LIC IPO: Volatility May Be A Drag On India’s Largest Insurer’s Embedded Value

A spike in volatility in India’s stock market may weigh on a key valuation metric of the nation’s largest insurer, that’s set to go public early next month.

Life Insurance Corp. of India has valued its initial public offering—from May 4-9—at 1.1 times its embedded value of Rs 5.39 lakh crore as on Dec. 31.

The embedded value—subject to economic variances due to large exposure into equity in its portfolio compared to peers—takes into account the sum total of the present value of future profits and adjusted net asset value.

The metric is impacted by investments marked to market, KR Ashok, executive director (actuarial) at LIC, said in response to BloombergQuint’s query during a media conference. “Around 25% of its investment portfolio is in equity, of which majority of the investment is in blue-chip stocks,” Ashok said, adding that the embedded value is sensitive to market volatility.

The state-owned insurer was compelled to pare the size of the IPO as valuations dropped amid uncertainties around the Russia-Ukraine crisis and foreign investors pulling out from the country. The IPO will now see a 3.5% stake sale by the Indian government, fetching Rs 21,000 crore against the Rs 70,000-crore projected from a 5% divestment.

LIC will sell shares at Rs 902-949 apiece in the IPO.

The company’s value of new business margin was at 9.3% as on Sept. 30 against 9.9% as of March 2021. LIC’s embedded value is lower than almost all private peers that have more than 20% VNB margin.

According to Ashok, HDFC Life Insurance Co. Ltd., which reported a VNB margin of 27.4% in the fourth quarter, had listed at similar margin levels as LIC, and must be looked at accordingly.

The margin can be expected to move north later and if LIC’s efforts on expanding its non-participating portfolio (margins on this portfolio are around 80%) were to work positively, the VNB will grow at a faster rate, said Ashok.

MR Kumar, chairman at LIC, told BloombergQuint that the state-run life insurer is looking at a growth rate of 15-20% on premiums and 10-12% in terms of policies in the coming years.

Eligibility Criteria

LIC has reserved 10% of its total shares offered in the IPO for policyholders.

One of the eligibility criteria for applying under this quota was to link PAN with the policy number. “LIC has had around two crore policyholders who have registered their PAN with the insurer,” said Kumar.

To proceed with the IPO, SEBI gave a special approval to bring down the IPO size from 5% to 3.5%. The regulator also allowed 30-day lock-in for anchor investors instead of the new regulations that require 50% of anchor portion capped at 30 days and remaining capped at 90 days. LIC, Kumar said, is confident of holding onto the market share and has seen signs of recovery in February and March after a slip in the previous months.

With regard to the regulation that disallows an insurer from holding a majority stake (over 51%) in any bank, LIC intends to hold a minority stake in IDBI Bank. “It has been the most beneficial bancassurance partner and we intend to continue with a small stake even after IDBI Bank is divested,” said Kumar. Steps for divestment, he said, are already in process.

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