Private insurance stocks under pressure as LIC IPO approaches

The stock market debut of Life Insurance Corporation of India (LIC) next month is expected to raise about $8 billion. This IPO news has sent shares of other insurance companies lower. The insurance and financial market experts believe that this major IPO could drag down the stocks of other insurers for around a year.

On Sunday, the Government of India had filed draft papers to liquidate up to 5 pc of their shares in the insurance giant LIC shares. This IPO is going to be the third-largest IPO globally from the insurance sector.

Why Investors are making room for the LIC IPO?

As the fund managers acknowledge that this IPO is going to be India’s biggest-ever offering, they also find it a little weird that the LIC was not listed on the stock exchanges for such a long time. Historical data shows that the market leaders from any specific industry are the first ones to get listed on the stock exchanges.

LIC, without a doubt, is India’s largest insurance business, with more than 280 million policies. LIC has launched 66 years ago and it’s been in the business since then. In terms of premium collected, LIC is the fifth-largest insurer in the whole world.

Until Sep 2021, the LIC had assets under management of around Rs. 39.50 trillion. With 60% of the market share, LIC is the insurance market leader. Other private insurers hold only about 10% to 11% market share. Naturally, an investor or a fund manager would prefer owning the shares of the market leader.

What are Investors / Fund Managers Upto?

Fund managers and other investors have started reducing their exposure to listed private life insurance businesses such as HDFC Life, or ICICI Prudential. This is likely because of the LIC’s since the selling began after the LIC IPO news was seen inching forward.

Since the beginning of 2022, the shares of ICICI Prudential have fallen by over 10 pc, while those of HDFC Life and SBI Life has tumbled by 6% to 9%. The LIC IPO could dilute about 60 percent of the free-float capital of the three largest life insurers, according to a Macquarie report.

Key Takeaways

If the LIC IPO is successful, the pressure on other insurers could widen, affecting consumer goods firms and non-banking financial companies. However, some fund managers believe that the influx of new listings usually dilutes the market’s liquidity and it is a normal principle on which the financial markets operate.

FAQs

What are key takeaways about the LIC IPO from a retail investor’s angle?

The LIC IPO is a great opportunity for retail investors. However, before the company goes public, it should make some changes that will make its investors more comfortable. LIC is well-prepared for the IPO. If its performance improves, then its shareholders will not be worried about the company’s financial performance.

What could be the reasonable valuation multiple for LIC?

The LIC valuation multiple could be about 2.5 times. At this reasonable valuation, they can generate new business at a fast pace. If the company can increase its business at a faster pace, then its valuations should continue to increase.

What will be the impact of reducing the business share of LIC on its share in future?

LIC needs to become more efficient in order to maintain its valuations and grow its market share. It should also have a stronger client base and a better product mix. A successful company should have a good foundation, solid management, and good execution. It should not be focused on market share, as it should also analyze its operations and risk management.

Disclaimer: This blog is exclusively for educational purposes and does not provide any advice/tips on investment or recommend buying and selling any stock.