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IPO and after



Updated on: May 09, 2022

LIC’s big challenges have just begun with its successful IPO

The Centre must be relieved that its offer for sale of shares in Life Insurance Corporation (LIC) to raise over ₹21,000 crore for the disinvestment kitty has successfully concluded, despite hostile market conditions due to geopolitical tensions, Fed tapering and a rate hike by the Reserve Bank of India. It is essentially LIC’s policyholders and employees apart from domestic institutions and retail investors, who have helped India’s largest IPO sail through, even as foreign investors were tepid in their response. But the real challenge begins now for LIC and its promoter, the government. Till date, LIC has had to meet a rather low bar on its financial performance and investment returns, thanks to being a wholly government-owned entity with un-demanding policyholders. But with a new set of stakeholders — public shareholders — now entering the picture, LIC will need to prove itself as a commercially-run entity that delivers on both policyholder and shareholder returns.

There are three areas on which LIC’s progress will be keenly watched. The first is whether it is able to arrest the significant loss of market share in its individual business to private players. Though LIC has fared reasonably well on growth metrics in the last five years with 13-14 per cent growth, it has lost market share from over 60 per cent of individual business in FY16 to below 45 per cent in the first nine months of FY22. To reverse this, LIC needs to revamp its rather dated product menu and scale up presence in the digital and bancassurance channels that bring in millennials and affluent investors. Two, having distributed 95 per cent of its surpluses so far to policyholders, LIC has focused very little on its own profit margins. LIC’s value of new business margin (VNB margin) is currently just 9.3 per cent, compared to 22-27 per cent for leading private players. The key to higher margins lies in LIC’s ability to defocus from endowment products which use bonuses to lure investors, to pure protection and pension products that deliver better value both to policyholders and the insurer. Third and most important, LIC enjoys a huge advantage over private players on the ₹40 lakh crore float that its policyholders have entrusted with it. But many of its investment moves are seen to serve its promoter’s rather than policyholders’ interests — whether it is the bailout of troubled banks, subscribing to PSU disinvestment offers or lending to the Railways. If LIC’s conversion into a Board-managed entity is to carry credibility, it will have to stay off non-commercially driven decisions, and the Centre has to co-operate with LIC on this.

Managing the above transformation may be tricky but that’s what will help LIC cut its apron strings with the government and raise capital for its future growth needs from public markets. The reception to the Centre’s big disinvestment offers in future will also hinge on LIC’s ability to create stock market value for its newly minted public shareholders.

Published on May 09, 2022

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