Prior to the LIC IPO, the draft red herring prospectus (DHRP) reveals some interesting numbers that clearly indicate definite trends that investors could follow
State-owned insurance group and investment company, Life Insurance Corporation of India (LIC), on Sunday, February 12, filed a draft red herring prospectus (DRHP) with the Securities and Exchange Board of India (Sebi) to raise funds via an initial public offering (IPO). The IPO consists of an offer for sale of up to 316.25 million shares or 5 per cent stake by the Government of India. The LIC IPO is likely to be the biggest IPO in India till date.
Read about India's most recent big IPOs here.
LIC was formed on September 1, 1956, by merging and nationalising 245 life insurance companies in India, with an initial capital of Rs 5 crore. Even as a lot of private life insurers have arrived at the scene, LIC continues to be the dominant life insurer.
How will the LIC IPO affect the market? Read here to find out more.
Here are five trend indicators from the LIC DRHP that investors must understand before deciding to participate in the IPO:
Embedded value: LIC’s embedded value (EV), which was Rs 95,605 crore in FY21, went up to Rs 5,39,686 crore as on September 30, 2021, according to the DRHP. The main reason behind this was a step that LIC took in January in changing the way it holds and distributes its surplus, or profit. EV is the present value of all future profits that a life insurer will make through its policies and net worth put together. Since life insurance is all about upfront costs and calibrated profits over a long period of time, EV is a popular metric at which insurers are valued in the capital market.
Rank compared to global peers: LIC is the only Indian insurer among the top global insurers. It ranks 5th globally in terms of life insurance premium and 10th in terms of total assets. In global ranking, it follows German insurer Allianz SE, China’s Ping An Insurance and China Life Insurance, and Italy’s Assicurazioni Generali S.p.A.
Asset management: LIC is considered to be the largest asset manager in India. As of September 30, its assets under management (AUM) were Rs 39.55 trillion on a standalone basis, which is more than 3.3 times the total AUM of all private life insurers in India and more than 1.1 times the entire Indian mutual fund industry’s AUM. Its investments in listed equity represented around 4 per cent of the total market capitalisation of the National Stock Exchange (NSE) as of September 30.
The bulk of LIC’s investments are in central government and state government securities. Around Rs 14.8 trillion — representing 37.45 per cent of its total investments – are in central government securities. Around Rs 9.74 lakh crore – representing 24.62 per cent – are in state government securities. Investments of more than Rs 9.78 lakh crore are in equities, representing 24.78 per cent of its investments. Around Rs 3.18 lakh crore – representing 8.06 per cent – are in debentures, bonds and pass-through certificates. Only around Rs 30,905 crore, or 0.78 per cent of its total investments, are in mutual funds, exchange traded funds and alternate investment funds (AIFs).
Agents’ contribution: LIC’s individual agents were responsible for sourcing 96.69 per cent, 95.73 per cent, 94.78 per cent and 96.42 per cent of LIC’s new business profit for its individual products in India, in FY2019, FY2020, FY2021 and the six months ended 30 September 2021, respectively. LIC has the largest individual agent network among life insurance entities in India, comprising approximately 1.35 million individual agents as of March 31, 2021, which is 7.2 times the number of individual agents of the second largest life insurer, SBI Life Insurance. LIC paid agents Rs 9,815.2 crore as commission in the six months ending September 2021. In the fiscal ending March 2021, the figure stood at Rs 22,358 crore. Commission is capped between 2 per cent and 40 per cent.
Rising operating expenses: For FY2019, FY2020, FY2021 and the six months ended September 30, 2021, LIC's operating expenses related to insurance business to premium ratio (as a percentage of premium) was 8.33 per cent, 8.99 per cent, 8.66 per cent and 10.08 per cent, respectively, on a consolidated basis. Total expenses (including commissions paid to agents) have been worsening from Rs 28,331.6 crore in FY19 to Rs 34,425.88 crore in FY2020 to Rs 35,162.21 crore in FY2021. Total expense for the six months of FY2022 was Rs 18,906.36 crore.
LIC reported negative cash flows from operating activities in the first half of FY2022 at Rs 11,114.3 crore due to other operating expenses being high. It had reported positive cash flows in the previous three financial years. Cash on its balance sheet has reduced substantially from Rs 67,899.5 crore in fiscal 2019 to Rs 26,050 crore in the first half of fiscal 2022.