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India’s crown jewel IPO deserves healthy discount

A man speaks on his phone outside the Life Insurance Corporation of India (LIC) office in Mumbai, India January 28, 2022. REUTERS/Francis Mascarenhas – RC248S9R1CWK

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MUMBAI, Feb 14 (Reuters Breakingviews) – Bigger isn’t always better. Life Insurance Corp of India’s eagerly awaited initial public offering prospectus arrived on Sunday and underscores its unrivalled reach with more to like. Even so, Prime Minister Narendra Modi’s sale of the century read more deserves a healthy discount.

LIC’s 283 million policies in force are enough to cover every Indian household and the former monopoly retains a 64% share of industry-wide gross written premiums. Assets under management amount to $536 billion, more than 10 times closest rivals SBI Life (SBIL.NS) and HDFC Life (HDFL.NS) combined. There’s plenty of room for industry growth: life insurance premiums per capita are one quarter those in China, per Swiss Re Institute.

At the same time, LIC’s gross written premiums increased at a tepid annual rate of 9.2% over the past two full financial years, at least half the pace of top rivals, and its latest annual 9.9% value of new business margin lags by at least 10 percentage points. That takes some shine off its lower operating costs.

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Copying the competition could lift profitability. LIC’s rivals focus more on products designed to offer protection rather than savings and put less emphasis on ones that share profit with policyholders: strict regulations around “participating products” are one reason Indian life insurers are less profitable than international peers such as AIA (1299.HK). Harder to fix is LIC’s readiness to mop up India’s troubled financial assets. For example, the insurer doesn’t rule out having to inject more money into IDBI Bank (IDBI.NS).

A $165 billion market capitalisation is achievable for LIC, by applying a 30% discount to the 3.2 multiple of embedded value commanded by SBI Life, a state bank-backed rival. On that basis, selling a 5% stake would raise some $8 billion, perhaps enough to help cash-strapped New Delhi hit its budgeted target for asset sales by end-March.

Citigroup (C.N) has the tricky task of coordinating pricing on a deal that the government wants done quickly. Paytm’s record $2.5 billion IPO in November hints at the difficulty; owner One97 Communications’ (PAYT.NS) stock price has fallen by more than half.

Up to 10% of LIC shares on offer are reserved for policyholders, inducting millions of first-time Indian investors just as expected U.S. interest rate hikes could roil markets. Taking a conservative view on price would be prudent.

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CONTEXT NEWS

– Life Insurance Corp of India on Feb. 13 filed for an initial public offering. The company will issue up to 316.2 million shares, equivalent to 5% of total post-offer shares.

– As much as 10% of the offer will be reserved for LIC policyholders and up to 5% for employees; both groups may receive an unspecified discount on the price.

– LIC’s investments in listed equities amount to roughly 8 trillion rupees ($106 billion), about 4% of the National Stock Exchange’s total market capitalisation.

– The insurer is being advised by 10 banks: Kotak Mahindra, Axis Capital, Citigroup, Bank of America, Nomura, Goldman Sachs, ICICI, JM Financial, JPMorgan and SBI Capital.

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Editing by Jeffrey Goldfarb and Katrina Hamlin

Our Standards: The Thomson Reuters Trust Principles.

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