LIC IPO : Finally after long hold LIC has filed its paper for ipo and all set for one of the biggest ipo ever in the indian market. In this ipo the indian government which is the 100 owner of lic is expected to be selling up to five percent stake in the company since the ipo price band is not fixed the exact dilution by indian government and exact lic valuation is not yet confirmed. It would get confirmed once the price band is fixed in march 2022 just before the public issue is launched.
Introduction of LIC IPO
This ipo is a part of the divestment plan from the indian government and the ipo is expected to happen in march so in this aricle, i have done a deep dive into the dhrp document and tried to understand the business of LIC, its key strength, future growth, respect key risk and financials.
Please note that we do not have the complete ipo details yet hence i can’t comment on the valuation and market cap and other iq details but this article is mainly to help you understand how LIC really works. If you are a long-term investor then this article might help in taking an informed investment decision before applying for the ipo once the ipo dates and other details get announced i’ll update the same but since the live insurance sector has different kpis like your embedded value gross return premium, new business premium and so on.
Which a normal retail investor don’t understand so i have decoded these kpis and their meaning overall this info would give you a very good understanding of life insurance sector and LIC position with future growth respect all right let’s get started.
LIC’s business plan after Lance IPO
the history of lic dates back to 1956 when 245 private life insurance companies in india were merged together to form lic under 2000 lic was the only life insurer in india and then irdi allowed private companies to enter into the live insurance sector.
If you look at the business of lic it is broadly divided into individual plan and group plan individual products are further categorized into two segment participating insurance products and non-participating insurance products so participating insurance product basically allowed the policy holder to participate in the profit of life insurance company.
It means with participating life insurance plan lic passes on the profits to policyholder in form of bonus and dividend whereas the non-participating plan does not offer any dividend payouts non-part plans are further divided into saving insurance product term insurance health insurance annuity and pension products and unit length insurance products on top of these plans.
LIC also offer multiple riders that provide additional benefit along with base product to cover for additional risk such as your accidental disability death critical illness and premium waiver on the death of the proposer.LIC also offer multiple group plans including your group term insurance product group saving insurance products group saving pension product and group nud products. As of 30th september 2021 LIC has 32 individual products including 17 participating product and 15 non-participating products and has got 10 group insurance products along with seven individual riders.
I hope now you understand the various product offering of lic now let’s try to understand the various distribution channels of LIC. So LIC products are being distributed by multiple channels including your individual agent then bank cash or his partner which is the banks lic has partnered with then alternate channels including your insurance marketing firms brokers corporate agents and so on. And for this digital sales via its company website and few other channels but its major distribution of individual plan is via individual agents that contributes more than 95 of total business of LIC just to give you an idea.
LIC has 13.5 lakh individual agents as of 31st march 2021 which is more than eight times the individual agent network of second largest live insurer which is sbi life that has around 1.7 lakh agents as of 31st march 2021. LIC has a huge network of 2048 branches and 1554 satellite offices covering 91 districts of india apart from this LIC also has branches in foreign countries including UK, Bahrain, Mauritius, Fiji, Bangladesh and so on. Not only LIC is the leader in insurance sector it is also the largest asset manager in India with a total asset under management of 39.56 lakh crore as of h1 of fy22 so.
LIC alone manages a total asset which is more than 1.1 times the aum of entire mutual fund industry in India which was around 38 lakh crore as of h1 of fy22 lic has an embedded value of 5.4 lakh crore as of 30th september 2021. So embedded value is basically the sum of net asset value and present value of all future profit of life insurance company since life insurance companies earn periodically in terms of premium embedded value consider the present value of all future profit it is a very important kpi in the life insurance sector.
Now you might wonder who runs india’s largest live insurance company so LIC is owned by Indian government and has appointed a chairman along with a government nominated director and four md’s mr Manglam Rama Subramanyam Kumar is the whole time chairman of LIC.
He has been associated with lic since 1983. then mr Pankaj is the government nominee director and he is an is from 1990 batch then four md’s include Raj Kumar who joined LIC in 1984 Siddharth Mohandi who is associated with LIC since 1985 ip mini who is associated with LIC since 1985 and Vishnu Charan Patna egg who is also associated with LIC since 1985. So overall LIC has a very experienced leadership team with average experience of more than 20 years in the insurance sector.
If you look at the key strength of lic its first strength is its dominance in the indian insurance sector lic is the largest life insurance in india in terms of gwp that is gross return premium nbp that is new business premium and total number of individual and group policies issued as of 2021. now there are a lot of terminologies that you’re probably not aware of.
So it is important to understand these kpis so first of all insurance companies do not earn from a one-time transaction when you take an insurance you pay premium on a monthly or annual basis so insurance companies continue to generate revenue in the future hence gwp that is gross return premium is total revenue that insurance companies expect to be received in the future lic has 64.1 percent in market share in terms of gwp that is gross return premium in india in fi 21 then nbp that is new business premium means the premium collected from new insurance policies from a specific year lic has sixty six point two percent share in indian.
Life insurance industry in terms of nbp in fi twenty one just to give an idea lic mbp is eight point nine times the nvp of second largest player in indian life insurance sector as per crisis report then lic has issued approximately 2.1 crore individual policies in india in fr21 which is roughly around 75 percent market share in new individual policies in india so basically lic is huge and it is way ahead of other companies in the insurance sector in india its second strength is its strong brand name alice enjoys a very strong brand positioning in indian market where the name lic is almost synonymous with live insurance then third strength is a very strong distribution network.
LIC has a very strong distribution network of 13.5 lakh agents 72 bank assurance partners 174 alternate channels and many other micro insurance agents and point of sale then fourth strength is very diversified product category lice caters to various individuals and group insurance companies across segments with 32 individual products and 10 group insurance products.
now as far as future growth is concernedi believe that the future of lifeinsurance sector in india is very brightwhat are some growth drivers the biggestgrowth driver is that india is one ofthe fastest growing economies in theworld in the middle class segment isexpected to jump from 4.1 crore in fr 12to 18.1 crore by 2030.
So basicallythere’s an increase in income level thatwould create a huge rise in indianmiddle class population then governmenthas a lot of focus on financialinclusion from rural part of the countryand there’s a rapid urbanization in thecountry and of course there’s a growingawareness about taking a life insuranceplan and a medical plan for financialsecurity so all these factors wouldresult in high growth in the lifeinsurance sector in india as per crystalreport the gross return premium for lifein children in india is forecasted togrow at 14 to 15 cagr between 2021 and2026 the new business premium isexpected to grow at 18between 2021 and 2026 for individualbusiness and around 17for group business now within indianinsurance sector one area that hasimmense growth potential is pensionproducts as per crystal.
There are still82.7 people in india that are employedin unorganized sector and a lot ofpeople work in private sector where youdon’t generally get pension plan andthere are a lot of people who do notwant to take high volatility of stockmarket so they are looking for goodpension plans that can offer a decentreturn at low risk just to give you anidea the share of elderly population inindia is going to double by 2050 andthese people would need pension plan atan early age to take care of theirfinancials after retirement so there isimmense growth potential in annuity andpension plans in india.
We discussed the positive aspectsof lic but you should be aware of thekey riskfirst risk is fall in persistency ratioin fr20 due to global pandemicpersistence ratio means how manypolicyholders have paid their renewablepremium quite often people end updiscontinuing their policies hence it isvery important for insurance companiesto maintain a high persistency ratiowhere the policy holder continues to paythe premium but there could be a risk ofhigh surrender of policies.
Which reducesits persistency ratio this can in turnimpact company business then second riskis mortality risk which is a part andparcel of insurance business the annualpremium that policyholders have to paydepends a lot on assumptions like howmany claims company can expect in thefuture and what are the expenses companywould have to bear now if there is ahigh mortality rate then expected thatit would directly result in higherclaims and can impact the business of the company.
For example recently duringcovet there was a rise in claim thatimpacted the profitability of lifeinsurance companiesthen third risk is competition risk licis a leader in insurance sector in indiaeven after many years of opening up ofthe insurance sector to privatecompanies but it is facing toughcompetition from private players thatare growing quickly and eating licmarket share in the individual businesssome of the competitors of lic includesdfc live sbi live icc potential lifemax life and so on.
so if you look at the assets of lic infr 19 it stood at 33.66lakh road then in fi 20 it wasfour point one four lakh crore in fitwenty one it was thirty seven pointfour six lakh crore and in h1 of frtwenty two it was forty point four threelakh crore rupees and if you look at thelic gwp that is gross return premium infi-19 it was three lakh thirty seventhousand crore then if i twenty it wasthree lakh seventy nine thousand crorethen in five twenty one it was fourpoint zero two lakh crore and in h oneof f twenty two it is 1.86 lakh crorethen.
If you look at the nbp which isyour new business premium in f19 itstood at 1.42 lakh road nfi 20 it’sstood at 1.78 lakh crore then an a521stood at one point eight four lakh roadand an h1 of fl 22 stood at 85 112 croreand finally if you look at the profitsof lic in front 19 the profit stood at2627 crore in fr twenty profits to thattwo thousand sunday ten crore and an f itwenty one profit student two thousandnine hundred seventy four crore so yearone year there’s a rise in profit andwhat is more interesting about this isthat in spite of your pandemic and kovadthere is not fall in profitability oflic and in h1 of fr 22 the profit stoodat 1504 crore
So in this article we discussed how LIC makes money, lic is the biggest lifeinsurance company in india with a marketshare of 64.1 percent in indianinsurance sector in terms of grossreturn premium in fr21 it has been ahousehold name in every part of thecountry lse has a strong network of 13.5lakh agents as far as future growth isconcerned.
LIC has a bright future growthrespect due to increasing middle classpopulation and increasing awarenessabout the importance of insurancemoreover there’s a huge market forpension fund in india although thecompany faces a tough competition fromprivate players in the sector we stilldo not have complete ipo details whichare expected to launch in the month of march.
But once the ipv dates areannounced i will share the other detailslike market cap valuation etc i hopeyou’ll find this analysis useful if youare a long term investor i’ll see younext video till then take careEnglish (auto-generated)AllStock marketsListenableRelatedRecently uploaded