LIC in the time of Corona

We have seen the market impact of coronavirus on SBI Cards’ listing and there will be a question mark now on the other mega initial public offering (IPO) which is in the works — that of the Life Insurance Corporation (LIC).

The listing of LIC is being thought when it is still a pre-dominant player in the sector. This is just like in the case of the State Bank of India in 1993. Soon after, new private bank licenses were issued. We have seen that government decision-making wasn’t as astute in the case of both Mahanagar Telephone Nigam (MTNL), and Bharat Sanchar Nigam. These weren’t monetised at the right time, and don’t have much value left today except for their real-estate assets.

LIC’S maiden float, given the scale of its business and spread, provides an interesting opportunity for investors, but we have to see how the business gets defined once it is corporatised. It will have a bearing on the valuation to be derived thereafter, but it will be one of the mega-caps for sure.

In December 2003, China Life’s IPO of $2.5 billion attracted $80 billion of capital (or 20 per cent of the Chinese listed market capital). It had a huge impact on the capital markets— within a year, MSCI’S weighting for China doubled to 15 per cent.

It is expected that LIC’S IPO will face a pushback from all sides as in the case of Air India’s (AI) disinvestment.

But unlike AI, which is a difficult equity story to sell, LIC will turn out to be a gamechanger.

The state-run insurer ’s franchise and unique customeracquisition model is hard to replicate. It is the predominant reason for its dominant market share, two decades after the sector was thrown open to private players. No other state-run entity

— AI, Doordarshan or MTNL — has been able to retain market domination post opening up of a sector to private players.

The magnitude of LIC’S dominance is demonstrated by the fact that it manages upwards of ~25 trillion of policy-holder assets. This accounts for almost 80 per cent of the assets under management in the sector — roughly 12 per cent of India’s GDP. High policyholder trust with a claim-settlement ratio of 98 per cent has resulted in every three out of four policies sold in the country belonging to the state-run insurer.

This dominance is further strengthened by a strong distribution franchise of nearly

1.1 million active agents accounting for 50 per cent of the life insurance industry’s agency force — one of the largest on the globally. While the top five private insurers have cumulatively registered flat profitability over the period FY14-19, LIC has managed to consistently grow its profits. This can be attributed to its focus on traditional products which insulates it from volatile capital market cycles unlike top private players which focuses more on easy-to-sell unit-linked insurance plans.

Healthy premium growth led by a steady rise in awareness, innovative products, an evolving underwriting and aggressive distribution strategy has resulted in stellar performance by listed insurance companies in the past one year (HDFC Life: 48 per cent, SBI Life: 47 per cent and ICICI Prudential: 38 per cent). This has improved the attractiveness quotient of the sector from investors’ perspective. Also, the recent outperformance of differentiated state-run stories such as the Indian Railway Catering and Tourism Corporation post-listing, should provide a strong backdrop for LIC’S IPO.

In December 2003, Chinalife’s IPO of $2.5 billion attracted $80 billion of capital. It had a huge impact on the capital markets — within a year, MSCI’S weighting for China doubled to 15 per cent