LIC listing: Not in national interest

Listing LIC: Is it in National Interest?

Introduction: Life Insurance Corporation of India (LIC) has filed its draft red herring prospectus (DRHP) with SEBI on 13^th February 2022. 31.625 cr. shares of Rs.10 each, representing 5% of the total equity shares of 632.5 cr. shares of Rs.10 each, are being offered for sale by the Central Government, the 100% shareholder in LIC. The issue is expected to open in the second week and close by the third week of March 2022.  As per various newspaper reports, the government may raise Rs.54000-Rs.80000 cr. depending on the per share ‘offer price’ to be finalised. Going forward, in order to comply with SEBI guidelines on minimum public shareholding in listed entities as well as to achieve its fiscal disinvestment targets in PSUs, the government is likely to divest 10% of its total shares in LIC before March 2024 and 25% within five years.

Who can subscribe: The usual stipulations that not more than 50% of the offer will go to QIBs and not less than 35%  will be available for allotment to retail investors (with a cap of Rs.2 lac per investor) accompany the issue. To enable its policy holders and employees to subscribe successfully, reservation in allotment of shares is made for them at 10% and 5% of the net offer (with a cap of Rs.2 lac per investor). To ensure that the issue is subscribed fully, the government has also permitted FDIs to subscribe up to 20% of the net offer.

Strengths: Enjoying a monopoly status, ever since it was established in 1956, till 2000 and continuing its number one position for the last 22 years, with the second player even now at less than two digits in market share, the story of LIC is full of records, accolades and achievements. Some of them are mind boggling and do not appear to have a parallel anywhere in the world.

ü  Brand Value: Brand LIC is recognised as the third strongest and 10th most valuable global insurance brand by Brand Finance.

ü  Market Share: 64% in terms of premiums (Gross Written Premium- GWP), 66% in terms of new business premiums (NBP), 75% of number of individual policies issued and 81% in terms of group polices. Virtually all segments of life insurance business are dominated by LIC. The gap between LIC and the second largest insurer in India in GWP is the highest as compared to the market leaders in the top seven markets globally. LIC is ranked fifth globally in terms of GWP.

ü  Assets Under Management (AUM): AUM was Rs.39.6 lac cr. as on 30.09.2021. This is more than 3.3 times the total AUM of all private life insurers in India, 16.2 times more than the AUM of the second largest life insurance player in India and more than 1.1 times of the total AUM held by all Mutual Funds together. It is ranked 10th globally in terms of total assets.

ü  Investments: Rs.24.45 lac cr. is invested in state and central govt. securities, Rs.7.34 lac cr. are in equity shares and Rs.1.5 lac cr. is invested across MFs, debenture and bonds, real estate and subsidiaries. LIC and Pension funds are among the top three investors in govt. securities, the SCBs being the other one. Incidentally, LIC’s investments in listed equity represented 4% of the total market capitalisation of NSE as on 30.09.2021.

ü  Business through Agents: Approximately 1.35 million individual agents are employed by LIC as on 31^st March 2021 (accounting for 55% of total individual agents in India on that date, which is equivalent to 7.2 times of the agents employed by the second largest life insurer in India). Unlike private life insurers, where banc-assurance play a major role in NBP, the individual agents account for an average of 96% NBP business of LIC.

ü  Network: With branch offices at 2048 and satellite offices at 1554, LIC serves 91% of the total districts in India.

ü  Traditional Life Insurance Plans: Private life insurers make their profits with investment linked insurance policies.  However, even after 65 years of its existence, LIC depends on traditional life insurance plans for its GWP and NBP. Of the total AUM of Rs.39.6 lac cr. as on 30.09.2021, Rs.29.6 lac cr. are booked through traditional plans.

Significant changes/amendments to make LIC capital market worthy: Inspite of its strengths, LIC was not thought fully fit for listing in its present structure, as the parameters to attract investors in the primary and secondary stock markets are totally different. With the total surplus getting added either as bonus to policy holders or as dividends to the government, its equity at Rs.100 cr. was inadequate; solvency ratio at 165 per cent (IRDA stipulation 150 per cent) was much less than that of private life insurers. Two important changes were made by the government to make the net worth and business attractive for investors.

LIC was allowed to retain the surpluses that were otherwise paid to the government, in the last two years. LIC Act was also tweaked to bifurcate the single policyholders fund into participating and non-participating funds. Surplus from participating fund will be split in the ratio of 90:10 between participating policy holders and shareholders (as against 95:5 so far) and the surplus from non-participating fund will be 100% distributed to the shareholders.

The above changes enabled the following:

1.     Due to retention of surplus with itself, LIC’s equity base has improved from Rs.100 cr. as on 31^st March 2019 to Rs.6325 cr. as on 30.09.2021(622.5 cr. bonus shares (of face value Rs.10/-) issued to the government, out of total reserves in Sept 2021). Net worth (NW) has improved to Rs.8203 cr. as on 30.09.2021 cr. (It was Rs.991 cr. as on 31.03.2020)

2.     Embedded Value (EV) plays an important role in determining the price of a share of a life insurance company, when it goes for an IPO or FPO. While globally, life insurers are valued in the market at two times their EV, in India, the private life insurers stocks carry 2.5-3 times their EV.  EV is determined based on the net worth and present value of future profits based on expected growth in business.

3.     With the increase in the share to shareholders from participating fund (increased to 10% from 5% effective 2024-25) and non-participating fund (100% surplus belong to shareholders), Milliman Advisors, an independent valuer, has estimated the present value of future profits (PVFP) at Rs.5.47 lac cr.  as on 30.09.2021 (Rs.1.05 lac cr. as on 31.03.2021)*. Consequently, the EV of LIC (Mainly NW and PVFP) is valued at Rs.5.40 lac cr. as on 30.09.2021.
(*The advisor mentioned that had the surplus funds been not split up in the above manner, PVFP would have been Rs.1.25 lac cr. only as on 30.09.2021)

Likely Share Price: Depending on the multiples of EV to be arrived for calculating estimated market capitalisation value, the 'offer price' for the share will be determined.  If the multiple is taken at two times the EV, the market capitalisation will be Rs.10.8 lac cr. and the offer price may be fixed at Rs.1707.  If the multiple is taken at 2.5, then market capitalisation assumed will be Rs.13.5 lac cr. and the offer price may be at Rs.2133. The government will be able to raise Rs.54000-Rs.67000 cr. in the above scenario.

Will the response be overwhelming?: Though the likely price appears to be out of reach of small retail investors, still the retail investors along with policy holders and employees are expected to participate in large numbers. Of course, QIBs are expected to subscribe fully and so will be response from FIIs. However, I personally felt that formalities for splitting the shares into Rs.2/Rs.5 each could have been explored,  prior to filing the DRHP. And this would have ensured that the offer price is lowered, without diluting the total offer for sale amount, and thereby enabling many small investors/policy holders to become a shareholder of LIC. ( I am absolutely in dark as to whether SEBI guidelines permit this before an issue is offered in the market for the first time. It is only a stray thought)

Whether the decision to list LIC shares is in National Interest?

My views:

1.     In the last 65 years, more than any other PSUs, LIC is perceived to take care of all its stakeholders’ viz. policy holders, employees and the government. In order to ensure that LIC is valued on its inherent merits and also that the disinvestment targets are achieved, LIC act is amended to favour the shareholders at the cost of policy holders. Sharing the surplus in 95:5 split between the policy holders and the government was a unique selling proposition from LIC, as compared to private insurers that practiced 90.10 from the beginning. With LIC getting listed, there is no guarantee that no more changes will be made in the Act to favour the shareholders.

2.     Perception of LIC as a sovereign corporation (a symbol of utmost good faith among policy holders) played a major part in reaching an AUM of Rs.39.6 lac cr. as on 30.09.2021. As per  recent research report by UBS, nearly Rs.10 out of every Rs.100 saved by the households in India goes to LIC, which could not have come but for the sovereign status.

3.     At present traditional plans and single premium plans form a significant portion of the total business of LIC. In order to improve PVFP, the single premium policies may give way for regular premium policies. Investment linked insurance plans may replace traditional plans over time. At present single premium annuities are offered to the public, more with their welfare in mind. For example, LIC offers 7.4% return on its single premium annuity policies for the senior citizens. For the large population living in semi urban and rural areas, traditional plans are easy to understand and the need of the hour, as they want protection against unfortunate loss of life/permanent disability of the family breadwinner. Any shift from selling single premium annuity/ traditional plans in these areas may result in mis-selling, as the subscribers in such places might not be able to comprehend fully, policies packed with investment and insurance.

4.     97% of the business are contributed by 1.35 million agents. Change in business focus to investment linked insurance and regular premium plans, keeping profitability of shareholders in mind, may change their mindset, which so far was towards the welfare of the insured, than on the monetary benefits that will accrue to the shareholders. Bancassurance, as it helps in improving cost-income ratio, may slowly replace the individual agents in the long run.

5.     With its network, LIC covers 91% of the total districts in India. To address the insurance needs of the vast majority of the population, it is absolutely essential to continue to maintain LIC as a policy holder-welfare oriented organisation than maximising profits for shareholders.  As per CRISIL Report, protection gap viz. gap between insurance protection reqirements and amount actually covered in 2019 was 83% in India. This explains the need to continue the largest player as a fully owned government organisation that prioritises to plain insurance products than complex linked products.

6.     Many of the PSUs, that were listed including banks, do not command a market price they deserve, as the stock market continue to discount factors of government interference, as long the latter’s cap is more than 51% of total equity. SBI is a classic example and so are the other major PSBs, which command PE/PB ratios, not reflecting their results and, much less than their peers. The same may happen to the shares of LIC also.

7.     51% of shares held by the government in IDBI Bank were divested favouring LIC three years back. The bank came out of PCA and is making healthy profits in the last four-five quarters. But its current market price is no-where reflective of the excellent results posted in the last few quarters. The investment made by LIC at that time did not have an impact on the corporation, as it was unlisted at that time.  But any such moves in future to   bailout any PSU/private corporation with the funds of LIC,  will have a telling effect on the market price of LIC’s shares, to be listed shortly. This might affect government plans to disinvest in LIC up to 25% within five years from date of listing.

8. The government stands to gain by holding on to LIC fully, as its growth trajectory continues to be strong, healthy and promising. 75% of new policies sold in fiscal 2022 are to those who never had life policies before April 2021 and those in the productive age 27-40 accounted for 42% of the individual  policies sold in fiscal 2021.

9. This is an emotive issue as well. Why the government, the owner is desparate to disinvest in an entity, which never had to be rescued from tax payers' money, but used as a rescuer of other PSUs. The size of its AUM at Rs.39.5 lac cr. is equivalent to 18.5% of estimated national GDP for fiscal 2022.

V.Viswanathan

1^st March 2022.