LIC IPO: Crown jewel at reasonable valuations: IIFL Capital Services

4 May 2022 , 10:18 AM

Life Insurance Corporation of India (LIC), India’s largest insurance company had market share of ~37%/74% in FY22 in retail APE/group NBP segments, respectively. It boasts of being one of the strongest brands in the country and having an unparalleled agency network that ensures it still owns ~46% of the total APE market even after 20 years of privatization of the sector. Its concentrated product and distribution profile leaves enough opportunities for this titan to improve its quality of growth.

IIFL Capital Services has a subscribing rating on the IPO.

Let’s look at the investment rationale for the same.

Enviable brand value and agency network
LIC has been a household name for over six decades, when it comes to savings insurance, with 286 million in-force policies as of FY21, garnering Rs4,058 billion of premiums. Its mass-market reach is unparalleled, driven by its 1.33 million agents who sell more than 20 million policies every year. While LIC is largely dependent on its agency force for retail business, the agent productivity is 4 times that of larger private players.

Product and distribution are concentrated
LIC’s retail business is largely concentrated towards participating products (~92% of retail APE) and needs adequate diversification for catering to the changing demands of the savings business. While it offers Non-Par (~7%) as well as ULIP products (<1%), management has indicated their focus on these segments now. The distribution architecture is dependent on the agency channel (~94% of retail NBP), despite a wide network of banca partnerships (~70 banca partners). Management has indicated its focus to drive product and distribution diversification going forward. With a captive and highly loyal customer base, the success of the same will be closely watched.

Multiple opportunity pockets exist
LIC’s current portfolio, while significantly large, offers multiple pockets of opportunities for faster growth. Lack of exposure to Non-Par and ULIP products, a significantly smaller policy ticket size (sum assured/policy at Rs0.3 million; <2.5 times of SBI Life), lack of protection penetration as reflected in sum assured/premium sold (10.4 times) and absence of banca business despite its reach to one of the largest bank branch networks (51,633 bank partners’ branches) are all potential opportunities for LIC’s business. So, there is also scope to improve VNB margins.

Change in business strategy poses threats as well
LIC’s decision to change the surplus sharing in Par policies to 90% going ahead versus 95% in the past will bring the attractiveness of its policies in line with the industry. Its focus on underpenetrated areas such as retail protection, banca channel and digital businesses also pose threat to the productivity of its strong agency force.

VNB margins could expand on changing product mix
For FY21, LIC’s VNB margin would have been 2.8%, assuming no change in its surplus allocation policy. But with changes, its VNB margins ended at 9.9%, which would be equivalent to 12.3% for FY25 VNB. Analysts at IIFL Capital Services note that while LIC’s Par and Group businesses generated low double-digit VNB margins in FY21, its retail Non-Par business, which includes protection and guaranteed return products, generated 80%+ margins. Hence, change in mix towards Non-Par could drive margins and lead to higher VNB growth for the company.

IPO valuations reasonable
The IPO valuation of Rs6 trillion imply trailing EV of 1.1x vs. 2.4-3.8x for the 3 larger listed private players. Hence, it adequately factors-in the gap in LIC’s growth and returns profile and is comparable with some global peers with weaker profiles. Analysts at IIFL Capital Services believe that with sovereign backing and the strong brand positioning, LIC may be able to steadily grow its premiums and VNB, while the proposed valuations factor-in limited growth going forward. Hence, the IPO pricing seems reasonable.