The LIC IPO: India's biggest IPO

What seems like a modern-day financial tool, is actually an instrument developed by people in 2250 BC. 

Some four thousand years ago, goods were transported by ships. There were many perils on the way though, like the weather would go mad sometimes, or a bunch of pirates would attack and loot the cargo, or the ship could sink. A lot of mishaps occurred during those days, and a lot of losses were incurred, of cargo and otherwise because of them. There was a dire need for a system that protected the concerned parties against this. 

And thus, insurance was invented (or the roots of something similar), and it was called bottomry. In its simplest form, A would extend a loan to B for the security of B’s ship. The condition was that, if the voyage was successfully completed, B would have to repay the loan along with a premium at a rate pre-mentioned in the contract. But in case any of the incidents mentioned in the contract happened to the ship, A would forfeit both the loan and premium amount. 

Thus, can we all agree that bottomry was the ancient era’s disguised insurance?

Fast forward to today, let us talk about the company that brought the insurance culture in India, Life Insurance Corporation of India. With a gross written premium of Rs. 4 Lakh Crore, LIC is the 3rd largest insurer in the world!  

The beginning of LIC

2 lakh employees, 15 lakh agents, a client base of approximately 250 million, 30 crores of issued policies and an expected valuation of IPO of 15 lakh crore. The numbers are hugeeeeeeee. Where did it all begin, though? 

Here is a brief timeline of how LIC started-

1818: First life insurance business was established in India - Oriental Life Insurance company in Calcutta. 

1912: The Indian Life Assurance Companies Act, the first statutory measure to regulate life insurance business was brought into action. 

1928: The Indian Insurance Companies Act was enacted for the government to collect data about life and non-life businesses in India. 

1950: The Insurance Amendment Act abolished all the Principal Agencies

1956: An ordinance was issued in which the government announced they would be nationalizing the Life Insurance sector and thus, Life Insurance Corporation came into existence. 

And since then, LIC had complete monopoly in the market, until the late 90s when LIC allowed private sector companies to re-enter the market. 

Enough about LIC’s past. Let’s be honest, you and I both know you are here to find out if you should apply for the IPO or not. So very quickly, let’s just get past these formalities to get to the good part.

The Future of LIC

There is already enough hype around this and well, I am here to add fuel to it. In 2001, LIC’s market share was 100%. You understand what this means right? LIC had complete monopoly back then, with not a single competitor attempting to snatch away its market share.

And today, there are 24 life insurance companies in India and LIC has a market share of 61%, being the only public sector company is the list. Not that bad, huh?

But it is not that happy of a story. Why would a decades-old government insurance company, that still has more than half of the market share, be willing to sell its stake?

Why is the Government selling its stake in LIC?

The government has proposed, in its IPO draft to divest 5% of LIC’s equity. To give you an idea about how big this IPO is, let us talk numbers. In 2021, IPO saw a record fundraising of nearly ₹1.2 lakh crores. With its IPO, LIC alone is most likely to raise an amount close to 50% of this. After its listing, it will become the third-largest stock in terms of market capitalization. 
These numbers are huge. Shouldn't we be actually be questioning where does all this money come from? We have a sprint course that will answer this question for you. 👇 

Back to numbers, there could be two reasons for the sale government’s stake. Firstly, it could be that since the market is performing pretty well lately, the government is hoping to benefit from the listing gains. They would get a good price and parallelly be able to achieve their disinvestment targets.

The second could be, as we will discuss further, that the government is sceptical if it could fight the technologically advanced private players flooding in with VC money with its old school agent model.

Regardless of this, LIC has unbeatable plus points which we shall look at now.

According to a UBS report, about 10% of all household savings go to LIC each year.

Strengths

 Established Trust:

“Zindagi ke saath bhi, zindagi ke baad bhi” has not just been LIC’s slogan for its meaning’s sake. LIC has a special trust of Indians that no other insurance company has come even a bit close to establishing anything similar. The fact that LIC is backed by the government in case a mishap occurred in a family is cushioning to its policyholders and also potential policyholders. 

Distribution Network:

The 2 lakh employees and 15 lakh agents I mentioned above clearly signifies how deep LIC has penetrated the Indian life insurance market. 

Back in the days, when we had to go to a cybercafe to surf Google, there was no scope for people to buy any online insurance. LIC came in handy and provided a one-to-one customised service. Even with the internet’s coming-of-age, there are some people who aren’t tech-savvy and neither do they have an interest in being so. LIC is a go-to company for them. 

The Indian rural market was still untouched due to lack of reach, and so was the posh community that wanted everything to be done without them lifting their fingers; until the agents came in and raided them as well. Below, you can see a clear comparison of how the numbers are so big to make a significant difference. 

Weaknesses

Now let us look at where this government company is lacking. To begin with, here is a data of LIC’s market share of today compared to what it was in 2014. 

The decline of 10% in its market share has reasons and we think they are justifiable. 

Affordability:

94% of the policies are sold by the agents. Since there are so many agents and employees and since the cost to reaching every Indian household is high, LIC’s insurance plans are expensive compared to its peers. Gradually the competition will increase. Private players won’t mind burning cash to make the policies cheaper and the aggressive marketing will eventually catch up with LIC. 

Weak technology system:

LIC works and relies on the ground forces more than it does on technology. An agent coming to the house multiple times to sell the plan and fill up forms has to compete with a half-hour process of applying online. As more of the population is shifting to tech, the reliability on others is decreasing and self-dependency is increasing. People would naturally choose to go online rather than set up appointments. 

Links with the equity and debt market

Equity ownership: After I researched about the companies in which LIC has a stake, I was convinced that LIC was more of an investor than a life insurance company. LIC is invested in approximately 4% of India’s total equity market. I mean, would you look at the numbers, please! These are the companies with top holding percentage- IDBI - 49.2%, LIC Housing fin.- 45.2%, ITC - 16.2%, HindCopper - 14.2%, NMDC -14.1%. 

Debt burden: But, but, LIC is the single largest owner of all of the government securities as well. It owns around 19% of the total government debt. 

IPO details

35% of the LIC IPO has been reserved for the retail investor which will amount to approximately 11 crores of shares. Currently, it is mandatory as under SEBI guidelines for all listed companies to maintain a minimum public float of 25%, which means a public ownership of 25%. Since right now, LIC is only offering 5% of its stake, it has to offer a further 20% stake in the next three years. This means LIC will have to sell nearly 42 crores of shares every year on an average. 

The chinta ki baat here is whether the market will have the appetite to consume such a large supply of infusion. 

No IPO details as of now have been announced yet, but visit us back in a few days and you check them on Ticker by Finology in the IPO section. Ticker rahe IPO ke saath bhi, IPO ke baad bhi!

The Bottom Line

The government wasn’t put in place to do business but rather to protect its citizens from internal and external harms. The disinvestment of government from businesses isn’t that bad if we look at it objectively. But, since LIC has a major stake in the biggest of companies in the Indian share market, a slight disruption in the market could be bad news. 

Be careful when you apply for the IPO (or don’t)! Until then, goodbye.