Assets Under Management AUM

LIC’s IPO price may value it unless Reliance, TCS

Mumbai: The government is likely to price Life Insurance Corporation (LIC) more conservatively than some analysts previously estimated. In fact, some had even predicted that it would be India’s most valuable business.
While the valuation will be several lakh crore rupees, it will be single digit, which will place it below companies like Reliance Industries (Rs 16 lakh crore) and TCS (Rs 13.8 lakh crore). However, even on a cautious assessment, the initial public offering (IPO) would be the largest in the country.
To encourage policyholders to participate in the IPO, LIC would issue shares at a discount to clients. The company is keen on policyholder participation because in the future there will be a change in the distribution of surpluses. Currently, the company only distributes 5% of its surplus to shareholders against the 10% allowed, with the rest being distributed to policyholders. Cautious pricing would reassure retail investors.
Actuarial firm Milliman has submitted its report on the intrinsic value of LIC, which will serve as the basis for pricing. According to sources in the insurance industry, comparing LIC’s assets under management (AUM) with those of private actors would give it a disproportionate valuation. This is because a large portion of the company’s funds represent guaranteed return plans, group insurance funds, and employer pension funds. The margins of these companies are extremely low.
Currently, SBI Life Insurance, owned by the State Bank of India, has a market capitalization of Rs 1.2 lakh crore against assets under management of Rs 2.4 lakh crore. LIC has assets under management which are almost 15 times higher. This has prompted many people to assign a value of over Rs 15 lakh crore, which is too optimistic, according to actuaries. The company is likely to include the intrinsic value report in the draft red herring prospectus, which it will file by integrating the results of the first half of the year.
In the past, when the government set ambitious pricing for public sector units like General Insurance Corporation and New India Assurance, LIC had to step in and support the problem. This time, the success of the show will depend only on market demand.