Market participants are looking forward to the initial public offering of Life Insurance Corp of India as it is part of the government’s mega divestment plan.
The government is looking to dilute as much as 10% stake in LIC.
According to Motilal Oswal, LIC has assets under management of around Rs 31 lakh crore. LIC is the largest institutional investor in the country, with a total investment of nearly ₹120 Lakh crore, the brokerage added. The life insurer had a market share of 66.18% in the new business premium during the period ended March 2021, according to Insurance Regulatory and Development Authority.
The IPO is likely to be issued in the fourth quarter of the current financial year, says Nilesh Sathe, former member of IRDAI and former executive director of LIC.
The government has picked Edelweiss Financial and Deloitte as pre-IPO transaction advisors for the listing.
Here are five things you need to know about the LIC IPO:
1. LIC’s valuation
The valuation of LIC will be a challenging one, given the absence of value-related data and the adequacy of provisioning, Motilal Oswal said. However, calculation based on the insurer’s current AUM and new business premium would suggests a valuation of around Rs 7-8 Lakh crore. This means that even if the government were to sell 10% of their stake, it could raise about Rs 80,000 crores by the sale of the IPO.
2. What the government has done
> The government has increased its paid up capital in LIC from Rs 100 crore to Rs 25,000 crore.
> To facilitate the listing process, necessary amendments in the LIC Act have been passed in Parliament.
> The government has paved the way to reconstitute the board, where 50% of the directors will be independent directors, with expertise in specific areas.
3. LIC’s profitability
The portfolio of LIC contains more single premium policies than private insurers. Since these policies have less present value of future benefits, it reduces profitability. According to reports, LIC’s embedded value is around 10% more than SBI LIfe’s.
4. Why the IPO is taking time
LIC has huge assets, both financial and non-financial. As of now, the draft red herring prospectus is likely to be issued by the end of next month, and the IPO by the fourth quarter, Nilesh Sathe said. Employees are likely to have the option to purchase a percentage of LIC’s shares through employee stock ownership plans or ESOPs, while agents and policyholders can buy a percentage of the IPO, he added.
5. Bonus to policyholders
Currently, 95% of the surplus is distributed as a bonus and 5% is paid to the government as a dividend. According to IRDAI rules, if an insurer is listed, 10% of surplus can be given to shareholders by way of dividends. However, Sathe does not expect LIC to suddenly bring down the percentage to 90%. He expects LIC to cut the percentage by 1-2% every year, and finally, settle at 90%.
Source: Economic Times