MUMBAI: Markets estimate that the government could price the LIC share at the upper end of Rs 1706-2133 based on market cap to embedded value multiple of two to two-and-a-half times. That would translate into an issue size of Rs 53,952 crore -67,456 crore, making it the country’s largest-ever IPO. The issue is expected to receive good response from the public.
From a valuation perspective, the most attractive life company is SBI Life, at Rs 1,096, and the costliest are HDFC Life at Rs 557 and ICICI Pru Life at `502.6 based on Monday closing, with private life insurers priced at a 3-4 times embedded value multiple.
The embedded value, consisting of adjusted net worth and value of in-force business, is the metric for valuing insurance firms. “Market consensus seems to be favouring a 2-2.5 times multiple,” said Siddarth Bhamre, director, research at InCred Equities.
Bhamre also feels that the offer for sale involving the government offloading 5% of its holding will be oversubscribed given, “the size of LIC and the goodwill it enjoys.” Market analyst Ambareesh Baliga expects the issue size at around Rs 70,000 crore, that it would “sail through” given the insurer’s status as a “household name which no fund manager could afford to ignore, it’s being managed by heavyweight merchant bankers and the LIC’s potential to become an index stock, going forward.”
Baliga said that only a correction in Nifty from the current level (16850-17000) to 14000-15000 would make subscription a “challenge.” The pricing is based on the jump in the embedded value to almost Rs 5.4 lakh crore by September 30, 2021, from just Rs 95,605 crore six months ago because of the bifurcation of a fund into participating and non -participating businesses.
This will result in shareholders receiving a higher proportion of surplus in the participating business, going forward, while shareholders will get a 100% allocation in the non-participating business. “Generally, the appetite for LIC IPO will be high from common & new investors given its mammoth public brand value,” said Vinod Nair, research head of Geojit Financial Services.
Covid claims, mortality reserves up
Bengaluru: During the pandemic, just like other private insurance companies, Life Insurance Corporation (LIC) of India too had to deal with a sudden increase in claims, as the total death claims paid out in FY21 increased to Rs 23,927 cr (8.29% of its total claims) from Rs 17,528 crore in FY20. LIC said for the six months ended Sept 30, 2021, its total death claims paid out stood at Rs 21,734 crore, which is 14.47% of its total claims. Also, according to the draft red herring prospectus, LIC has created a separate mortality reserve of over Rs 2,344.5 cr for FY21 and set aside Rs 7,419.5 cr for the six months ended Sept 30, 2021 for the pandemic.
“Currently, we believe the mortality loading in premium rates is adequate for the long term due to the expected duration of the pandemic,” the company said. The pandemic and the related lockdowns adversely affected sales of LIC’s individual policies in Q4 of fiscal 2020, as policies were down 22.66% to 6.35 m from 8.21 m in the 4th quarter of fiscal 2019. The first quarter of FY21 and FY22 saw 46.20% decrease to 1.91 million policies and 34.93% decrease to 2.31 million policies. However, in Q2 of FY22, its new individual policies stood at 5.05 million and group policies issued were 7.87 million. Its persistency ratio decreased as of Mar 31, 2020. LIC’s persistency ratio by individual business in the 13th month was 72% as of March 31, 2020 compared to 77% in the year-ago period, it said.