LIC IPO is credit positive for India’s life insurance sector: Moody’s


Examining the impact of India’s state-owned Life Insurance Corporation’s IPO Moody’s Investors Service on Thursday said that the public issue is credit positive for India’s life insurance sector.

LIC IPO, which hit the market on Wednesday, will remain open till May 9.

By 10:30 am on Thursday, LIC IPO was subscribed 71 per cent. Policyholders’ portion subscribed 2.14 times, staff portion 1.31 times, retail investors subscribed 65 per cent of their allocated portion, QIBs close 33 per cent and NII lapped up 28 per cent of their portion.

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

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, Moody’s said in a report.

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, it said.

However, 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, said Moody’s.

According to Moody’s, 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 per cent of total assets, compared with, for example, 4.9 per cent for Ping An Life Insurance Company of China, Ltd.

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 more such transactions are expected, 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 also expects foreign insurers to continue investing in India’s private insurers where the 49 per cent foreign direct investment limit is much higher than the 20 per cent allowed in LIC. Many global companies already present in India through joint ventures may increase their ownership stakes in their local affiliates.

The price band of LIC IPO has been fixed at 902-949 per share and the government aims to raise over 21,000 crore by selling over 22.13 crore shares or 3.5 per cent of its stake.

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