by Welcome back to Traders Ideology, In this article, we will be discussing the fundamentals analysis of LIC IPO. In this article, we will discuss the company overview, its operating segments, industry overview, financials, strengths & weaknesses, the way ahead.
Disclaimer: This article is only for educational purposes. I do not recommend buying or selling so please consult your advisor and do your own research before investing.
Also, Read: Fundamental Analysis of IRCTC & Fundamental Analysis of DMART
Introduction
Dear friends, finally after a long time LIC has filed its paper for IPO and is ready for one of the biggest ever IPO in the Indian market. In this IPO, the Indian government which is the 100% owner of LIC is expected to be selling up to a 5% stake in the company.
Since the IPO price band has not been fixed, the exact dilution by the Government of India 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.
This IPO is a part of the Government of India’s disinvestment plan and the IPO is expected to open in March. In this article, I have done an in-depth analysis of the DHRP document and tried to understand the business of LIC, Its key strength, future growth prospects, key risk, and financials.
Please note that I don’t have complete IPO details yet, so I cannot comment on valuation and market cap, and other IPO details. But this article is mainly to help you understand how LIC actually works.
If you are a long-term investor, then this article might help in making an informed investment decision before applying for the IPO, once IPO dates and other details get announced I will update it.
But since the life insurance sector has different KPIs like your embedded value, Grace return premium, New Business Premium, and so on; which a normal retail investor doesn’t understand.
I have decoded these KPIs and their meaning. Overall, this article will give you a very good understanding of the life insurance sector and LIC position with future growth prospects.
Fundamental Analysis of LIC
Fundamental Analysis of LIC are as follows:
Company Profile & Its business
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 life insurance sector. If you look at the business of LIC, it is broadly divided into Individual plans and Group plans.
Individual products are further categorized into two segments…
1. Participating Insurance Products
- Participating in Insurance Products basically allows the policyholder to participate in the profit of the Life Insurance Company it means with participating life insurance plan LIC passes on the profits to the policyholder in form of bonuses and dividends.
2. Non-Participating Insurance Products
- The non-participating Insurance Products plan does not offer any dividend payouts. Non-part plants are further divided into Saving Insurance Protect, Term Insurance, Health Insurance, and Annuity & Pension Products and Unit Linked Insurance Products.
- On top of these plans and LIC also offer multiple riders that provide additional benefit along with the base product to cover additional risks such as your Accidental disability, Death, Critical Illness, and Premium waiver on the death of the proposer.
- LIC also offers multiple Group plans, including your Group Term Insurance Product, Group Saving Insurance Products, Group Saving Pension Product, and Group Annuity Products.
- As of 30th September 2021, LIC has 32 Individual Products including 17 Participating Products and 15 Non Participating Products, and has got 10 Group Insurance Products along with 7 Individual riders. I hope now you understand the various product offering of LIC.
3. LIC Distribution Channels
- Now let’s try to understand the various distribution channels of LIC. LIC products are being distributed by multiple channels, including Individual agents, Bancassurance partners (which is the banks LIC has partnered with), Alternate channels (including your insurance marketing firms, brokers, corporate agents, and so on), and Digital-sales, (Via its company website and a few other channels). But its major distribution of individual plans is via individual agents that contribute more than 95% of the total business of LIC.
- I want to tell you that, LIC has 13.5 lakh, individual agents, as of 31st March 2021, which is more than 8 times the individual agent network of SBI Life, India’s second-largest life insurer which has around 1.7 lakhs agents as of 31st March 2021.
- LIC is a huge network of 2048 branches and 1554 satellite offices covering 91% of the districts of India. Apart from this LIC also has branches in foreign countries, including the UK, Bahrain, Mauritius, Fiji, Bangladesh, and so on.
- LIC is not only a leader in the insurance sector, but it is also the largest asset manager in India with total assets under management of Rs 39.56 lakh crore as H1 of FY22.
- LIC alone manages a total asset, that is more than 1.1 times the AUM of the entire mutual fund industry in India, which was around Rs 38 lakh crore as of H1 of FY 22.
- LIC has an embedded value of 5.4 lakh crore as of September 2021. The embedded value is basically the sum of net asset value and the present value of all future profits of a life insurance company.
- Since life insurance companies earn periodically in terms of premium embedded value considering the present value of all future profit, it is a very important KPI in the life insurance sector.
Promoter & Leadership
- Now, you might wonder who runs India’s largest Life Insurance Company.
- LIC is owned by the Indian Government and has appointed a Chairman along with a government-nominated Director and 4 MDs. Mr. Mangalam Rama Subramanyam Kumar is the whole time chairman of LIC. He has been associated with the LIC since 1983.
- Then Mr. Pankaj Jain is the government nominee Director and he is an IAS from 1990 Batch, then 4 MDs include Mr. Raj Kumar, who joined LIC in 1984, Mr. Siddharth Mohanty, who is associated with LIC since 1985, Mrs. Ipe Mini, who is associated with LIC since 1985, and Mr. Vishnu Charan Patnaik, who is also associated with LIC since 1985.
- So overall, LIC has a very experienced leadership team with an average experience of more than 20 years in the insurance sector.
Key Strenghth
If you look at the key strength of LIC, its strengths are:
1. Dominance in the Indian insurance sector
LIC is the largest life insurance in India in terms of GWP (Gross Written Premium), NBP (New Business Premium), and the total number of individual & group policies issued as of 2021. There are a lot of terminologies that you are 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 insurance you will pay a premium on a monthly or annual basis. So insurance companies continue to generate revenue in the future. Hence GWP (Gross Written Premium) is the total revenue that insurance companies expect to be received in the future.
LIC has a 64.1% market share in terms of GWP (Gross Written Premium) in India in FY 21, then NBP (New Business Premium) means the premium collected from new insurance policies from a specific year. LIC has a 66.2% share in the Indian life insurance industry in terms of NBP in FY 21.
Just to give you an idea, LIC NBP is 8.9 times the NBP of the second-largest player in the Indian life insurance sector as per Crystal Report. LIC has issued approximately 2.1 Crore individual policies in India in FY 21, which is roughly around 75% 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.
2. Strong Brand Name
Its second strength is a strong brand name, LIC enjoys a very strong brand positioning in the Indian market, where the name LIC is almost synonymous with life insurance.
3. Very Strong Distribution Network
Its 3rd strength is a very strong distribution network. LIC has a very strong distribution network of 13.5 lakh agents, 72 bancassurance partners, 174 alternate channels, and many other microinsurance agents and points of sale.
4. Very Diversified Product Category
Its 4th strength is a very diversified product category. LIC caters to various individuals and group insurance companies across segments with 32 individual products and 10 group insurance products.
Future Growth Prospects
As far as future growth is concerned, I believe that the future of the life insurance sector in India is very bright. Some growth drivers are…
- The biggest growth driver is that India is one of the fastest-growing economies in the world Indian middle-class segment is expected to jump from 4.1 crores in FY 20 to 18.1 Crore by 2030. So, basically, there is an increase in income level that would create a huge rise in the Indian middle-class population.
- Government has a lot of focus on financial inclusion from the rural part of the country and there is rapid urbanization in the country, of course, there is a growing awareness about taking a life insurance plan and a medical plan for financial security. So, all these factors would result in high growth in the life insurance sector in India.
- As per Crystal’s report, the Gross Written Premium for life insurance in India is forecasted to grow at 14 to 15% CAGR between 2021 and 2026. New business premiums are expected to grow by 18% for individual businesses and about 17% for group businesses between 2021 and 2026.
- In the Indian insurance sector, one area that has immense growth potential is pension products. As per Crystal, there are still 82.7% of people in India that are employed in the unorganized sector and a lot of people work in the private sector where you don’t generally get a pension plan, and there are a lot of people who do not want to take high volatility of the stock market. So they are looking for good pension plans that can offer a decent return at low risk. I want to tell you that, the share of the elderly population in India is going to double by 2050, and these people would need a pension plan at an early age to take care of their financials after retirement. So there is immense growth potential in annuity and pension plans in India.
Key Risk
So far we discuss the positive aspects of LIC, but you should be aware of the key risk.
1. Persistency Ratio Risk
- The first risk is the fallen persistency ratio in FY 20 due to the global pandemic.
- The persistency ratio means how many policyholders have paid their renewable premium. But often people end up discontinuing their policies.
- Hence, it is very important for insurance companies to maintain a high persistency ratio where the policyholder continues to pay the premium, but there could be a risk of the high surrender of policies, which reduces its persistency ratio, which can impact company business.
Mortality Risk
- The second risk is mortality risk, which is a part and parcel of the insurance business. The annual premium that policyholders have to pay depends a lot on assumptions like how many claims the company can expect in the future and what are the expenses company would have to bear.
- Now, if there is a high mortality rate, then expected that it would directly result in higher claims and can impact the business of the company. For example, recently during COVID, there was a rise in claims that impacted the profitability of life insurance companies.
3. Competition Risk
- LIC is a leader in the insurance sector in India, even after many years of opening up the insurance sector to private companies, but it is facing tough competition from private players that are growing quickly and eating LIC market share in the individual business.
- Some of the competitors of LIC include HDFC Life, SBI Life, ICICI Prudential Life, Max life, and so on.
Financials
Asset
- If we look at the assets of LIC in FY 19, it was 33.66 lakh crore, in FY 20 34.14 lakh crore, in FY 21, 37.46 lakh crore, and in H1 FY 22, 40.43 lakh crore.
Gross Written Premium
- If you look at LIC GWP in FY19 it was 3,37,000 crore, in FY20 it was 3,79,000 crore, in FY21 it was 4,02,080 crore, and in H1 FY22 it is 1.86 lakh crore.
New Business Premiums
- If we look at the NBP in FY19 it was 1.42 lakh crore, in FY20 1.78 lakh crore, in FY21, 1.84 lakh crore and in H1 FY22 it is 85,112 crore.
Profit
- If we look at the profits of LIC in FY 19 the profit stood at 2627 Cr. in FY 20 profits stood at 2810 Cr. and in FY 21 profits stood at 2974 Cr.
- Year on year there is a rise in profit and what is more interesting about this is that in spite of your pandemic and COVID there is not fallen profitability of LIC and in H1 FY 22 the profits stood at 1504 Cr.
Conclusion
- In this article, we discussed how LIC makes money.
- LIC is the biggest life insurance company in India with a market share of 64.1% in the Indian insurance sector in terms of Gross Written Premium in FY 21. I
- t has been a household name in every part of the country. LIC has a strong network of 13.5 lakh agents.
- As far as future growth is concerned, LIC has bright future growth prospects due to the increasing middle-class population and increasing awareness about the importance of insurance.
- Moreover, there is a huge market for pension funds in India. Although the company faces tough competition from private players in the sector. I still do not have complete IPO details, which are expected to launch in the month of March, but once the IPO dates are announced, I will share the details like market cap, valuation, etc. I hope you will find this analysis useful.
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