Bigger isn’t always better. Life Insurance Corp of India’s eagerly awaited initial public offering prospectus arrived on Sunday and underscores its unrivalled reach with more to like. Even so, Prime Minister Narendra Modi’s sale of the century deserves a healthy discount.
LIC’s 283 million policies in force are enough to cover every Indian household and the former monopoly retains a 64% share of industry-wide gross written premiums. Assets under management amount to $536 billion, more than 10 times closest rivals SBI Life and HDFC Life combined. There’s plenty of room for industry growth: life insurance premiums per capita are one quarter those in China, per Swiss Re Institute.
Long-standing issues
At the same time, LIC’s gross written premiums increased at a tepid annual rate of 9.2 per cent over the past two full financial years, at least half the pace of top rivals, and it’s latest annual 9.9 per cent value of new business margin lags by at least 10 percentage points. That takes some shine off its lower operating costs.
Copying the competition could lift profitability. LIC’s rivals focus more on products designed to offer protection rather than savings and put less emphasis on ones that share profit with policyholders: strict regulations around “participating products” are one reason Indian life insurers are less profitable than international peers such as AIA.
Harder to fix is LIC’s readiness to mop up India’s troubled financial assets. For example, the insurer doesn’t rule out having to inject more money into IDBI Bank.
Risk warnings
A $165 billion market capitalisation is achievable for LIC, by applying a 30 per cent discount to the 3.2 multiple of embedded value commanded by SBI Life, a state bank-backed rival. On that basis, selling a 5 per cent stake would raise some $8 billion, perhaps enough to help cash-strapped New Delhi hit its budgeted target for asset sales by end-March.
Citigroup has the tricky task of coordinating pricing on a deal that the government wants done quickly. Paytm’s record $2.5 billion IPO in November hints at the difficulty; owner One97 Communications’ stock price has fallen by more than half.
Up to 10 per cent of LIC shares on offer are reserved for policyholders, inducting millions of first-time Indian investors just as expected U.S. interest rate hikes could roil markets. Taking a conservative view on price would be prudent.