LIC IPO: Life Insurer's Embedded Value Is Out. Here's What Could Be The Offer Price.

Life Insurance Corporation of India Ltd. filed its draft red herring prospectus for India's biggest-ever initial public offering.

The government is offering 31.62 crore shares or 5% of the equity in the IPO, according to the filing with the Securities and Exchange Board of India on Sunday.

According to the draft prospectus, LIC has an embedded value of Rs 5,39,686 crore as on Sept. 30, 2021. The insurer has for the first time released its embedded value, an actuarial measure for valuing a life insurer.

BloombergQuint takes a look at the embedded value and the indicative offer price of the issue.

The embedded value takes into account the adjusted net worth of the life insurer including free surplus and capital, coupled with the discounted value of future profits from in-force policies.

While the price-to-earnings ratio is the most popular method of understanding a company's valuation, the nature of the life insurance business and the fact that profits accrue after a lag and expenses are booked immediately, the market capitalisation-to-embedded value is a better multiple to value a life insurer.

Currently there are three listed life insurers in India: HDFC Life Insurance Co., SBI Life Insurance Co. and ICICI Prudential Life Insurance Co. Among these, HDFC Life enjoys a premium over its peers because of its business mix, financial performance and governance premium.

The embedded value of the three private insurers is in the range of Rs 29,000-33,000 crore, according to the last disclosed data. The average embedded value for the three is Rs 31,045 crore and the average market capitalisation-to-embedded value ratio stands at 3.4 times, according to BloombergQuint's calculations.

Going by the average multiple, LIC's market capitalisation could be Rs 18.23 lakh crore.

And considering the 31.62 crore shares being sold, the indicative price per share would be around Rs 2,901 apiece, according to BloombergQuint's calculations.

But if the street discounts LIC's multiple to 2.3x-3x, the life insurer could be valued between Rs 12.4 lakh crore and Rs 16.2 lakh crore. And the government would be able to raise Rs 62,000-80,900 crore from the sale of a 5% stake at that level.

Yet, a further discount to this indicative price could be expected as the public insurer will be prone to government interference due to public welfare objective being placed above profits despite a high level of governance exhibited.

The LIC management is expected to begin roadshows next week by meeting domestic and global investors ahead of the IPO in March.

The listing is expected to be completed by March 31, in line with the government's divestment target for the year.