As the Clock Ticks Towards LIC IPO, What Policyholders Should Consider

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Chances are, you or a family member of yours holds an LIC policy. At 40 crore insurance policyholders, LIC covers almost 30% of the Indian population, and in that capacity manages to play a unique socio-economic role that is unmatched by any other institution not just within India but globally as well.

Consider, for instance, that the insurance monolith, despite facing competition from 23 private life insurers, still commands the lion’s share – two-thirds – of the premium income earned segment. If that’s not all, three-fourths of all life insurance policies in India come from LIC. In FY21, its premium income clocked in at a mammoth Rs 4.03 lakh crore and it has over Rs 38 lakh crore assets under management. After the Indian Railways, it is the second largest owner of land in India. Its real estate portfolio alone, valued at prevailing market rates will run into thousands of crores.

To whom does LIC owe its unparalleled growth trajectory? If you think it is the Indian government, then think again. After the initial capital of Rs 5 crore in 1956, the government hasn’t contributed much. Sure, in 2011, the equity capital of the government was expanded from Rs 5 crore to Rs 100 crore but even this move was pulled off on the basis of funds generated by the LIC.

Since 1956, it has been India’s small and marginal households, especially those in rural areas that have in essence been the thrusters behind LIC’s meteoric rise. While LIC has 1,037 branches in Tier IV cities and towns, private sector insurance companies have pathetic rural area coverage of just 107 offices.

That the village demographic puts its faith in LIC is substantiated amply by the numbers: In FY21, 15% of all new business of LIC amounting to Rs 92,000 crore stemmed from rural areas. This is because LIC carries the yoke of providing social security cover to low-income households. When private sector insurers’ average ticket size has been in the higher range of Rs 75,000 to Rs 89,000, LIC’s average ticket size is in the Rs 16,000-Rs 23,000 range.

Indian markets have been eagerly awaiting the blockbuster IPO of LIC given its importance, its size and the singular position the institution occupies in the Indian business ecosystem.

Meanwhile, a citizen’s platform named Peoples’ Commission on Public Sector and Public Services has raised a number of red flags urging the government to “pause and ponder ” over the concerns raised by them with the seriousness they deserve.

LIC disinvestment is against policyholders?

The latest amendments to the LIC Act have reduced the policy holders’ minimum share in the corporation’s profits from 95% to 90%. The commission argues that this is an indicator of the way the policy holders are going to be treated in the coming years and that they stand to lose much more in the course of the disinvestment.

“95% of LIC’s profits come back to the policyholders. It is they who have funded LIC’s phenomenal growth over the decades. LIC and its policy holders have a symbiotic relationship, each having a huge stake in the other. In the normal course, therefore, it is they who should play the pivotal role in determining the trajectory of LIC’s future growth,” the commission has said.

It added that the government responding to the “public outcry against the shabby treatment meted to the policyholders” sought to neutralise the damage “by offering them a measly window of 10% in equity, whereas they ought to be owning the LIC fully”, the commission states.

LIC’s character could be dramatically altered

The amendments to the LIC Act in 2021 provide for the government’s equity share in the LIC to remain not less than 75% during the first five years after the IPO. After the period of five years, according to the finance bill, the stake is to remain “at all times, not less than fifty-one percent”. As per media reports, 20% of the stake will be set aside for foreign investors. The commission argues that the disinvestment of LIC can lead towards private investors gaining a controlling interest and subsequently determining the direction LIC can take after five years.

“For example, the new private entrants into LIC could demand that the present arrangement of 95% (since the threshold already lowered to 90% in the recent amendments to the LIC Act) of the profits being shared with the policy holders be altered. The composition of the policy holders may also progressively shift in favour of those with bigger ticket-sized policies, which would undermine and subvert the cause of life insurance in a poor country like India… In short, the LIC’s character as an instrument of the State for fulfilling its welfare mandate will get progressively diluted, and its activities will be driven largely by profit-seeking investors. In the ultimate analysis, it is the smaller policy holders who will lose in the bargain and the wealth created by the LIC will gradually shift into the hands of a few affluent investors,” the commission states.

No set parameters on valuation of LIC

The commission questions the methodology of valuation of the IPO. As per media reports, IPO valuation is estimated to be Rs 15 lakh crore and the “embedded value”, which is the statistical measure of investors’ interest in an insurance company, is Rs 4 lakh crore.

The commission has argued that in the specific case of the LIC, the task of valuing it is far more complex and challenging, as its “activities are multi-dimensional, its benefits, both tangible and intangible, enormous”.

The commission states that the “embedded value” as assessed by the valuation adviser appointed by the finance ministry is “a highly restricted estimate of the “statistical measure of investors’ interest in an insurance company” which is based on the financial returns and risks associated with the LIC. The embedded value of Rs 4 lakh crore for LIC, as per the commission, is “patently erroneous and a gross underestimation” and the disinvestment will send out a misleading message that the “LIC’s vast social capital along with its financial wealth will is being offered on a silver platter”.

It also raises the thorny issue of how the valuer plans on determining the market value of its vast land assets not to mention the intangible assets that also need to be accounted for in the valuation.

Will the disinvestment enhance profitability and efficiency?

The government has time and again chimed in that disinvesting LIC will help improve its profitability and efficiency. The commission contends that this is a fallacious argument given that the efficiency of a life insurance company is measured by claim settlement performance.

“By this measure, the LIC is not just better than its private peers, but is among the best in the world. For the record, the LIC has been settling more than 99% of the claims. The fact that the percentage of claims repudiated by LIC is far less than its private sector rivals is proof that it needs no private participation to improve its performance.”

Data from IRDAI does validate the fact that LIC’s operational expenses are healthier vis-à-vis private insurers. The regulator’s annual report for 2020-2021 states that operating expenses of LIC are at 8.68% of its total premium income, whereas the same for private sector life insurers is at a troubling 11.72%.

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