percent CAGR from Fiscals 2016 to 2021. Private insurers grew at a 18percent CAGR growth during the same period.
New business premium has grown at 15percent CAGR in the past five years with LIC and private insurers growing at 14percent and 18percent CAGR, respectively. In Fiscal
2021, amid the COVID-19 pandemic, NBP grew approximately 7percent reflecting the impact of the economic slowdown. During the first nine months of Fiscal
2022, NBP growth remained low for the industry with y-o-y growth of 7.4percent.
Global Life Insurance Industry
Growth in the global life insurance industry was almost stagnant for a few years after the financial crisis in 2008. During CYs 2003-2007, the total premium of
the global life insurance industry grew at 4% CAGR (in nominal dollar terms). However, there was a revival in growth from CY 2014. During CYs 2014-2019,
global life insurance premiums grew at a CAGR of 1.7%. Growth in this period was primarily driven by emerging markets which grew at 8% CAGR compared
to a CAGR of 0.3% for advanced markets during the same period.
In CY 2020, the global life insurance market contracted by 3.1% to $2.79 trillion from $2.88 trillion in CY 2019 (in nominal terms) due to the impact of COVID19 and the consequent weakness in the life savings business, which represents 81% of the global life portfolio. Advanced markets were hit harder, contracting 3.9% as compared to approximately 0.3% for emerging markets. The reason for the resilience of emerging markets was China, where premiums rose
by 5.5% due to its strong economic recovery, solid demand for risk protection, quicker adoption of digital channels and insurers’ active approach to engage
with customers.
India’s life insurance penetration stood at 3.2% in CY 2020 compared to the global average of 3.3%. Among Asian countries, life insurance penetration in
Thailand, South Korea and Singapore were at 3.4%, 6.4%, and 7.6%, respectively, in CY 2020. The penetration of the Indian industry is not comparable to
developed markets, such as the United States and Australia, where mandatory pension contributions are not included in the insurance pie.
