It has been party time for companies launching Initial Public Offers (IPOs) in India, with markets rolling out the red carpet for even loss-making firms. But the IPO journey has been challenging for Life Insurance Corporation of India (LIC), despite being a dominant insurer and enjoying the instant brand recall that comes from a 65-year vintage and 40 crore customers. DIPAM, tasked with getting the IPO off the ground this fiscal, has had to parley with multiple detractors, before LIC could file its draft prospectus this week.
For a successful IPO, a private sector firm has to only arrive at an agreement between its promoters and public investors on offer pricing. But for LIC, which has ‘Yogakshemam vahamyaham’ (‘I will ensure the welfare and prosperity of all those who believe in me’) as its motto, a public listing means negotiating demands from multiple stakeholders to balance opposing interests.
For the Indian government, which promoted LIC with just a ₹5 crore equity contribution in 1956, it has been a model PSU. Unlike its loss-making brethren, LIC has scaled up on the strength of its own surpluses, rarely seeking the Centre’s financial support. Therefore, the government’s keenness to list LIC stems as much from its need to prove its reformist credentials, as to fill the budget gap.
Mandated to parcel out its surpluses in a 95:5 ratio between policyholders and the government, LIC has traditionally paid out the bulk of its annual surpluses, as bonuses and payouts to policyholders, while distributing ₹2,600 - ₹2,700 crore to the Centre. The payouts are loosely termed dividends, but are actually quid pro quo for the sovereign guarantee backing all LIC policies.
LIC’s capital structure and profit-sharing formula however, needed to change ahead of its IPO, as they were becoming a sticking point with investors. Compared to the solvency ratios of 200-400 per cent and comfortable capital cushions maintained by many private insurers, LIC was making do with a ₹100 crore equity base and a solvency ratio of 165 per cent (IRDA mandates 150 per cent) to support policyholder assets of ₹39.5 lakh crore.
To remedy this, LIC has been allowed to skip payouts to the government for the last two years. The surpluses have shored up its equity base from ₹100 crore to ₹6325 crore, reserves from ₹628 crore to ₹1,436 crore and solvency ratio from 165 to 183 per cent (by September 2021).
A tweak in the LIC Act has also paved the way for the switch from a 95:5 surplus sharing between policyholders and the government, to a 90:10 split between policyholders and shareholders, including the government. Over 20 amendments to the LIC Act were also pushed through in last year’s Finance Bill, to transition it to a corporate structure and tone up governance. In its first set of financial results for the six months ended September 2021, LIC reported net profits of ₹1,436 crore and an earnings per share of ₹2.27.
But this may not be enough. If LIC’s public shareholders demand a bigger pound of flesh, it could mean sacrifices for both the government and policyholders.
It is LIC’s 30 crore policyholders, who have actively bankrolled LIC’s growth. In FY21, LIC received ₹4.02 lakh crore in premium income and paid out ₹2.86 lakh crore to policyholders, with a majority of payouts being maturity proceeds on investment plans (₹1.67 lakh crore) rather than death claims (₹23,776 crore).
This points to LIC’s business mix being quite different from private insurers. Compared to the market-linked products that are bread-and-butter for private players, LIC’s business has been built mainly on traditional participating plans, where it is obliged to pay an annual bonus to policyholders out of the surpluses in its life fund. Of LIC’s ₹39.5 lakh crore assets, ₹29.6 lakh crore belonged to traditional plans. Post IPO, if shareholders demand that LIC retain more of its surpluses to reward them, it may need to trim its historically high bonus rates to policyholders or payouts to the government.
As a sweetener to this transition, the Centre plans to reserve 10 per cent of its IPO for LIC’s policyholders, with a massive mobilisation to get them to open demat accounts.
However, policyholders can look forward to other positive spin-offs from LIC’s listing. With large coffers at its command, LIC has traditionally been roped in by the powers-that-be to help ‘public’ causes such as PSU disinvestment, infusing capital into PSBs and even sometimes bailing out troubled entities such as IDBI Bank. A market listing, by bringing greater public scrutiny into LIC’s investment actions, can help it make more autonomous decisions.
This is why seasoned investor and corporate finance expert PV Subramanyam describes LIC’s IPO as a ‘fantastic move’ by the government.“Even if only a small stake is shed, LIC’s listing will bring greater public scrutiny into its investment decisions and portfolio. LIC’s top management and fund managers will be able to act independently and take purely commercially-driven decisions.”
Good customer service and a strong claims settlement record (98.3 per cent) are significant contributors to LIC’s popularity. To sustain business-as-usual post-IPO, LIC needs the buy-in of its one lakh-strong workforce.
But All India Insurance Employees Association (AIIEA) has long opposed the government diluting stakes in LIC, because it sees no real need for it. Shreekant Mishra, General Secretary of AIIEA argues — “With a ₹5 crore initial equity contribution, LIC generates ₹3.5 to 4 lakh crore in annual surpluses and doesn’t need external capital.
It distributes ₹2,600-2,700 crore annually to the government. Nor is listing needed to boost LIC’s brand value, as it already enjoys enormous trust and goodwill among investors.”
To get employees on board, the Centre approved long-pending wage revisions last year. To allay privatisation concerns, it introduced provisions in the LIC Act that require the government to hold a minimum 75 per cent equity stake for five years after the IPO, and 51 per cent thereafter.
But employees remain skeptical. Mishra says, “With public sector banks and general insurers too, the government began with minority stake sales, but is now openly talking of privatisation. Though transparency is said to be the main objective for this IPO, we feel that transparency in LIC’s divestment process has been compromised by passing amendments to LIC Act through the Finance Bill and the lack of clarity on LIC’s valuation”.
With over 90 per cent of its new business sourced through individual agents against less than 25 per cent for private players, LIC’s depends overwhelmingly on its 13.5 lakh strong agent-force to grow its business. It is to the agents’ credit that LIC’s customer base of 28.6 crore individual policyholders is yet to be rivalled by either the mutual fund industry (12 crore folios) or the stock market ecosystem (7.5 crore demat accounts). But there are worries that LIC is lagging in the bancassurance and online channels used by private insurers to woo millennial investors. LIC’s focus on traditional, single premium products — while private insurers sell slickly packaged market-linked plans, guaranteed return plans and term covers to first-time buyers — is hurting its share of new buisness too. A recent Kotak Institutional Equities report shows that on an adjusted premium basis, private players increased their share of individual policies from 37.9 per cent to 63.5 per cent between FY14 and FY22, while LIC ceded share from 62.1 to 36.5 per cent.
To remedy this, LIC has been inking bancassurance tie-ups in recent years and on the eve of its IPO, signed up with Policybazaar, a leading web aggregator, to list its products. But this pivot may require big adjustments on the part of LIC’s agent force.
Financial and business metrics apart, a key variable that will swing investors for or against the LIC IPO, is the price at which they’re being offered shares. Shares of insurance firms in the market are valued based on their Embedded Value (EV) and expected growth in new business. EV captures the current and future value of all the profits an insurer expects to make for its shareholders on its business in force.
Unlike private insurers, LIC has not attempted to estimate its EV in the past and only recently commissioned independent valuers to undertake this exercise. LIC’s EV calculation is rendered trickier by its unconventional investments in real estate and subsidiaries. A DIPAM official was recently quoted by Reuters placing LIC’s EV upwards of ₹5 lakh crore, while analysts estimate the EV of private players such as SBI Life and ICICI Pru Life at ₹35,000-40,000 crore.
While globally, life insurers are valued at one to two times EV, Indian insurers have enjoyed EV multiples of two to four times. There are now conflicting views on whether LIC can hope to secure similar multiples.
Dhananjay Sinha, Managing Director and Head Strategist at JM Financial, explains that the higher multiples are based on the low penetration of pure term covers and pension products in the country, demand for which will grow with financial savings. But this may not automatically translate into higher market multiples for LIC.
Mr Sinha says, “As an IPO investor, I would view the size of LIC’s assets, its market share, sovereign guarantee and agent force as key positives, while government control and a product mix skewed towards traditional plans, are minuses. State-owned enterprises tend to trade at sub-par valuations compared to private players”.
Even if LIC rides on the euphoria to successfully conclude its IPO, it will have to learn to juggle many balls in air, to deliver on its motto of securing the welfare of all who depend on it.