LIC & Entry Into Public Markets As A Participant

LIC’s IPO is its test of what it is supposed to stand for - of that of being a life insurance company, regulated by the IRDAI. The actual test for the listing is how the markets see LIC as - if it’s seen as a HoldCo since it has host of financial entities beneath it; or if it’s seen as a extraordinary financial intervention tool of the government (even the risk factors in the DRHP transparently allude to this); or if it has to be seen as another cash cow that GoI holds and will continue to strengthen it; or that of a quasi sovereign fund as many perceive it to be.

It’s another matter that most of insurance regulatory senior leaders are / have been LIC alumni. So assumably any regulatory decision around LIC would continue to be taken with a pinch of salt by the market. As it is, LIC alumni are on many private sector management as well as boards or advisory boards too.

There is sufficient criticism that the government is selling its family silver to make ends meet. But what will you do if your family has hardships due to a long-lasting pandemic and yet as a populous family, you have to keep everyone fed, and healthy ? That is exactly what this government has done, without actually selling the family silver !

Be it the universal free vaccination program (largest in the world), or the fiscal stimulus to hold up or prop the economy, or the food security initiatives. India averted the rise in extreme poverty during the pandemic by assuring food security through its Pradhan Mantri Garib Kalyan Anna Yojana (PMGKAY) program. Add to this complication of the Ukraine-Russia war, and the associated global worries as well as fiscal impact. And yet, the GoI is only selling a small portion than it had originally estimated to.

Valuations & various opinions

Much has been complained in the markets and media, without adequate management response, that LIC is sitting on a huge realty book and priced art work, potentially or supposedly priced at several thousands of crores; and that those have not been factored into its EV calculation. Yet another constant grouse is that with the Year 2021 amendment to the LIC Act, it’s original character of its capital structure was changed, and with feeling that the participatory policy holders were short changed.

LIC is a sort of unintended financial services HoldCo, being a large shareholder / promoter of a bank, mutual fund, housing finance entity. As with any other financial institution, it would be subject to vagaries of HoldCo discount, with every news about its holdings / associate entities. It is ranked fifth globally by life insurance GWP and 10th globally in terms of total assets. As at December 31, 2021, LIC had 2,048 branch offices and 1,559 satellite offices in India, covering over 90% of all districts. LIC is the largest life insurer in India across the parameters of GWP (gross written premium), NBP (new business premium), number of individual policies issued, and the number of group policies issued. LIC has over 62% market share of first premium. It’s Embedded Value (EV) multiple of only 1.1 is unlike it’s private sector peers of over 2.5X.

Questions that arise are :

Is the lower EV multiple (and consequent valuation) left deliberate to leave value on the table for initial investors ?

Or

Is it the strategy to ensure listing at cost of potential valuation premium ?

I opine it’s the former.

Anchor investors who have come in, are of mixed bag. Sovereign funds and domestic mutual funds crowd the anchor book, with overwhelming domestic interest. The market does fear if some of these mutual funds have invested more as an informal closure of the IOUs that LIC had earned in the market over the years. This market murmurs will be put to rest only if those mutual funds hold onto listed shares for the long term, thus restricting any more loose conversation.

Also the domestic banks could be constrained from investing in the LIC IPO due to Basel III norms - as their investments - would be considered as reciprocal cross-holdings propping up their capital adequacy. Hence, a cross-holding has to be fully deducted out from their capital base, which the banks can ill-afford or that their Bank Boards may not be willing to.

Why it is a strong bet on India ?

With the Indian insurance industry penetration being low single digit, the opportunity for the entire industry is huge. LIC can be a large gainer with their brand loyalty and large distribution reach. The question is how efficiently can they use their capital, and to adopt to Phygital channels to serve newer consumers. While LIC continues to have 2/3rd market share of the Indian life insurance sector, it will have to prove itself to balance its large agency force it has built, along with digital initiatives. It’s ability to be nimble and quick to react to consumer needs will be tested in the next 3-4 years.

Not much has been spoken about the digital framework LIC has built silently over past few years. It has quietly built robust digital engagement models for consumer and sales force engagement. For LIC to have digitised and then to have added digital business capabilities at the scize and scale and granularity of wide distribution network scattered across length and breadth, it is a phenomenal digital transformation story.

While LIC still sells three in every four life insurance policies in India, it may have to make changes to its product and distribution mix. While private sector insurers can get away without doing much for social inclusion using insurance, LIC cannot do so. Hence any criticism about this has to be factored into the valuations.

Governance queries about government involvement or interference is just being pesky. The GoI will continue to be a ‘largest majority’ shareholder in this case, even after listing. So preaching to this promoter (GoI) about governance, while many private or institutional promoters who hold less than even 1/3rd of shareholding get away with far worse behaviour, is unfair.

Is this a low ball valuation as a strategic error as analysts called out during IRCTC listing ? It still hurts that IRCTC was valued at just $700 mn when it listed at more than 2X of that in 2019. Its market cap now is over $7.5 billion. However the positive is that GoI is only diluting an insignificant minority. Hence it has enough nudge-space to navigate for higher valuation exit in years to come. This puts onus on itself to figure out if it can give management leeway for independent running of the behemoth. For a listed entity is subject to scrutiny and market questions.

Also another theory in the investor community is that people are withdrawing to keep liquidity for LIC IPO. Is that the reason why market indices have been low and volatile ?

The only way we will know the reality is to look at over-subscription that comes in.and how many of those simply don’t invest for listing gains and exit once the lock-in period ends.

True test for LIC and it’s promoters is not the listing. The listing would be successful and with positive outcomes. The test will be the disclosures that market would expect from it in the next few quarters. Every board meeting of LIC will be watched and it’s analyst presentation keenly debated and critiqued. It’s abundant institutional resilience and deep market knowledge will be put to test, as it begins its journey in a new avatar - that of a market participant, rather than a market-maker that it has played so far. Being listed is just the start of that journey.

For India, it’s a big positive step, as it starts to bring its large public enterprises into public view as listed entities. That’s the step towards institutionalising the holdings of its entities and making Indian public markets as truly public, with scattered holdings and not with any promoter-puppetry.