What investors should consider before betting on the big-bang LIC IPO

The listing of life insurance company (LIC) in the second half of this fiscal year is likely to be as impressive as Saudi Aramco or China's ICBC. Given the sovereign support and the huge difference, the dominance of the low-income market will be steady for at least another decade. The IPO is critical for the government, which is facing huge revenue shortfalls and spending in a pandemic year, and has set the fiscal deficit at 6.8% of GDP for this fiscal year.

But there are several points that investors should take into consideration before betting on them.

*While in the league of Saudi Aramco and CIB, LIC does not provide a significant return on equity for its shareholders, the government. In an investment pool of Rs 31,000 crore, it paid Rs 1,7513,85 crore, including surpluses and taxes, to the Ministry of Finance in 2018-19, a year-on-year increase of 6.6%. The growth of the investment body is 11.74% year-on-year.

* LIC's profit after tax (PAT) increased by 6.9 percent to Rs.2906.77 crore in FY21, while the ratio of value-added tax to total revenue remained unchanged at 0.004. LIC's return on investment for FY21 was 7.42%, while it was 7.54% in FY2020. Its total earnings from interest, dividends, and rents in FY21 increased by 8.33% to Rs.2.34 lakh



* More LIC clients use policies as an investment vehicle rather than as a life insurance product, resulting in LIC selling more investment related products than long-term policies. This has resulted in lowering the company's stability rate compared to its global peers.

*While life insurance is a long-term business, only 51% of LIC policies last more than five years, or half of LIC policyholders retire early and not claim their premiums, making the company profitable for all the wrong reasons.

* Although LIC generates better returns for its policyholders, nearly half of its premiums are used to increase its profits, which is bad for shareholders.

* It is the largest underwriter of government securities, having bought Rs 1.10 thousand crore of central government securities and Rs 1.52 thousand crore of state government securities in 2017-18. It’s total investment in central and state marketable securities, loans, debentures and other government-guaranteed securities in infrastructure and social sector is Rs 19.55 crore.

* LIC closed 15 fully designated bad loan accounts, including DHFL, RCom and IL&FS, for sale while cleaning up the books prior to its initial public offering. Accounts for sale include DHFL (Rs 2,610 crore), RCom (Rs 2,200 crore), Reliance Capital (Rs 775 crore), Amtek Auto (Rs 380 crore), Jaiprakash Associates (Rs 313 crore) and IL&FS (Rs 300 crore).

* After listing, the LIC will have to maintain a solvency margin of 150% as per the Insurance Regulatory Development Authority guidelines, which will reduce its role as a government bailout agent. As a government funder, LIC had to bail out stressed lenders such as IDBI Bank and PSU IPOs.

* Total revenue of the insurer increased by 10.7 percent to Rs.6.82 thousand crore in FY21 from Rs.6.16 crore in FY20. Net premiums in FY21 were Rs.4.03 thousand crore, up 6.33 percent from Rs.3.79 thousand crore. Rs in FY 2020: First year premiums decreased by 41.4 percent in fiscal year 21, renewal premiums increased by 8.82 percent and one-time premiums increased by 25 percent.

LIC's total NPA fell 39 basis points to 7.78 percent in FY 21 from 8.17 percent a year earlier. Net NPA declined 74 basis points to 0.05 percent in FY21, showing strong savings by the insurer to clean up the balance sheet before the IPO.

* The 13-month persistence rate, or the percentage of policyholders who continue to pay the renewal premium, increased in terms of the number of policies to 67 percent in fiscal year 21 compared to 61 percent in fiscal year 2020, while in terms of terms of annual premiums, it increased to 79 percent from 72 percent previously. Likewise, 61-month continuity improved to 48% in FY21 from 44% in FY20 in terms of policies, and in terms of annuities, it increased to 59% from 54%.

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