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Moody's sees LIC IPO as credit positive for India's life insurance industry

LIC IPO is nearly  ₹21, 000 crore in size and opened on May 4. The issue will be available for subscription till May 9. (REUTERS/Francis Mascarenhas)Premium
LIC IPO is nearly 21, 000 crore in size and opened on May 4. The issue will be available for subscription till May 9. (REUTERS/Francis Mascarenhas)

  • Moody's said that as a listed company, LIC will face more demanding disclosure requirements, resulting in increased transparency over its operations, and encouraging it to prioritize profitable underwriting and risk management. 

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Moody's Investors Service on Thursday said LIC IPO is credit positive for the country's life insurance sector. LIC IPO has subscribed by 89% against the total offered size so far on the second day of the issue.

LIC IPO is nearly 21, 000 crore in size and opened on May 4. The issue will be available for subscription till May 9.

At around 2.48 pm, data on NSE showed, cumulatively the IPO has received bids of 14,37,03,000 equity shares against the offered size of 16,20,78,067 equity shares - subscribing by 89% of the total size.

The reserved portion for employees and policyholders was oversubscribed by 1.86 times and 2.72 times respectively. Retail individual investors (RII) portion subscribed by 82% of the reserved size, while the portion for non-institutional investors (NII) and Qualified Institutional Buyers (QIBs) subscribed by 36% and 34% against the reserved size.

LIC IPO has a price band of 902 to 949 per equity share. Discount of 45 per equity share to retail and eligible employee categories and 60 per equity share to policyholder category.

In its report, Moody's said that as a listed company, LIC will face more demanding disclosure requirements, resulting in increased transparency over its operations, and encouraging it to prioritize profitable underwriting and risk management. This will, in turn, boost its capacity to generate and grow capital internally.

Moody's said, "We see the arrival of external shareholders with experience in the insurance industry as a further key benefit of the IPO. We believe the presence of foreign stakeholders will bring particular benefits in the areas of capital adequacy, financial flexibility, and governance standards, enhancing LIC’s credit profile. Additionally, their influence could aid operational and distribution efficiencies, for example, by encouraging LIC, whose online distribution is currently limited to its own portal, to negotiate wider online distribution agreements with third parties. This would support LIC’s sales growth, given the increasing importance of digital distribution in the life industry, and the greater geographic reach of online sales."

However, Moody's also believes that these benefits will likely remain somewhat limited until the government sells a larger stake, allowing external investors to build a more strategic stake in the company."

Further, Moody's highlighted that while LIC complies with the Insurance Regulatory and Development Authority of India's (IRDAI's) solvency requirements, its capital adequacy is weaker than that of global life insurance peers. LIC's shareholders' equity accounts for less than 1% of total assets, compared with, for example, 4.9% for Ping An Life Insurance Company of China, Ltd. (Ping An Life, insurance financial strength rating A2 stable) and 4.2% for Aviva Plc (insurance financial strength rating Aa3 stable).

Going forward, Moody's said, "We expect post-IPO improvements in LIC’s operating performance and profitability to drive comparable changes across the wider life insurance sector. This is because as India’s dominant life insurer, LIC often sets the trend for pricing and policy terms."

"The country’s privately owned insurers have already been preparing for the prospect of future profitable growth opportunities, as premium growth continues alongside the government reforms of state-owned insurers (which include LIC’s IPO). In FY 2020, 4 of the 24 life insurers raised capital, and we expect more such transactions, as well as more M&A deals and IPOs. These will improve the Indian insurance sector's capital adequacy and financial flexibility in the months ahead," Moody's added in its research note.

Also, Moody's expects foreign insurers to continue investing in India's private insurers where the 49% foreign direct investment limit is much higher than the 20% allowed in LIC. It added, "Many global companies already present in India through joint ventures may increase their ownership stakes in their local affiliates."

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