Easier said than done: Complexity of listing LIC, India's top life insurer

Variegated ownership, a size more than Budget 2020-21, a difficult-to-determine valuation and a slew of other factors make the LIC sale a herculean task

The government announced in  the annual Budget for 2020-21, that it would sell a part of the sexagenarian state-owned life insurance company, the Life Insurance Corporation (LIC) of India an other financial-sector entities, as a part of its disinvestment programmme. It expects to earn a substantial revenue of Rs 90,000 crore, or 5.5 per cent of its receipts, from the sale of these financial institutions. This is a tad lower than what it expects to collect from the two largest state-owned petroleum companies (one has already been sold) put together. 

But selling a part of a company that is wholly-owned by the government and insurance policyholders, and which has never tested the waters of the open market, isn't going to be an easy task, either for the officials on LIC's board of the LIC, or the department of financial services in the finance ministry. 

The herculean and never-tried-before exercise of ascertaining LIC's value, and the uncertainty uncertainty that accompanies it makes the task all the more difficult. A strong tilt towards policyholders that reduces the profits available for shareholders, the heavily-skewed product mix in the favour of single premium plans and against unit-linked policies, disproportionate market share, are only the few, albeit important factors that will determine how the sale goes. 

Life insurance in India: a brief history

The insurance market in India after independence largely catered to the rich class. Though there were several companies in fray, and a few laws in British India to structure India’s insurance market, insurers were more or less outside the ambit of the Indian government's control. The first law in independent India came in 1950, which removed the principal agencies and gave control to government. 

In order to further take the insurance business to the nooks and corners of the country, the government nationalised insurance business in 1956, absorbed more than 240 private insurers, consisting of Indian- and foreign-owned firms, and provident societies, to give birth to the LIC of India. 

For about 40 years, the insurance market remained state-owned. Things moved quite slow back then, too: a committee was formed under former Reserve Bank of India governor R N Malhotra in 1993. It was only a decade after liberalisation ushered in the 1990s, that in 2000, India got its insurance regulator, the Insurance Regulatory and Development Authority (initially IRA, later changed to IRDAI). 

Along with it, ICICI Prudential became the first private life insurance firm, and IRDAI allowed 26 per cent foreign direct investment (FDI) in India. Today, there are 23 private life insurers in India with a total annual premium size of Rs 1.7 trillion. 

Despite this, LIC still enjoys a market share of nearly 70 per cent in India’s life insurance sector, with a premium size of Rs 3.4 trillion. The sale of a part of LIC would be the first attempt to actually make the private sector—at least indirectly—the majority stakeholder in the insurance business in India. 

And to top it alll, LIC is continuing its streak of bailing out sick Indian companies, the latest of which was IDBI bank, in which it acquired a controlling share a year ago.

Mammoth size, mammoth task

Then comes the size of LIC. The balance sheet of LIC stands at Rs 31 trillion, of which, Rs 28.7 trillion (93 per cent) is contributed by more than 280 million life insurance policies (the number of policy holders would be slightly lower). This is more than the size of annual Budget of the central government, which is pegged at Rs 30 trillion for FY21!  

Though the sheer size poses a challenge, several experts view that this size, which is mostly made up of assets under management, does not indicate the “value” of the company. 

Assets under Management (AUM) is not the correct metric to value LIC or any other life insurance company for that matter, says Sandeep Ghosh,  Partner & Leader - Financial Services Advisory at EY India.

The value of LIC would have to be arrived at by looking at multiple factors. The first is the embedded value (EV) of its business which stems from the present value of the future profits of the current book.

The second is the value of new business which is a reflection of the profitability of the products. Besides these factors such as growth in business, market share, sovereign guarantee, the strength of the brand will also be factors to be considered, Ghosh adds.

The fact is that the valuation of any insurance company is a fairly complex exercise and more so in the case of LIC,” he told Business Standard.

Here comes the role of actuaries, and experts are saying that valuing LIC would be one of the most complex actuarial exercise undertaken in India. 

“Finding the valuation of LIC accurately is not the job of investment bankers or financial strategists but certified actuaries,” an insurance analyst who did not wish to be named, said. 

Then comes the critical issue of product mix, which has an impact on LIC's profitability. Private companies have innovated their insurance products better, and in principle, stand to give better value for stakeholders, basic data shows. 

For example, the share of surplus that LIC allocates to its polic yholders is 95 per cent in participating products, as against the 90 per cent norm designed by IRDAI, and followed by most companies (this giving a better return vis-a-vis any other company with similar profitability). Private companies allocate 90 per cent surplus to policyholders, and remaining 10 per cent to stakeholders. LIC keeps only 5 per cent pie for stakeholders. 

In addition, LIC is more aggressive in offering participating products than private listed players such as ICICI, HDFC and SBI. 

Secondly, LIC still markets more single-premium policies, and a small piece of data proves it. The share of LIC in new business premium of regular premium policies is 43 per cent (private: 57 per cent), while that in the new business premium in single premium policies is a staggering 83 per cent (private: 17 per cent). Single-premium policies, in fact, formed a third of total premium raked in by LIC in FY19. The share of such policies for private players was merely 18 per cent.

The benefits available to policy holders in single-premium policies are very small, and limited in comparison to regular premium policies.

Finally, most of the business of private insurers is carried out through bank channels, which is not the case with LIC.

The state-owned insurance king has an authorised assortment of more than one million agents, who channelise premium funds to the company. This brings us to the yet another important aspect of LIC, which is reach, and the strength of the distribution network. 

From the top—corporate customers—to the bottom—low income households—in the income strata, LIC is ubiquitous. Though no expert or even life-long LIC officials may not be able to comment on how the listing or the public offering would go, accurate valuation and policy changes to improve profitability would most likely help. 

But one thing is clear: the enormity of the task is unmatched