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    HomeBusinessBeyond listing woes: LIC should be able to up its game if...

    Beyond listing woes: LIC should be able to up its game if govt stays away

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    The fact is that although LIC enjoys the trust of millions and boasts an enviable network of 1.3 million agents, the industry landscape as well as the competitive intensity is changing.

    The stock market debut of Life Insurance Corporation (LIC) may have been disappointing to many, but the government deserves credit for pulling off its biggest initial public offer. The decision to slash the size of the offering, from Rs 65,000 crore at one point to Rs 21,000 crore, was certainly a practical one given the choppy state of the markets. It was also prudent on the part of the government to acknowledge that the insurer could not command a valuation of 2.5-3 times the embedded value (EV) and to accept a much lower multiple of 1.1 times. The government may have ended up selling a stake of just 3.5%, and not the 5% it had intended to earlier, but that can always be done when the sentiment is better. Had the government insisted on a higher valuation, it might have faced some embarrassment given the stock listed at close to Rs 869, around 9% below the issue price of Rs 949. While policy holders and employees would be relieved since they were allotted shares at a discount of Rs 60 per share and Rs 45 per share, respectively, others may need to wait before they make meaningful returns.

    With the benefit of hindsight, the Centre needed to have left a little more on the table for investors. The fact is that although LIC enjoys the trust of millions and boasts an enviable network of 1.3 million agents, the industry landscape as well as the competitive intensity is changing. While investment experts point to the ‘long-term’ potential for the company in a country where the penetration of life insurance is low, an addressable opportunity in itself cannot guarantee growth or, more importantly, profitable growth. In the absence of a diversified product portfolio, the insurer has been yielding share in the individual policies segment. The growth in annualised premium equivalent has been 6-7% over the past five years, compared with 14% for private players. Following a reorganisation, LIC is looking to up its share of high-margin non-participating, pure protection products that today account for just about 5-6% of the portfolio. Analysts are not quite sure LIC’s agents will be up to the task since they have been used to peddling more of investment-oriented products that leave policyholders a significant share of their surplus.

    Again, LIC could find it hard to scale up business through the bancassurance channel given top lenders including SBI, HDFC Bank and ICICI Bank are not among its partners. In an age where insurance products are being sold by online platforms, LIC will need to enhance its digital presence and price its products competitively. The big disadvantage that LIC suffers from is that due to its large EV base, the contribution from new business to the overall value is much smaller than the contribution from the mark-to-market gains. Moreover, the EV is vulnerable to stock price movements and, therefore, the impact of adverse movements hurts it more than private sector players.

    To be sure, the insurer may be able to up its game, but given its strong PSU parentage it may be not be as nifty as its competitors. Also, given that the government still owns 96.5%, the chances of interference in the business cannot be fully ruled out. LIC has remained obliged to do the government’s bidding whenever called upon. As LIC’s draft red herring prospectus itself noted, it “may be required to take certain actions in furtherance of the GoI’s economic or policy objectives. There can be no assurance that such actions would necessarily be beneficial to the corporation.” To ensure that the insurer becomes a more competitive player and is able to command a better valuation, the government must stop interfering in the running of the company. Now that LIC is a listed entity, the government should not pressure the company to take investment decisions that might not be in the interests of the insurer. In short, LIC must be allowed to stand on its own feet.

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