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At 7.74 per cent gross non-performing assets (NPA) in FY21, India’s largest life insurance company – Life Insurance Corporation of India (LIC) – has the highest share of bad loans.
Top three private insurers in comparison posted near zero per cent bad loans last fiscal. Even when seen against asset quality of the country’s top seven banks, LIC’s gross NPAs remain the highest (see table).
Risky book
While LIC does not directly lend to Indian companies like how banks do, it invests in their debt instruments, which have the potential to turn bad. Jet Airways, Bhushan Steel and Dewan Housing Finance Corporation are some of the recent high-profile instances where LIC has exposure to debt instruments. That said, even historically, LIC’s NPAs have been the highest among life insurers.
However, in the context of its initial public offering (IPO), this factor needs to be viewed more sensitively. Recent, news reports say that LIC could be seeking a valuation of $8 billion or ₹60,000 crore. This works out to a price to embedded value of about 3x. Seen against the private sector’s average at 3.1 x (2.5x excluding HDFC Life), LIC’s asking rate appears to be at a premium (see table).
More pain ahead
Investors will also have to take note of ₹5,366 crore of likely hit to the financials that is likely to occur post listing. According to LIC’s draft offer document, investments worth ₹11,289 crore (₹24.7 crore of equity and ₹11,265 crore of debt instruments) forming part of the pension and group and life annuity funds need to be reclassified as ‘Other Investments’ and the value of these instruments reduced to ₹5,923 crore.
As per IRDAI norms, investments which have turned bad should either be sold down or transferred to the shareholders’ funds at amortised cost within 90 days of reclassification. LIC hasn’t done so and has sought time till January 31, 2023, to comply with the requirement.
With the option of sell-down appearing unlikely as stated by the life insurer, investors need to brace for a hit in profitability in the next fiscal.
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