Did you know that Life Insurance Corporation of India (LIC) was an amalgamation of 245 entities, including 154 life insurers? They were bound by an Act of Parliament in September 1956, after some private insurers were found guilty of fraud. Today, more than 20 years after the private sector entered the fray, LIC still holds 61% of new premiums collected and over 72.5% of policies sold in the country.
That’s not all. LIC’s assets under management (AUM) of Rs 36.8 lakh crore is 20% higher than the AUM of the entire Indian mutual fund industry. This is also equivalent to nearly 19% of India’s GDP. And its equity investments, a small share of AUM, represent 4% of the total market capitalization of all stocks listed on the NSE.
Obviously, in terms of size and scale, it does not exceed LIC. And that may be where the challenge lies. The IPO is bound to set records in terms of size, retail subscription, etc., but can it go off without a hitch? This remains the big question.
CHALLENGES OF A MEGA IPO
LIC’s IPO, no matter what metric or valuation metric you use, will clearly be the biggest in India’s history. Most estimates, even the broad ones, would place the range between Rs 30,000 and Rs 60,000 crore. This is more than double the size of the IPOs of Paytm (Rs 18,300 crore) or Coal India (Rs 15,200 crore). Recovering such a large sum is necessarily a difficult task. This, especially as the proportion reserved for resident individuals of 35%, would on its own be almost the size of India’s earlier mega IPOs.
At the end of January 2022, India had a total of 8.4 crore active demat accounts. And it would take between a minimum of around 7.5 lakh (if each invests Rs 2 lakh) to over 2 million investors to complete the offering. To put this in context, Paytm has 10.4 lakh shareholders who have invested up to Rs 2 lakh. The number for Zomato is 7.9 lakh. We are therefore talking about a great leap forward for LIC.
Can LIC build up the frenzy to get a wide range of investors to subscribe? This remains the big question. It should be noted that LIC reserved 10% of its IPO for its 29 crore policyholders and 5% for its employees. The insurer’s policyholder base is huge and it has tried to get them to open demat accounts and take up the offer with the allure of a discount, but from what we learn its vast agency force has not yet been mobilized to generate subscriptions. This can be a critical factor in the success of his offer.
The other hurdle for LIC is that now is not the best time to tap foreign money, given that foreign portfolio investors have withdrawn funds from several emerging markets, including India, ahead of likely action by the US Federal Reserve to raise rates and tighten liquidity. It also hurt overall market sentiment.
Moreover, the life insurance business is not easy to understand and retail investors would find it difficult to assess its performance and valuation. Then there is also the company itself. While there are positives to scale and dominance, there are also concerns and triggers to weigh. Let’s take a quick look at some of them.
THE ADVANTAGES AND DISADVANTAGES OF LIC
What LIC clearly has going for it is its scale, dominant market share and the huge trust Indians have in the brand. In case you didn’t know, LIC is the No. 2 brand in the country after Tata. And that’s a big plus.
What is not really reassuring is the current nature of its activities and certain operating parameters, for which its market share provides information. While it sells 72.5% of policies in the country, its value share is 61% and its share of protection in individual policies is low, resulting in a share of only 17% of the total sum. assured. This makes LIC more of a seller of savings products than a provider of life insurance, and limits its profitability – its margins are about half those of its industry peers.
The nature of the products it sells, more par policies and limited ULIPs also impact its value share, making its value per policy much lower than its peers at less than Rs 1 lakh against nearly Rs 2.7 lakh for HDFC Life Insurance and Rs 2.3 lakh for ICICI Prudential Life Insurance. It also has an impact on employee productivity. LIC’s revenue per employee is around Rs 2.5 lakh compared to the median of the top 5 private insurers at nearly Rs 11 lakh.
Its marketing efforts are also skewed by an overreliance on its strong network of agencies, which is undoubtedly an asset but results in high commission payouts. In addition, there is little diversification and very little direct or low-cost online distribution. The latter became evident during Covid when his business was hit much harder than his private peers due to the lockdown.
Other areas of concern are how LIC might use its resources and whether it will act in the interests of minority shareholders. He injected Rs 4,743 crore into the IDBI Bank using the funds of the policyholders, and such other transactions to save situations where the government may need support are quite possible. In fact, the insurer is quite candid in its risk factors, stating that: “Our company may be required to take certain actions in furtherance of the economic or political objectives of the Government of India. There can be no assurance that such actions would necessarily benefit our company. “The interests of the promoter as the majority shareholder of our company could conflict with the interests of our other shareholders. We cannot assure you that the promoter will act to resolve any conflict of interest in favor of our company or the other To the extent that the interests of the Promoter differ from your interests, you may be disadvantaged by any action that the Promoter may seek to pursue,” LIC said last week.
In a nutshell, therefore, LIC has scale, but also operational challenges in terms of product mix and distribution that impact its profitability, although it is considering corrective actions to increase the share of non-peer products and sell policies through partners like Policybazaar.
LIC now has something to do with changes to its surplus distribution policies. Until recently, LIC had only one life fund, distributing the surplus to policyholders and shareholders at a ratio of 95:5. This has changed. The life fund has been split into a participating fund and a non-participating fund and from now on, 100% of the non-participating surplus will be allocated to shareholders and their 5% share in the participating fund will gradually increase to 10%. by fiscal year 2025.
This means that, from a profit perspective, LIC has an incentive to focus more on products with no face value (because 100% of the surplus goes to shareholders), and its profit margins will improve further by the end of the year. financial year 2025, with a higher share of the profit-sharing surplus. To give you an idea, on a stable basis, the present value of the new business margin (indicator of profitability for insurers) will improve to 12.3% from 9.9% with the change in the distribution policy. surpluses.
According to Credit Suisse, a 10% move from par to non-par can push the value of new business margin (VNB) up to 20% and increase absolute VNB to Rs 8,500 crore for FY2021, up from compared to the post-surplus VNB adjustment of Rs 5,199 crores. It’s a big leap.
Can LIC handle such a big change? This remains the important question. Competition can only send the message that its policies would become less attractive given the new surplus distribution policy. This is all the more so for outstanding products, but even for the participating products which are its mainstay. LIC itself admits: “Changes to our company’s surplus distribution policy could reduce the attractiveness of our participating products, which could adversely affect our business, financial condition, results of operations and our cash flows.
So while there remains a promise of better profitability to come, how much improvement remains a matter of judgment. The price of the IPO will therefore remain decisive in the reaction of investors. And here the government has its work cut out to balance the political implications of selling at a low price versus offering an attractive price to attract more investors.
I watch carefully how things are going.