New Delhi: The opening of the initial public offering (IPO) of the Life Insurance Corporation (LIC) on May 4 will mark the beginning of the process of disinvestment of one of India’s largest public sector companies which is also the leader by quite a distance in its industry. While the LIC IPO has seen both delay – it was originally scheduled for the last fiscal year – and downsizing – the government is only selling 3.5% of its stake compared to the mandated 5% citing tumultuous market conditions – the IPO has already got the markets excited. Mint reported on May 3 that the shares reserved for anchor investors were already fully subscribed. The opening of LIC IPO gives a good opportunity to take a look at India’s insurance behemoth and the what its disinvestment will mean for Indian economy. Here are five charts which try to answer this question.
A successful listing for LIC will be good news for the government’s disinvestment target
The last two years have been lacklustre for the Union government on the disinvestment front. In 2020-21 the Budget set a target of ₹2.1 lakh crore in disinvestment receipts, but the government ended up making ₹37,900 crore from disinvestment proceeds. This target was brought down to ₹1.78 lakh crore in 2021-22, but the revised estimate numbers show that only ₹78,000 crore could be raised. To be sure, disinvestment proceeds were just 50% of the Budgeted target even in 2019-20, when the pandemic was not a factor. Even though the disinvestment target for 2022-23 is just ₹65,000 crore , a good listing for the LIC IPO, though which the government is raising around ₹20,557 crore will restore much needed credibility to the government’s disinvestment targets.
See Chart 1: Disinvestment proceeds as share of Budget Estimates
How big a player is LIC in the global insurance industry?
When it comes to an IPO, this is not a question to satisfy just curiosity. International investors play an important role in stock markets and their decision to invest (or not) in a company is also driven by its international standing. In its mandatory prospectus filing with the Security Exchange Board of India (Sebi), LIC lists itself as the fifth largest insurance company in the world in terms of life insurance premium in 2020. In terms of assets under management, its global rank is tenth, the prospectus says.
See Chart 2: LIC international standing
But LIC has been losing market share in India
Among the biggest reasons for LIC’s giant lead over its peers in India is the fact that it has enjoyed a virtual monopoly for decades as private life insurance companies were not allowed to do business in India. While LIC still has a massive lead over its private competitors in the life insurance business, its market share has been coming down gradually. Data from the Insurance Development Regulatory Authority of India (IRDAI) shows that between 2013-14 and 2020-21, LIC lost almost 10 percentage points in terms of share in new business premium of life insurers in India. While LIC’s market share was still an overwhelming two-thirds, this trend is expected to gain momentum going forward.
See Chart 3: LIC share in new life insurance premium
Is LIC a small saving company or a life insurance company?
Bulk of LIC’s business comes from policies which are technically life insurance products but very different from the manner in which life insurance is understood in the risk aversion sense. This is because the sum assured in such LIC policies is a very small amount (the policy holder is actually expected to pay a very big fraction of it during the term of the policy and gets this money back with a small return after completion of the policy period) compared to what would be needed to compensate for the policy holder’s future stream of earnings in the event of his death. Policies which offer a large amount in the event of death are also known as term insurance policies and in these products the policy holder does not stand to gain anything if the lives through the period of the policy.
The dominance of policies which offer a sum assured on maturity in LIC’s portfolio means that it is more a small savings company than a life insurer in the strict sense of the term. One statistic which captures the lack of term insurance type of policies in LIC’s portfolio is the small share of reinsurer’s premium – insurance companies seek a reinsurance on the insurance they sell to their clients and this amount will be significantly higher if the sum assured is higher – in LIC’s total premium earrings. LIC’s small savings driven business model is going to be a headwind for its future business as retail investors in India move to new opportunities such as equity and debt markets and the tax incentives for small savings are diluted with steps such as the government announcing two kinds of income tax slabs with lower rates on the one without any exemption for investment in LIC style products.
See Chart 4: Share of reinsurance premium in overall premium earnings
But none of these caveats are likely to dampen the enthusiasm around the LIC IPO
To be sure, the limits to LIC’s future growth and market dominance which have been discussed above are well known in the market, and are unlikely to dampen the enthusiasm when the shares of the insurance giant will be up for grabs till May 9. Not only is LIC a household name in India, which gives it immense credibility in the eyes of the small-ticket retail investor, it still makes far more in profits than its listed insurance peers which is among the key factors driving future earnings on share. The fact that subscribers will also be eying windfall listing gains over and above the issue price is only going to add to the demand for the shares when the IPO opens today. the shares are being sold in the price band of ₹902-949 (policy holders get a ₹60 discount)
See Chart 5: LIC comparison with listed peers