Ensuring transparency

LIC's listing will have multiple benefits

 Giant public sector insurer Life Insurance Corporation (LIC) has filed its draft red herring prospectus (DRHP) and the details make interesting reading. The government is looking to sell 5 per cent of this wholly-owned behemoth. That amounts to over 316 million shares and the success of this single initial public offering (IPO) alone could ensure that the disinvestment target in the Budget’s Revised Estimate is achieved in the current fiscal year.  The proceeds would go straight to the government and, as a listed entity, LIC would have to comply with more financial reporting, making its operations and balance sheet more transparent to investors. The “embedded value” (a metric used for insurers) of LIC is approximately Rs 5.4 trillion and, going by market capitalisations for private life insurers, LIC could be valued at 2.5-3.5 times that. The issue would raise somewhere between Rs 65,000 crore and Rs 95,000 crore if investors consider this valuation reasonable.

Apart from the IPO helping to shore up government finances, some other factors make a listing desirable. Given the sheer size of the institution and the breadth of its investments, LIC is a proxy for a significant segment of the Indian economy. A look at the returns on LIC’s investments should give investors a fair idea of broader economic health. In theory, the management should also pay some heed to the interests of minority investors, which could mean more due diligence before LIC deploys its funds in future. However, in practice, the government remains very much the majority shareholder and, going by management practices in other listed public sector enterprises (PSEs), it is unlikely there will be much sensitivity to minority interests. Indeed, this is listed as a risk in the DRHP — the “promoter” could influence management.

LIC has faced increasing competition over the years with 30-odd private life insurers (three of them listed) in direct competition. It has suffered some erosion in market share, which is now in the range of 65 per cent and the trends in new premiums collected suggest that more aggressive private players (often in conjunction with banks which cross-sell) could grab more market. Like other life insurers, it has had a heavy payout due to deaths in the last two years. Insurance is a risky business. In essence an insurer takes bets, receiving a premium upfront and being prepared to pay out many multiples of that premium if an adverse event occurs. The premium collected is very low-interest (in money-back schemes) and long-term, or zero-interest (term plans). It can be invested in highly long-gestation projects, which banks cannot touch due to asset-liability mismatches. Depending on how it is invested, the insurer can generate higher returns from its portfolio.

The key to profitability for an insurer lies in how the corpus of the premium received is invested. About 24.8 per cent of LIC’s portfolio investments are in equity, with another 6.6 per cent invested in long-term infrastructure-related instruments. The rest is mostly in state or central government debt. 

Unfortunately, LIC has a reputation for being forced to bail the government out; it has stepped in time and again when other PSEs have sold equity and issues have been under-subscribed. These are not necessarily lucrative investments. As a listed entity, investors would get a better sense of how that portfolio is deployed and what sort of long-term returns LIC generates. This transparency would serve the market well.