By Andy Mukherjee,
Life Insurance Corp. of India was created by the New Delhi government, but feeding the sapling to a colossus with Rs 39.6 lakh crore ($525 billion) in assets under management – and more lives insured than the population of Pakistan – is fallen on generations of loyal customers. That’s why LIC’s upcoming initial public offering, India’s biggest ever share sale, raises a troubling question: Will a cash-strapped state turn greedy and eventually shake the financial tree so strong that it will cease to bear fruit for future policyholders?
LIC was born in 1956 after 25 private insurers in India went bankrupt in the decade following World War II. Alarmed by the destruction of savings in the newly independent nation and eager to extend coverage beyond a small, affluent urban class, a socialist-minded government nationalized the insurance industry, giving society a state about $10 million in seed capital and a monopoly.
The monopoly ended in 2000, but the moat remains intact. Even now, as it battles with nearly two dozen non-state rivals, LIC holds a 64% share of gross written premiums; it issues three of India’s four individual policies and owns 4% of all publicly traded shares in the country. The ubiquitous role that LIC plays in India’s financial life has made the IPO a controversial exercise, as has the privatization of Japan Post.
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To extract value from the national insurer, the government first had to create about $850 million in shareholder funds that LIC did not need; it did this by letting its dividends accumulate for a few years. Then New Delhi will sell 5% of that inflated stake to plug a $213 billion hole in its budget. Although the offer price is not yet disclosed, the risk is that, to make the sale attractive as investors around the world are on the brink of US monetary tightening and the risk of war in Ukraine, the government will sacrifice the long-term interest of small savers, the same people who actually funded the business and continue to run it.
This controversy centers on intrinsic value, a measure used by the life insurance industry that combines capital and surplus accumulated in the past with the present value of future profits from in-force policies. The IPO prospectus filed Sunday pegs LIC’s intrinsic value at $72 billion. By adjusting its surplus sharing policy, the institution quintupled the present value of future earnings in just six months. Still, critics say the exercise grossly underestimates the franchise, including a sprawling real estate portfolio.
The economy is definitely leaning toward investors. Participating policyholders’ share of investment surplus will gradually decrease to 90% by FY2025. Shareholders will claim the remaining 10% in addition to the total surplus generated by the deployment of policyholder funds. non-participating policy, such as those who purchase term protection. . Until recently, participating policyholders received 95% of all excess.
As the IPO prospectus notes, the recalibration will bring LIC in line with its private sector competitors, but it could also “reduce the attractiveness of our participating products, which could adversely affect our business, financial condition , our results of operations and cash flow.”
This loss of advantage may not matter to current customers, who are now being offered a chance to own. Millions of new securities accounts opened in India last month as LIC policyholders hoped to get shares at a discount. A tenth of the IPO is reserved for them. But even if a small fraction of the 282 million individual policyholders in force manage to get a benefit, future customers – many of them still unborn – won’t be so lucky.
Also read: Staged for LIC’s landmark IPO: Government files draft documents to sell 5% for around Rs 63K crore
Too often in the past, the Indian government has used LIC as a piggy bank to buy shares in state-owned companies no one wanted or as a lender to the Food Corporation, which helps run the subsidized grain program. At the end of 2018, New Delhi threw IDBI Bank Ltd. on the underwriter’s knees after failing to find a genuine buyer for the lender plagued by bad loans.
None of this matters because the population is young and underinsured. At $78, India’s insurance density, or premiums divided by population, has increased sevenfold in two decades, but is still only a fraction of Malaysia’s $400-500 levels, in Thailand and China. The LIC still has a long streak ahead of it: new money will continue to flow into the paper in the event of cracks due to sub-optimal investments.
The company’s dominance will also be protected by the unparalleled reach of its more than 1.3 million agents and 72 bancassurance partners, including numerous public and rural banks. The insurer’s reimbursement history, which is better than that of its rivals, is another reason it is trusted.
At some point, however, the loss of competitive advantage can bite. Even after further reducing its involvement in the future, the government is unlikely to adopt a hands-off approach. The institution will always be used as a stabilizing device for larger goals that may not be aligned with client interests. LIC’s army of agents may stay, but Gen Z customers can purchase more financial services digitally, giving rivals a chance to catch up.
SBI Life Insurance Co., number 2, is trading at three times its intrinsic value per share. Applying the same metric, LIC’s post-IPO market cap of $216 billion could put it slightly ahead of Reliance Industries Ltd. billionaire Mukesh Ambani as India’s most valuable listed company. There is no doubt that Life Insurance Corp. is a flourishing financial tree. But as investors and the government try to do so, the roots that have been kept alive by a confident Indian middle class for six decades may begin to dry up.