What can be the Impact of LIC IPO?

Since the announcement of the decision, a lot of views have come from different perspectives. The impact is going to be huge. Be it government, the customers, or just investors; LIC IPO is getting everyone ready. This article is about all the fodder you need to churn to decide on LIC IPO.

The Life-Size

The government decision to sell its stake in the IPO deserved the cheer of the parliament. LIC is the crown jewel when it comes to PSUs. It is India’s biggest insurance company. It enjoys credibility and unmatched customer trust.

LIC is a family of 29 crores policyholders. By 2019, Life Insurance Corporation of India had a total life fund of ₹28.3 lakh crores. It settled 26 million claims in 2018-19. LIC had a market share of 76.28% in terms of number of policies sold in 2018-19 so far. Its net premium income for FY19 stood at ₹3.37 trillion, while net income from investments stood at ₹2.22 trillion.

Coal India Limited was the most successful IPO by the government so far. It garnered ₹15200 crores in 2010. With a valuation of LIC around ₹9 lakh crores, government plans to collect as much as ₹70000 crores!

The LIC Portfolio

Any insurance company accumulates funds from its customers. It then invests in various companies. The profits from these companies are used to settle the insurance claims. This is how an insurance company works.

Since LIC enjoys immense trust of Indians, it has huge sums for investments. The total value of its equity investments by FY19 stood ₹28.32 trillion (94.9% of its total investments), with another ₹1.5 trillion as loans and money market investments.

LIC portfolio comprises of several big names. Infosys, RIL, Coal India Ltd, ITC, Power Grid Corp, NTPC, Siemens, Bharti Airtel and Hero MotoCorp are some well-known names in its portfolio.

The Future

The IPO might be a signal from the government that it is serious about exiting any business it does, the future of LIC will be judged on several parameters.

While massive assets, trust and credibility are LIC’s strength, its structure and working have certain bottlenecks.

In previous years, governments have used LIC’s customer money for its own intentions. It has bought bonds of DHFL, Reliance Capital and Reliance Home Finance. Investments in these bonds cumulatively worth ₹11000 crores and they are now deemed near worthless. Resultantly, LIC NPA that stood 1.5-2% (healthy range for an insurance company) until now has reached 6.15%.

LIC was forced to buy several sick companies over the years, especially PSUs. LIC bought 51% stake in IDBI Bank that was plagued with rising NPAs. In short, the government forced LIC to buy sick companies. Now it wants people to buy this sick LIC!

Moreover, LIC has lost much of its market share to private players in recent years. Its market has been limited to low and middle-income earners, unlike private players who carved their ways into the upper-middle-income band and High Net-worth Individuals. Their products have limited diversity.

Though it functions on their massive network of the agents, other players like SBI Life, ICICI Prudential or HDFC Life Insurance have used their banking chain to push their insurance products. LIC does not have any such establishment. Hopefully, after acquiring IDBI, LIC will hunt for new customers through banking route.  

The IPO

Impact of IPO will be much more for the betterment for the LIC rather than its customers. LIC owns the huge sums of public money paid as insurance premiums. Still, there is not much known about its investments. When a company falls, it is revealed that LIC had its money there. When a company booms, LIC tells their profits rose because of its investment in that company.

When the company will be listed post the IPO, it will become more transparent revealing about its business. It will not only help people know about the health of LIC, but it will also keep a check on any malpractices or poor decision making at the administration front. Their portfolio will be in the eye of customers and investors alike. Concisely, management will become more accountable. Since the government would still own a huge chunk of LIC, it will have to explain its decisions.

The IPO would ensure that the government is no more its sole owner. When people would own LIC, though a minuscule share, they would have their representatives on the board. The management will have to professionalize and experts would take over its decision-making. This transparency and efficiency will also ensure higher LIC returns to its customers that are currently as low as 3-4%.

Conclusion

LIC is plagued by certain problems be it its poor returns on insurances, lossy investments, lack of modernization and product diversity, and government interferences that affect its business. On the other hand, it boasts the best claim settlement ratio, an infallible seeming portfolio, and immense trust of people.

The LIC IPO may help LIC rejuvenate before any real problem comes to its doors. Efficient and accountable management would ensure that it builds a strong portfolio, provide better products, adapt to the market, and create money for itself, its customers and its investors.

Government interference would still a roadblock in major decision-making. However, some sense of investments and transparency will ensure returns for everyone.

The LIC IPO will assure that it sticks by its motto “Yogkshemam Vahaamyaham” which translates into English as "Your welfare is our responsibility."