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MUMBAI : An actuarial valuation exercise has arrived at a $150 billion embedded value for Life Insurance Corp. of India, the first such valuation done by India’s largest insurer, which is set to start road shows for its initial share sale next month, two people aware of the development said.

India’s largest insurer has also initiated talks with several foreign investors, including pension funds, to join as anchor investors in its initial public offering, the people said, requesting anonymity.

Anchor investors are typically financial institutions that are allotted shares in a company ahead of the public offering on a discretionary basis.

Priority investors
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Priority investors

“LIC has completed its valuation exercise and, as part of the government’s strategy, fixed-income type of funds, pension funds and foreign long-term sovereign funds related to social welfare trusts may be given top priority to become key shareholders of LIC," one of the two people said on condition of anonymity.

Even at a valuation of $150 billion, the share sale would make it India’s biggest-ever IPO. At a 10% sale by the government, it would make the share sale one of the biggest such sales by an insurer in the world. In comparison, Reliance Industries Ltd, the country’s most valuable company, is valued at around $220 billion.

Long-term investors bring more stability to a company’s stock as they react less often to external shocks and avoid churning their investments. If such investors become key shareholders, LIC’s shares could see less volatility, and shareholders will gain more from dividends rather than short-term price movements.

“Rather than hedge funds and short term pure-equity oriented investors, the government seems to be keener to rope in large fixed-income-oriented funds (who invest only partly in equities) and long-term pension and sovereign funds as LIC’s key shareholders while selecting anchor investors," this person added.

Emails sent on Friday to spokespeople for LIC, finance ministry and the department of investment and public asset management went unanswered.

LIC’s size and its ongoing restructuring could raise concern among some investors about its ability to sustain growth, and anchor investors would help enhance investor confidence and assess the demand for the IPO. Ahead of public share sales above 250 crore, companies are free to allocate shares to anchor investors with a minimum of 5 crore for each investor. Anchor investors cannot sell their shares for 30 days.

“The IPO will be priced in multiples of the embedded value of LIC, which has been estimated at over $150 billion. Most life insurers’ shares are trading at a huge premium over their embedded value. The offer price of LIC shares, too, may be fixed at a 20-30% premium to the embedded value," the person cited above added. Embedded value is a valuation measure used by life insurers.

“Road shows for the IPO will be started within a fortnight," the second person said.

In June, Mint first reported that the government plans to bring in a clutch of anchor investors to invest up to 25,000 crore in the shares of LIC. “We will invite anchor investors after the embedded valuation exercise is done, and the pricing for the IPO is ready," said the report, citing an unnamed government official who added that there may be more than two dozen anchor investors in LIC’s IPO.

Amendments to the LIC Act, which are critical for the share sale, could be completed in the Parliament’s upcoming winter session, the two people said. LIC’s IPO has taken longer than usual because these amendments need to be passed; its accounts, board and businesses restructured; and its valuation completed. Despite its towering presence over India’s financial landscape, the insurer has never had a valuation exercise before; in contrast, private insurers such as Bajaj Allianz, ICICI Prudential and HDFC Life had been regularly doing this exercise even before their listing.

The government said that it would hold at least 75% in LIC after the IPO and, subsequently, own at least 51% in the insurer at all times after five years of the proposed IPO.

After the Union budget was presented, the markets regulator streamlined public issue norms, saying the IPO size must be 10,000 crore plus 5% of the incremental market capitalization amount beyond 1 trillion for very large companies.

LIC, in which the government holds a 95% stake, is the largest insurer in the country, with assets over 34 trillion. The insurer recorded new business premium of 1.84 trillion for fiscal 2021, which is almost double the total premium collected by all private insurers combined in the same period. LIC commands a market share of 67% in the life insurance space.

At present, LIC pays 5% of its surplus to the government, while the remaining 95% goes to its policyholders. In comparison, private insurance firms pay 10% of the surplus to shareholders and the rest to policyholders.

LIC controls two-thirds of the Indian insurance market, with over 300 million policies and more than 1.2 million agents, over 100,000 employees, 2,000 branches and 1,500 satellite offices.

LIC’s IPO is primarily aimed at contributing to the government’s ambitious divestment target worth 1.75 trillion for the fiscal year, which would be used to narrow India’s budget fiscal deficit that is expected to be 6.8% this year.

For many Indians, insurance is still synonymous with LIC, and the euphoria in the primary market, coupled with the company’s brand recall, may help LIC’s IPO sail through.

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