With the Budget announcement setting off the process for listing insurance behemoth LIC, the life insurance space is buzzing with activity. LIC has delivered a robust performance over the past year, gaining substantial market share. A huge investment book of ₹31-lakh crore, and strong agency network comprising about 12 lakh agents, is a big positive for the insurer, slated to hit the primary market in the end of FY21. MR Kumar, Chairman, LIC, told BusinessLine in an interview that arriving at a proper valuation, keeping in mind the size and structure of the organisation, will be critical. Excerpts:

With the proposed sale of the government’s stake in LIC, all eyes are on the upcoming IPO, slated to be one of India’s largest IPO yet. How is the process coming along? Will LIC hit the primary market in FY21?

We are in the process of initiating the work on the IPO. Topmost on the agenda is to arrive at a proper valuation keeping in mind the size and structure of the organisation. The government has to kickstart the process and we will be taking it forward. It is still early days to lay out a concrete timeline for the IPO process. But indications from the government suggest that it could be slated for the second half of FY21. Importantly, since LIC is governed by the LIC Act, before the IPO process, the Act will have to be amended.

 

What are the key sections that need to be amended in the Act?

There are three key sections that are under focus. One, under Section 37 of the Act, the sum assured including any bonuses declared is guaranteed by the government. It needs to be seen if this is retained, though the government has stated that the sovereign guarantee will continue. Next, Section 28 of the Act that deals with the manner of distribution of surplus will need to be reviewed. Currently, LIC pays 95 per cent of the surplus to the policyholders and 5 per cent to the government (other insurers have to follow a 90:10 distribution). With the listing of LIC, this may need to be reviewed, as there will be other investors that come into play.

Section 24, which states that ‘the Corporation shall have its own fund and all receipts shall be credited thereto and all payments shall be made there from’, may also need a re-look. Whether there will be a separate fund or a composite fund going ahead needs to be seen. Then the capital and solvency structure of LIC needs to be changed. Currently, the capital is only ₹100 crore (as per Section 5(1)).

A chunk of LIC’s products are traditional policies. Diversification will be imperative post the IPO for scale and profitability. How do you plan to expand your product portfolio?

We will be looking at diversifying the portfolio. But it is still early days to comment on the overall strategy as various factors have to be taken into consideration. But, importantly, we will want to drive profitability through persistency — the number of policies (or amount of premium) retained with an insurer across different time periods. A healthy 61st month persistency for instance is a critical factor.

What are your flagship products currently?

Our endowment plans, New Endowment, Jeevan Anand, Jeevan Labh and Jeevan Laksya, are our best selling products and doing very well. We had also launched Aadhaar based products — Aadhaar Shila (for women) and Aadhaar Stambh (for men) with a maximum sum assured of ₹3 lakh. They are also doing well. Then we have our annuity products — predominantly Jeevan Shanti. So, our portfolio is split equally between endowment and annuity. But if we include our pension and group schemes portfolio, which includes group schemes and superannuation business, it has collected over ₹1-lakh crore premium income during the current financial year.

The new tax regime does away with most of the exemptions. Given that LIC has a savings-heavy portfolio, what will be the impact on your sales?

While in the past the tax saving pitch has been used to sell insurance policies, I believe that the market today is a lot more mature. Many people do not have taxable income (PF etc already covering most of the exemptions under 80 C). High networth individuals do not need exemptions. Low-income salaried rural people also do not need it. And hence people claiming these exemptions are a smaller proportion. I believe the time has come to wean people away from the tax-saving pitch. We do have Section 10 (10D), where maturity proceeds are tax exempt, which is a big incentive.

If we look at LIC’s investment portfolio, the proportion of State Development Loans (SDL) is relatively higher (about 30 per cent) than other private players (about 6 per cent). Any particular reason for this?

So much of this is legacy book, where, in the past, State governments used to approach directly for funds. But now it’s on the platform and one has to bid for it. And hence the rates are very competitive. Our volume appears to be relatively big only because of our legacy investments.

For the September quarter, the book value of LIC’s investments downgraded is about ₹23,000 crore. Since there are no prescribed guidelines for provisions to be made by insurance players, what is the norm that LIC follows? Also, at about ₹30,000 crore currently, the gross NPA is about 6 per cent of debt portfolio...

Once there is a default we recognise it and make provisions accordingly. On downgraded investments we make provisions based on our prudential assessment of the risk. One thing that has changed drastically, thanks to IBC, etc, is the focus on recovery. Also, the right way to look at the NPA figure would be on an overall basis. While the gross NPA is 6 per cent of our debt portfolio, on the entire ₹31-lakh crore of investments, it’s just about 1 per cent. The net NPA after provisions is only 0.04 per cent. This is the right figure to look at because unlike banks who are in the business of lending, we mostly have investments, of which over 60 per cent is in government bonds.

In the current financial year, we made equity investments of about ₹49,406 crore and debt investments of about ₹57,000 crore. We made a gain of about ₹24,000 crore on equity investments this year.

After acquiring a 51 per cent stake in IDBI Bank, have you been able to strengthen your bancassurance model? How many policies have you sold through IDBI Bank this year?

Of the 1.96 crore policies sold so far this year, about 57,640 policies were sold through IDBI Bank, amounting to premium of about ₹600 crore. Overall, our premium through bancassurance has been around ₹1280 crore, so the contribution through the IDBI Bank channel has been very significant in just the first year of sale. The bancassurance channel is around 3.5 per cent of the premium.

How long do you plan to stay invested in IDBI Bank? Any plans for disinvestment?

For now the Centre is planning to divest its stake in the bank. We will wait for a couple of more years to take a call. We will wait for the right value and then consider selling off our stake. We do not plan to hold the stake for a very long time. The timeline will depend on the guidelines from the RBI and IRDAI.

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