A subpar record

LIC's valuation is likely to remain compressed

A year after the listing of insurance giant Life Insurance Corporation (LIC) of India, investors are licking their wounds. The mega-issue illustrates many things that can go wrong with an initial public offering (IPO). The February 2022 draft red herring prospectus stated the government’s intention of selling a 5 per cent stake (the minimum according to regulations). This would have been 316 million shares, with investors assuming a prospective valuation of about Rs 2,500 per share. The money would go straight to government coffers. But the Ukraine war started in late February and, combined with a spike in inflation, it led to a downturn in market sentiment. The IPO was pared down — to sale of a 3.5 per cent stake — at a disappointing valuation of Rs 949. The market regulator had to make a special dispensation for this sale.

The stock listed at Rs 873, a discount of 8 per cent to the IPO price. The issue raised Rs 20,560 crore, which made it the country’s biggest ever IPO. But this was a far cry from the Rs 65,000 crore-plus initially hoped for. Investors who sold on listing and cut their losses saved themselves some pain. The stock, which dropped to a low of Rs 530 in March, is now trading at around Rs 570, down 40 per cent from the IPO price and 35 per cent from the listing price. While LIC has several listed rivals (and many unlisted ones), it has a dominant market share and the biggest network of offices and agents, besides huge chunks of prime real estate. However, the share price implies far lower valuations than its private sector rivals and SBI Life in terms of the usual metric of embedded value, which is the present value of expected future profits. Its rivals are valued three to four times as highly on this count. Most analysts believe LIC has received an unusually low valuation.

However, there are multiple reasons for the low valuation. LIC has been losing ground to its rivals in terms of premiums collected. In terms of new premiums, the aggregated private sector collected higher new business premiums in April 2023, while LIC saw a 50 per cent year-on-year reduction. In addition, it has a higher proportion of participatory policies, which means it has to pay out a share of its profits to policyholders. It also has a lower proportion of takers for its market-linked policies. These suggest it is losing market share steadily.

LIC also has a less impressive record in terms of what it does with the premiums it collects. The business model for an insurer is simple: The surplus of premiums over claims is cheap (or free) cash, which can be invested for the long term. Invested well, insurance is one of the world’s most profitable businesses. The yield on assets under management (AUM) is, therefore, a critical factor in assessing an insurer. LIC gets returns of 8-9 per cent on its enormous AUM of over Rs 43 trillion — this is well below the yields that other life insurers generate. Critics contend that the underperformance is attributable in part to the fact that it has bailed the government out multiple times during its disinvestment programme. Until it shedsits reputation as the government’s investor of last resort, LIC will always be undervalued in comparison to its more aggressive rivals.