Disappointing debut

LIC's discounted valuation didn't help

The listing of the Life Insurance Corporation (LIC), after its mega-initial public offering (IPO), indicates weak market sentiment. The issue was oversubscribed at Rs 949 (ignoring discounts to policyholders and employees), which was the top end of the price band. The government raised Rs 20,516 crore from the issue. But the share closed out its first trading session at Rs 873, a discount of 8 per cent to the issue price. The IPO has been plagued by consistent bad luck. The combination of the Ukraine war and tighter monetary policy to counter inflation led to the paring of the plan to sell a 5 per cent stake. Indeed, the regulator had to clear the sale of only 3.5 per cent, contrary to its norms for minimum 5 per cent divestment. Besides, the valuation was downgraded. As a result, the government has received far less than what it hoped for. This puts a crimp in the Budget estimates of a disinvestment target of Rs 65,000 crore for the current fiscal year. Unless market conditions improve, the disinvestment target would be hard to meet.

Although LIC has many strengths, the market may also be responding to perceived competitive challenges. LIC has lost market share in the last five years. In terms of annual premium collected, LIC’s market share in group business is 74 per cent, down from 81 per cent in 2015-16. In individual premiums, market share has declined from 56 per cent to 43 per cent in the same period. There are 30-odd life insurers operating in India and the others are not only more aggressive; they have also structured policies better. Most LIC policies are not equity-linked, which leads to low returns compared to other insurers, which have far higher percentages of equity-linked policy structures. After deducting expenses and paying claims, insurers also retain a chunk of cheap, long-term cash, which is referred to as the “float”. Unlike banks, insurers can afford to invest in long-gestation projects. How the float is invested is important, since this is how insurers generate higher long-term returns.

The issue itself cited the promoter’s influence on management as a possible risk and this manifests in LIC’s investment decisions. The majority shareholder has a habit of using it as a piggybank. LIC has, time and again, been forced to invest in other public sector firms during disinvestment to bail out issues, which may be otherwise under-subscribed. This yields sub-optimal returns. Just under 25 per cent of LIC’s portfolio investment is in equity, with another 6.6 per cent in long-term infrastructure-related instruments. The rest is in state or central government debt. Nevertheless, LIC booked Rs 42,862 crore of profits from the sale of equities between April 2021 and December 2021 and around Rs 42,900 crore in equity sales in 2020-21. Private insurers have far higher equity exposure, and also more exposure to blue-chip corporate debt. Their returns on investment are consistently higher. This is one reason why LIC had to offer shares at one-third of the valuations enjoyed by listed private insurers. Those who received allotments in the IPO are currently contemplating losses. However, lower valuations imply this may be temporary. If the listing leads to more transparency about LIC’s finances and less interference in its investment decisions, that could eventually lead to improved returns.