Life Insurance Corporation of India - IPO - India's Insurance Behemoth; Attractive Valuation

One of the Oldest PSU in India with Strong Market Share: Life Insurance Corporation of India (LIC) was formed by merging and nationalizing 245 private life insurance companies in India in Sep'56, with an initial capital of Rs50mn. LIC has 2,048 branch offices and 1,559 satellite offices in India, covering 91% of all districts in the country. It has been providing life insurance in India for more than 65 years and is the largest life insurer in the country. LIC is ranked 5th globally for life insurance GWP (gross written premium) and ranked 10th globally in terms of total assets. Premium from the international market is ~1% with branches in Fiji, Mauritius and the UK and with subsidiaries in Bahrain (operations in Qatar, Kuwait, Oman and UAE), Bangladesh, Nepal, Singapore and Sri Lanka in the life insurance segment.

LIC is coming out with an IPO of Rs210bn, comprising of an OFS of 221.4mn shares. The price band is at Rs902-Rs949 and the market cap at the higher band is seen at Rs6,002bn. As a divestment process, the government wants LIC to be a long-term value creator in the equity market. It is diluting 3.5% stake in the company thereby making it the biggest IPO in India.

Strong Brand Recognition: LIC was recognized as the third-strongest and 10th most-valuable global insurance brand as per the "Insurance 100 2021 report" released by Brand Finance. LIC was also recognized by WPP Kantar as the second most-valuable brand in India in the report "BrandZ Top 75 Most Valuable Indian Brands" for 2018, 2019 and 2020.

Largest Assets Manager in India: LIC is the largest assets manager in India with an AUM of Rs40.1tn on a standalone basis, which was (i) more than 3.2x the total AUM of all private life insurers in India, (ii) ~15.6x more than the AUM of the second-largest player in the Indian life insurance industry, (iii) more than 1.1x the entire Indian mutual fund industry's AUM, and (iv) 17% of India's estimated GDP for FY22. LIC's investments in listed equity represented ~4% of the total market capitalization of NSE.

Financials in Brief: During FY19-21, LIC's premium and income from investment clocked a CAGR of 6% and 9%, respectively. Embedded value (EV) has moved up sharply to Rs5.4tn in 2QFY22 led by lower future profit distribution to policy holders in line with the private peers. Net premium for FY21 stood at ~Rs4.1tn, from Rs3.8tn in FY20 and Rs3.4tn in FY19. For 9MFY22, the net premium stood at Rs2.8tn with a surplus of Rs16.4bn. Its profit posted a CAGR of 4% during FY19-21 to Rs29.7bn in FY21, and the company reported PAT of Rs17.1bn for 9MFY22.

Product Portfolio: LIC has a broad and diversified product portfolio covering various segments across individual products and group products. Individual products comprise of (i) participating insurance products and (ii) non-participating products, which include (a) savings insurance products; (b) term insurance products; (c) health insurance products; (d) annuity and pension products; and (e) unit linked insurance products. Individual products include specially designed ones for specific segments such as special products for women and children and micro insurance products. In addition, it offers riders that provide additional benefits along with the base product to cover for additional risks such as accidental disability, death, critical illness and premium waiver on the death of the proposer. Its individual product portfolio in India comprises of 32 individual products (16 participating and 16 non-participating ones) and 7 individual riders. Group products comprise of (i) group term insurance products, (ii) group savings insurance products; (iii) group savings pension products; and (iv) group annuity products. Its group product portfolio in India comprises of 11 group products.

Our View: Despite LIC writing millions of insurance policies, the insurance premium-to-GDP ratio in India is at 3.7%, well below the global average of 7.2%. The IPO is valued at a Price/Embedded Value of 1.1x on the higher band on its 2QFY22 EV, which is at a significant discount compared to the P/EV for listed private life insurance companies. HDFC Life Insurance is trading at a P/EV of 4.1x, SBI Life at 2.9x, and ICICI Pru Life at 2.2x. LIC has a diverse portfolio of insurance and investment products to cater to the needs of individuals. The company is well-placed owing to its omni-channel distribution network comprising of 1.33mn agents, several partners and alternate channels, its trusted "LIC" brand value, and 65 years of lineage. Moreover, LIC is backed by its strong financial track record and experienced management team. In view of the giant market share, largest assets under management, strong brand, diverse portfolio of products, and valuation comfort, we recommend SUBSCRIBE to the issue.

Source : Equity Bulls

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