LIC is a household name and stays top in the field even after facing private competition for last 20 yrs.
HDFC Bank and its home financing predecessor are valued more than the next four biggest banks combined — Kotak Mahindra Bank, ICICI Bank, State Bank of India (SBI) and Axis Bank.
Life Insurance Corporation is a household name and stays numero uno in the field even after facing private competition for the last two decades. When the company gets closer to listing on bourses, it could generate interest equivalent to what China’s ICBC did. But the government and the institution have to address its inadequacies before it is floated for private investors to benefit from it, says Shilpy Sinha.
HDFC Bank and its home financing predecessor are valued more than the next four biggest banks combined — Kotak Mahindra Bank, ICICI Bank, State Bank of India (SBI) and Axis Bank. That exclusivity on the market capitalisation leaderboard seems to extend to every financial entity carrying the HDFC badge, including life insurance that remained a state monopoly until two decades ago.
It is quite natural, therefore, for HDFC Life to command a premium over its peers, reflecting the quality of the insurer’s portfolio. But where does new-age competition place the Life Insurance Corporation (LIC), the erstwhile monopoly?
Frankly, the jury is out on that. If listed, will LIC become India’s largest financial services company by some distance, rivalling China Life, Ping An and AIG, and alter the current marketcap leader-board beyond recognition? Or will the compulsions of state-set objectives, frequent federal interference, reliance on singlepremium products and an agencydriven business model make it as much a value loser as the oncemonopoly telecom services providers — MTNL and BSNL?
With assets under management of close to Rs 30 lakh crore and providing some sort of a cover to a fourth of India’s 1.3 billion people, LIC is among the world’s top insurers. But size alone does not reflect its financial health. As a government financier, LIC has had to bail out stressed lenders such as IDBI Bank and state proposals to divest stake. So, LIC’s governance and capital allocation will face scrutiny when one of India’s biggest holders of listed stock approaches the bourses to list its own equity.
“If LIC continues to bail out PSUs like this, it will become like Unit 64 and, ultimately, savers and the nation will pay the price,” said Nilesh Shah, MD and CEO, Kotak Mutual Fund. “Listing LIC will be beneficial for the nation. People will buy LIC papers and India’s weightage on the MSCI index will go up.”
Competition over two decades has, of course, made the market more scattered but, on most parameters, LIC has largely held on to its turf regardless of a slippage here and there. Based on total premium income, the market share of LIC decreased from 71.81 per cent in 2016-17 to 69.36 per cent in 2017-18. The market share of private insurers in new business premium was 30.64 per cent in 2017-18.
Similarly, in renewal premium, LIC continued to have a higher share at 69.35 per cent, compared with 30.65 per cent share of private insurers combined.
SINGLE-PREMIUM PRODUCTS
But there are important differences in product portfolio.
Single-premium products continue to play a major role for LIC contributing 33.48 per cent of its total premium income. LIC dominates the annuity business with a 95 per cent market share. Annuity accounts for about 20-25 per cent of LIC’s total new business. LIC reprices annuity products intermittently, especially when the rates move.
“In India, LIC is not just a life insurance provider but also a pension provider. If any government tries to dip into the life fund, it is a clear signal of a collapse,” said Ashwin Parekh of Ashwin Parekh Consultancy, an insurance advisory.
Of course, LIC’s brand equity is high but the influence of the government in asset management is seen as the worst weakness of an insurer which came under state control in the backdrop of multiple failures by its private owners. High guarantee portfolios, annuity, an agencyfocused business model and group fund management businesses are areas that new-age private sector rivals would see as weaknesses to be exploited.
Private sector companies have a capital of Rs 28,000 crore with a 30 per cent market share. LIC, by contrast, has a paid up capital of Rs 100 crore.
LIC charges more for mortality and pays a decent sum to agents as commission. In any year, LIC pays over Rs 18,000 crore to agents as commission for selling new policies and renewing old ones, whereas the private sector pays around Rs 8,000 crore. Despite extensive tie-ups with scheduled banks, LIC procures 65.4 per cent business through its 11 lakh agents. Private sector companies get a fourth of their business through banking tie-ups.
STICKING TO ITS PROMISE
To be sure, LIC repudiates 1 in every 100 claims filed, while the private sector rejects 8 out of every 100 claims. “As long as people do not fiddle with investment regulations, LIC should be alright,” said Hari Narayan, the former chairman of Irdai.
Where LIC trails its private peers is in the quality of asset management. Of the 61 large PSUs listed on the BSE that have LIC as an investor, 28 have yielded negative returns in the past five years.
Today, LIC pays 95 per cent of surplus to participating policyholders, despite the norm of 90 per cent. Policyholders of most mutual societies in the West, when converted to corporates, became shareholders.
“The government should look at capitalising LIC by offering shares to existing policyholders and use that money to provide for solvency just like mutual societies in Europe and the US did in the past,” said Parekh.
LIC’s business is governed by the LIC Act, which at times is different from provisions of the Insurance Act. LIC’s capital requirement of Rs 5 crore was amended in 2011 to Rs 100 crore. If it lists, the government will have to bring in capital to make it solvent. The Act will need an amendment by Parliament.
“The first tranche of capital raise should be sufficient to cover the solvency margin of 150 per cent,” said a former chairman of LIC. “Irdai can give it some time to bring in additional capital.”
LIC maintains a solvency capital of above Rs 1 lakh crore almost entirely funded and owned by the policyholders. SOVEREIGN GUARANTEES
The sovereign guarantee available to LIC generates trust and differentiates it from other insurers. According to the LIC Act, all policies have sovereign guarantee. If LIC were to list, guarantees on these products will go away. The notional or the actuarial estimates of losses are made as part of the scheme.
“All of LIC’s sum assured and bonuses are guaranteed as to payment in cash,” said Sanjiv Pujari of SBI Life. “The Fiscal Responsibility and Budget Management Act, 2003, restrains the government from taking on additional guarantee in any year to 0.5 per cent of the GDP, while LIC’s sum assured plus bonus amounts to roughly 40 per cent of the Indian GDP.”
Guaranteed products have brought strain on the corporation in the past. However, Pujari says if LIC can maintain a premium growth of 10-15 per cent, generating returns will not be a problem.
But today, the insurer runs several services for the state without levying adequate fees on the state.
“LIC today is servicing a number of government schemes where the government may not be paying a service charge,” said a former chairman on conditions of anonymity. “Despite the lowest expense ratio, LIC will be under stress. The workforce will have to be rationalised.”
LIC is currently servicing Aam Admi Bima Yojana, Social Security Group Scheme, and the Pradhan Mantri Jeevan Jyoti Bima Yojana.
Most private sector companies operate at around 25 per cent management expense ratio, but LIC manages the businesses at 15 per cent.
ONE UP ON D STREET?
But where LIC would gain the most from a listing is enhancement in the quality of assets.
LIC is known to bail out PSUs by picking up stakes. It invested Rs 21,000 crore in IDBI Bank last year. LIC bought an 8 per cent stake in New India Assurance and General Insurance Corporation, and both are trading 20 per cent below their issue prices. LIC is the largest institutional investor in the Indian financial markets. It invests in various asset classes and is exposed to various risks in the shape of markets, credit, interest rates, liquidity, and counter-party.
It is the largest subscriber of state and central government securities. It had bought Rs 1.10 lakh crore securities of the central government and Rs 1.52 lakh crore securities issued by state governments in 2017-18. Its total investment in central, state and other government-guaranteed marketable securities, loans, debentures and equity investments in infrastructure and social sector is Rs 19.55 lakh crore.
“The government dipping into LIC funds for the purpose of funding the economy or budget by way of capital would tantamount to using up the policyholders’ money,” said Parekh. “The corporation is funded by policyholders.”
ASSET QUALITY UNDER THE LENS
LIC has non-performing assets of Rs 25,241 crore, of a total debt of Rs 4,05,304 crore. The sub-standard assets are worth Rs 7,828.07 crore whereas doubtful assets are worth Rs 13,157.86 crore, and loss assets are Rs 4,255.07 crore. It has provided Rs 18,195.73 crore toward nonperforming assets. The percentage of gross nonperforming assets is 6.23 per cent while net NPA is 1.82 per cent.
Insurers do impairment value for equities that are not doing well.
“Any stock that is not doing value, insurers have to set aside the difference in the impairment account,” said Pujari of SBI Life. “LIC will have to start providing for investments that are not doing well.”
Embedded value calculation for LIC is a vast exercise. EV is a measure of the consolidated value of shareholders’ interest in the life insurance business. It covers the value of in-force business, including future renewals. It will require market value of all their assets. Over the last 63 years, LIC has bought many real estate properties, all valued at book value. LIC’s headquarters, the Yogakshema building at Nariman Point, could alone be valued at Rs 2,000 crore.
LIC declined repeated requests for interviews for the story.
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