The Life Insurance Corporation of India was seeded by the government in New Delhi, but nourishing the sapling to a colossus with ₹39.6 trillion ($525 billion) in assets under management — and more lives assured than Pakistan’s population — has fallen on generations of loyal customers. Which is why LIC’s upcoming initial public offering, India’s biggest ever share sale, raises a troubling question — will a cash-strapped State get greedy and end up shaking the money tree so hard that it stops bearing fruit for future policyholders?
LIC was born in 1956 after 25 private insurance players went bust in India in the decade after World War II. Alarmed by the destruction of savings in the newly independent nation, and impatient to expand coverage beyond a tiny urban affluent class, a socialist-minded government nationalised the insurance business, giving the State-owned firm just about $10 million in seed capital and an undisturbed monopoly.
The monopoly ended in 2000, but the moat remains intact. Even now, when it spars with nearly two dozen non-State rivals, LIC has a 64 per cent share of gross written premiums; it issues three out of India’s four individual policies and holds 4 per cent of all publicly traded shares in the country. The all-pervasive role that LIC plays in India’s financial life has made the IPO a contentious exercise.
To extract value from the national insurer, the government first had to create about $850 million in shareholder funds that LIC didn’t need; it did that by letting its dividends accumulate for a couple of years. Next, New Delhi will sell 5 per cent of this puffed-up stake to narrow a $213 billion hole in its budget. While the offer price is still undisclosed, the risk is that to make the sale appealing when investors globally are on the edge about US monetary tightening and the risk of war in Ukraine the government might sacrifice the long-term interest of small savers, the same people who actually funded the business and continue to make it tick.
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That controversy centers on embedded value, a measure used by the life insurance industry that combines capital and surplus accumulated in the past with the present worth of future profits from in-force policies. The IPO prospectus filed on Sunday pegged LIC’s embedded value at $72 billion. By tweaking its surplus sharing policy, the institution has given a fivefold boost to the present value of future profit in just six months. Still, critics claim that the exercise grossly undervalues the franchise, including a sprawling real-estate portfolio.
The economics is undoubtedly tilting toward investors. The share of investment surpluses accruing to participating policyholders will gradually reduce to 90 per cent by financial year 2025. Shareholders will claim the remaining 10 per cent in addition to the entire surplus generated by deploying funds from non-participating policyholders, such as those who buy term protection. Until recently, participating policyholders got 95 per cent of all surpluses.
As the IPO prospectus notes, the recalibration will bring LIC in line with its private-sector rivals, but it may also “reduce the attractiveness of our participating products, which could have an adverse effect on our business, financial condition, results of operations and cash flows.”
This loss of advantage may not matter to current customers, who are now offered a shot at being owners. Millions of new securities accounts opened last month in India as LIC policyholders hoped to get shares at a discount. A tenth of the IPO has been reserved for them. But even if a small section of the 282 million individual holders of in-force policies manage to get some allocation, future customers — many of whom are yet to be born — won’t be so lucky.
All too often in the past, India’s government has used LIC as its piggybank to buy shares in State companies nobody wanted or as a lender to the Food Corporation, which helps run the subsidised grain program. In late 2018, the central government dumped IDBI Bank in LIC’s lap after failing to find a genuine buyer for the bad loan-eaten lender.
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None of that has mattered because the population is young and underinsured. At $78, India’s insurance density, or premiums divided by population, has grown sevenfold over two decades, but it’s still a fraction of the $400-to-$500 levels in Malaysia, Thailand and China. LIC still has a long runway ahead — new money will keep pouring in to paper over any cracks from suboptimal investments.
The firm’s dominance will also be protected by the unrivaled reach of its 1.3 million-plus agents and 72 bancassurance partners, including many State-owned and rural banks. The insurer’s track record of paying out, which is better than that of its rivals, is another reason why it’s trusted.
At some stage, though, the loss of competitive advantage may bite. Even after paring its stake further in the future, the government is unlikely to take a hands-off approach. The institution will still be used as a stabilising device for broader goals that may not be aligned with customers’ interests. LIC’s army of agents may remain, but Gen Z customers may buy more financial services digitally, giving rivals a chance to catch up.
SBI Life Insurance Co., the No. 2 player, trades at three times its per-share embedded value. Applying the same metric, LIC’s post-IPO market capitalisation of $216 billion may put it slightly ahead of billionaire Mukesh Ambani’s Reliance Industries as India’s most valuable publicly traded firm. LIC is a flourishing money tree but as investors and the government try to pull it their way, the roots that have been kept alive by a trusting Indian middle class over six decades might start to dry up.
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