Why LIC's Mega IPO May Not be a Simple or Smooth Ride

While Sitharaman is hoping to see appetite for the LIC issue from FIIs, the public sector behemoth will have to sort out a few messy issues first.

Struggling to meet her government’s disinvestment target, in a surprise move, finance minister Nirmala Sitharaman announced that the Life Insurance Corporation of India (LIC) would be listed on the stock exchanges. The expectation so far has been that selling a part stake in this insurance behemoth would raise enough funds to meet the equally tall divestment target of Rs 2.1 lakh crore for the Modi government in FY’21. Of that figure, a partial stake sale in LIC is expected to raise as much as Rs 70,000 crore.

Indeed, the country’s largest institutional investor and the largest insurer, LIC, is the market leader in the life insurance industry both by premium collected, as well as the number of policies sold. But what’s the real story behind LIC?

Till the year 2000, the public sector behemoth enjoyed a complete monopoly. Interested buyers would reach out themselves. It functioned through a massive army of agents – close to 10 lakh active agents exist for LIC by some industry estimates.

The private players had a late start. But like most lean private machines, they made up for lost time with aggressive marketing and an extremely focused outreach strategy. They had neither a customer base nor a web of agents. So, they directed the bulk of their efforts through the banks they were allied with – for example, HDFC Life Insurance pushed its products through HDFC Bank. Same for SBI Life.

Ironically, with potential access to a huge universe of PSU banks, LIC did nothing. As a result, private insurance companies today hold over 80% of the top end market that has been made accessible through bank outreach strategies.

Also read: The Disinvestment Clock Starts Right Now for the Modi Government

In a scenario where 50% of the insurance industry contribution comes from banks, LIC neither participates nor tries to garner that market – 97% of its business comes from agencies and a measly 3% from banks. Agents themselves are a failing mechanism with very poor conversion and earnings potential. As one industry watcher pointed out, the agents are worse off than Uber and Ola drivers. With no access to the higher economic strata and a lack of novel products to pitch, this massive pool of agents is now a beast of burden for LIC.

There’s also a very poor product mix at play. In the insurance business, pure term covers (that focus on mortality and morbidity) are the highest margin business. Even in the lower end participating products, there’s a higher profit sharing ratio in case of private players. So it’s a poor business mix and a highly inefficient way of getting to potential buyers.

As history shows, LIC has always put in minimal effort coming off its history of being a monopoly and a government-owned company .

The rising exposure of LIC to companies facing a liquidity crisis has also been a cause of concern. Just one example illustrates this clearly: LIC is today the biggest shareholder in Yes Bank, which has gone through a major crisis, with an 8% stake.

Gross bad loans for LIC jumped almost five times in the last eight years through FY’19 to as high as 6.15%.

Analysts also believe its non-performing assets or NPAs may inch up further in FY’20. On the debt side, bonds of companies like DHFL, Reliance Capital and Reliance Home Finance, in which it had exposure of around Rs11,000 crore, have been junked by rating agencies. Its acquisition of a controlling stake in IDBI Bank in FY19 has been as much of a no-go.

Elevated gross NPAs of Rs 24,777 crore in FY19 forced LIC to set aside as much as Rs 23,761 crore to bring down the net NPA ratio to just 0.27.

Also read: By Using LIC to Fill Fiscal Gaps, Modi Govt is Risking Premium Money of Millions of Indians

Across the board, the PSU vs private battle has ended up badly for the PSU side. The FM is hoping to see huge investment and appetite for the LIC issue from FIIs. But recent government issues have brought home one golden truth – foreign investors do not touch anything that looks messy. And when your core owner is not on your team, it spells trouble. Over the years LIC has frequently been left holding the can in cases where the government has struggled to get its own poorly valued and perceived issues through.

In November 2017, the Rs 9,600-crore initial public offering of state-owned New India just about scraped through with LIC bidding for a large chunk of the shares.

Same story with state-owned General Insurance Corporation of India (GIC Re) that saw just 1.35 times subscription. A little over half the bids came from – you guessed it – LIC.

So, when the time comes, and LIC struggles to raise interest and subscription – who gets to be its knight in shining armour? That remains to be seen. What complicates matters is that it’s difficult to assign a valuation because of lack of trust. When there is a lack of credibility in the leadership team and when the motivation is just divestment, not scaling up business – why should one buy into the LIC idea ?

But, there is legacy – and perhaps it is that hope the government is riding on. LIC is often seen as a sovereign guarantee of sorts. If there’s trouble, the government will step in. For many ordinary citizens, PSUs and LIC spell safety.

The mood in the stock market towards Delhi has also turned. Despite the market’s teflon-coated rise, there’s concern about whether the government actually has any lateral thinking ability at all.

In a bid to be seen as doing “something” about personal taxes, the finance minister announced two alternate slabs would be on offer. In the previous slabs, individual income tax payers could avail a Rs 1,50,000 deduction under Section 80C to save and invest in instruments like PPF and insurance. The idea had always been to help people imbibe the saving habit. In the new structure, there are lower tax rates but deductions have been done away with – in effect, dis- incentivising saving. The move could mean insurance players like LIC stand to lose any potential future income. In a year when the finance minister intends to get LIC to the market, shunning the savings habit and insurance as an idea seems like a self-goal and an exercise in bringing down possible valuations for LIC .

LIC has always followed a ‘contrarian’ investment strategy, which is ‘sell’ when the sentiment is bullish and ‘buy’ when the mood is bearish – often at the cost of landing lemons. Good luck to the team that runs the LIC issue. They are going to need it.