LIC grey market premium (GMP) declined after RBI Rate hike
RBI announced an unscheduled hike in interest rates on May 4 and the impact was seen in the IPO grey market as well. As per a dealer dealing in the grey market, the GMP for LIC IPO declined from Rs 93-96 in the afternoon on April 29 to mere Rs 48-52 after the RBI announement yesterday. It however recovered marginally by evening to Rs 58-60.
As per the IPOWatch.com and IPOWala.com, which tracks the grey market premium, LIC is currently commanding a premium of Rs 65 per share.
Key Risk to LICs business: KR Choksey
Under the IRDAI Investment Regulations, LIC is required to invest its investment assets forming part of its controlled fund in certain specified categories of assets and instruments, subject to thresholds prescribed for each category of investment. Given the prescribed limits on the way the company’s assets are held and in which its investments can be made, LIC may be unable to mitigate market risks, while making investments, in the same manner as non-insurance companies; The company faces limited liquidity risk due to the nature of its liabilities and business structure; Events such as changes in regulatory policies, volatility in capital markets, loss of customer confidence in the insurance industry or in the company, or sharp declines in its 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; The strength of the brand ‘LIC’ could be adversely affected by changes in customers’ and market perceptions about the
company, particularly in the insurance sector, where integrity, trust and customer confidence are paramount. LIC is exposed to the risk that litigation, misconduct by its employees, agents or other distribution partners, operational failure and negative publicity could harm its brand, reputation, customer trust and business
LIC IPO : Subscription status
Source: BSE India
How the changes to the Corporation’s surplus distribution policy is expected to benefit shareholders, Ventura Securities
Prior to 30th Sept, 2021, the Corporation had one fund – a participating fund. However due to an amendment to the LIC Act notified on June 30, 2021, the Corporation can now have a participating fund and non-participating fund. Previously LIC transferred only 5% of the valuation surplus to the shareholders account while the remaining 95% was distributed in the form of bonus to the participating policyholders. However, the government, vide letter dated November 13, 2013, allowed the Corporation to continue with the existing surplus distribution pattern of 95:5 between policyholders and the shareholders, while retaining the flexibility to reduce it to 90:10 between policyholders and the shareholders in the future. This amendment brought LIC in line with the private players in India who are already permitted to allocate the surplus in participating funds between policyholders and shareholders in the ratio of 90:10.
LIC has therefore made a change in its corporation’s participating fund distribution policy and hence the surplus in respect of the participating fund will be allocated between policyholders and shareholders in the ratio of 95:5 for FY22, 92.5:7.5 for FY23 and FY24 and then 90:10 for FY25 onwards. The shareholders will have a 100% allocation in the non-participating fund. Both these changes- allowance of non-participating fund and change in distribution corpus of the participating fund will result in a higher allocation of the surplus to shareholders.
Source: Axis Capital, LIC IPO Note
LIC: Key business strategies
Capitalize on the growth opportunities in the Indian life insurance sector; Further diversify the product mix by increasing the contribution of the non-participating portfolio; Reinforce the omni-channel distribution network and increase its productivity; Continue leveraging technology to aid growth, drive operating efficiencies and provide digital support; Maximize value creation through various commercial and financial levers as well as changes to LIC’s surplus distribution policy
Categorywise breakup of LIC policies serviced in India
Source: Axis Capital, LIC IPO Note
LIC IPO Live Updates:Issue subscribed 71 percent
Issue subscribed 71 percent: policyholders portion subscribed 2.14 times, staff 1.31 times, retail investors subscribe to 65% of their allocated portion, QIBs close 33% and NII lapped up 28% of their portion
Few insurance terms explained
VNB – It represents the present value of the Shareholders’ interest in the earnings distributable from the assets allocated to the covered business,
after making sufficient allowance for the aggregate risks in the covered business. The allowance for risk is calibrated to match the market price
for risk, where reliably observable. The “covered business” is all life insurance and pensions business, accident and health insurance business
across both individual and group segments: (a) that has been written by LIC in India; and (b) that has been written by LIC’s entities outside of
India, either through its branches, subsidiaries or joint ventures.
Indian Embedded Value – Indian Embedded Value consists of the Adjusted Net Worth (“ANW”) (consisting of LIC’s free surplus and required capital) and the value of in-force business (“VIF”). The free surplus is the market value of assets allocated to, but not required to support, the in-force covered business as at the applicable valuation date. The required capital is determined as the amount of assets attributed to the covered business over and above that required to back liabilities for covered business, the distribution of which to shareholders is restricted. The VIF is a measure of the value of the Shareholders’ interest in LIC “covered business”. The VIF represents the present value of the Shareholders’ interest in the earnings distributable from the assets allocated to the covered business, after making sufficient allowance for the aggregate risks in the covered business. The allowance for risk is calibrated to match the market price for risk, where reliably observable. Indian Embedded Value was not calculated as at March 31, 2019 as there is no requirement for it be calculated.
VNB margins have potential to improve: Nirmal Bang Institutional Equities
For 1HFY22, LIC reported a VNB margin of 9.3% compared to FY21 VNB margin of 9.9%. Absolute value of VNB stood at Rs41.67bn for FY21 (Rs15.83bn for 1HFY22). LIC’s VNB margin is on the lower side when compared to private sector peers. The VNB margin also reflects the par dominated product mix. However, a meaningful scale up in the non-par products can improve margins going ahead substantially. The company highlighted that it will be focusing strongly on non-par products going ahead and on the term insurance particularly. As of Sep ‘21, LIC reported EV of Rs5.4tn, a huge jump from Rs956bn as
of FY21. The increase in EV is driven by change in the company’s surplus distribution policy which entails paying 10% of Par surplus and 100% of non-par surplus to shareholders. This shall come into effect in a phased manner by FY25. Note that upto Mar ‘21, LIC had one fund and the valuation surplus from both the par and non-par businesses were distributed between policyholders and shareholders in the proportion of 95/5%.
Low free-float may push the price higher, says Religare Broking
Religare broking believes that the low free-float of LIC shares may push the prices higher. Given that the government is offloading only 3.5% of its 100%
stake, the free-float would be low which could create demand-supply mismatch.
Ajcon Global recommends investors to subscribe to the IPO
At the upper end of the price band of ₹949, LIC’s IPO is valued at Implied Market Cap/Indian Embedded Value (as on H1FY22) of 1.1x at which is at a
discount to its peers like SBI Life Insurance Company Limited, HDFC Life Insurance Company Limited, ICICI Prudential Life Insurance Company Limited which are trading in the range of 2.5 ‐ 4x.We recommend investors to “SUBSCRIBE” to the issue owing to the following factors: a) Fifth largest life insurer globally by GWP and the largest player in the fast growing and underpenetrated Indian life insurance sector; b) Amongst the top global insurers, LIC is the only Indian player. LIC is ranked fifth globally in terms of life insurance premium and tenth in terms of total asset, c) LIC has the highest RoE amongst the global peers; d) Trusted brand and a customer‐centric business model; e) Cross‐cyclical product mix that caters to diverse consumer needs and an individual product portfolio that is dominated by participating life insurance policies; f) Presence across India through an omni‐channel distribution network with an unparalleled agency force; largest asset manager in India with an established track record of financial performance and profitable growth; i) Highest RoNW amongst other listed players in India in the same industry. j) Robust risk management framework.
