LIC’s valuation pegged at over Rs 11 lakh crore

Independent valuation firm RBSA Advisors’ has valued the Life Insurance Corporation of India (LIC) in the range of Rs 9.9 lakh crore to Rs 11.5 lakh crore, much lower than what private insurers command.

Market capitalisation as a percentage of assets under management (AUM) is lower for the state behemoth as LIC distributes about 95% of its surplus among policyholders. While the practice may be benevolent to the policy holders, it reduces profits available to LIC’s shareholders and can significantly affect its valuation, said RBSA in a report.

The government aims to raise Rs 2.1 lakh crore in FY21 to narrow India’s fiscal deficit and plans to list the insurance firm. LIC’s initial public offering (IPO) is expected to be India’s largest issue after Coal India and is an important contributor in meeting GoI’s disinvestment target.

The life insurance Industry has grown significantly and the total assets of the industry stand at Rs 37 lakh crore, of which LIC’s share is Rs 33 lakh crore, more than the combined assets of India’s mutual fund Industry.

LIC’s underwriting margins are significantly lower possibly due to higher bonus payouts to policyholders, sub-optimal underwriting practices and lower investment yield. LIC has a relatively lower net worth of Rs 679 crore as it shares its total surplus between policyholders and shareholders in the ratio of 95:5 irrespective of policy product mix. Also, more than 95% of the above 5% attributable to the shareholders is distributed as dividends to the GoI, the only shareholder and thus retaining very limited surplus to the net worth.

“This has led to a higher level of leverage which seems unsustainable and the possible reason for this lower net worth and corresponding high leverage is the sovereign guarantee provided by GoI to the policyholders of LIC,” said the valuation report by RBSA.

LIC has return on equity of 396.8% in FY19 compared to 18.8% of SBI Life or 24.6% of HDFC Life or 16.4% of ICICI Prudential.

Finance Secretary Rajiv Kumar said that the government was aiming to float the IPO in the second half of FY21.

As per RBSA’s report, the possible upside risk to the valuation range could be LIC’s investments in unlisted equities and subsidiaries, joint ventures and associates, which are currently recorded at cost and the market value of these investments may be substantially higher. Also, LIC’s distribution reach and market share are unparalleled. However, the possible downside risk could be its PSU tag and the GoI’s tendency to treat LIC as an investor of last resort.