India seeks ‘Aramco second’ with sale of stake in LIC

Amit Sant, a monetary adviser in Central India’s most populous metropolis Indore, bought his first insurance coverage coverage in 2000. There was by no means any query the place he would purchase it from: the state-run Life Insurance coverage Company of India, which held a monopoly for 44 years and employed Sant’s father for 36 years.

“My father used to say LIC is the establishment which has made our life,” mentioned Sant. At present, India’s authorities is on the lookout for a brand new type of life for the insurance coverage behemoth it created. It’s planning to promote a 5 per cent stake in what could be the nation’s biggest-ever preliminary public providing, elevating as a lot as $8bn.

The deal is being seen as “the Aramco second for India”, mentioned chief govt of score company CARE Ajay Mahajan, referring to the biggest-ever IPO of Saudi Arabia’s state-owned oil producer. “LIC is a family title, from each nook and nook of this nation . . . [it] is synonymous with insurance coverage.”

A particular act of parliament created the company after India nationalised life insurance coverage provision in 1956. LIC had a mandate to make life insurance coverage out there throughout the nation, particularly in far-flung rural areas. It offered moderately priced cowl by a community of brokers and offered a dependable technique of saving for hundreds of thousands of individuals within the nation with out financial institution accounts.

There was a significant shift out there across the new millennium, after LIC’s monopoly was led to 1999. However the enterprise now being privatised by India’s head of state stays a colossus.

Two men walk passed the Life Insurance Corporation of India headquarters in Mumbai
The LIC headquarters in Mumbai, India © Dhiraj Singh/Bloomberg

Its property underneath administration of $495bn are greater than 3 times that of all different life insurers in India, its prospectus states. It points virtually three-quarters of all particular person insurance coverage insurance policies in India, most of them offered by its 1.3mn brokers, representing a much bigger community than all of its opponents put collectively, in accordance with Credit score Suisse analysis.

“Their scale is one thing that we will’t think about,” mentioned a senior insurance coverage govt. “That provides them large economies of scale.”

When it lists, LIC is predicted to turn into India’s third-largest firm by market valuation. The funding case is the corporate’s large attain throughout India, mixed with the expectation {that a} rising middle-class on this planet’s second most populous nation will need its core life insurance coverage, pensions and different long-term financial savings merchandise. It additionally sells medical insurance.

However Sant represents one of many issues that’s beginning to have an effect on LIC. Regardless of his attachment to the corporate, he mentioned he had just lately discovered opponents offering higher and extra various choices for merchandise corresponding to cowl towards particular diseases.

“Though they’re altering their merchandise, [LIC] have vanilla merchandise solely,” mentioned Sant. “There is no such thing as a butterscotch or chocolate topping.”

Rivals corresponding to SBI Life and HDFC Life have chipped away at LIC’s market share in recent times. In the meantime, restrictions on abroad funding had been eased final yr — LIC’s prospectus warns of “an impending risk of overseas gamers getting into the market”.

At LIC, gross sales are skewed in direction of life insurance coverage merchandise that pay a share of the insurer’s earnings to policyholders yearly, referred to as “taking part insurance policies”. It has a smaller share of the higher-margin marketplace for non-participating insurance policies, which don’t supply these annual payouts. The latter insurance policies are sometimes offered by banks, the place rivals do extra of their enterprise by partnership offers.

The combo is mirrored in LIC’s “new enterprise” margin, a key measure of the profitability of recent insurance policies. Whereas India’s high 4 insurers had a margin of above 20 per cent within the first half of the 2022 monetary yr, LIC’s was simply 9.3 per cent, in accordance with funding financial institution Jefferies.

However on the similar time, there’s apparent potential for progress. Insurance coverage revenues account for under 4 per cent of India’s financial output, which is low in comparison with different giant markets, in accordance with Moody’s. The pandemic has fuelled demand for all times and medical insurance, analysts have mentioned.

LIC must also profit from growing numbers of individuals trying to save for retirement utilizing monetary merchandise corresponding to mutual funds and pensions. “Increasingly more individuals are shifting cash from their conventional holding money or actual property or gold to monetary merchandise,” mentioned Jignesh Shial, an analyst at InCred Capital. Even when LIC’s market share falls, “the pie itself will carry on rising”, he added.

Two women next to an LIC annuity advert at a bus stop in Mumbai, India
An LIC annuity advert at a bus cease in Mumbai © Ashish Vaishnav/SOPA Photographs/Shutterstock

The federal government has taken steps to spice up LIC’s attractiveness forward of the itemizing, revising laws that had required it to share 95 per cent of earnings with eligible policyholders. Now, LIC will be capable of maintain a much bigger share of earnings, which is extra consistent with its non-public sector friends.

Some analysts count on that spurred by this transformation and the scrutiny of exterior traders, LIC will work tougher to become profitable. “Itemizing brings lots of self-discipline and urgency on the a part of any administration to match as much as the competitors,” mentioned Deepak Jasani, head of retail analysis at HDFC Securities. “As soon as they get listed, they’ll get lots of questions from the analysts . . . so that they should gear up, be extra progressive, extra nimble footed.”

Banks concerned within the IPO are aggressively advertising and marketing it to retail traders, together with present policyholders and LIC’s workers and brokers, who will likely be eligible for reductions. New Delhi can be hoping to draw worldwide traders, pitching the inventory as a wager on India’s rising prosperity.

“We’re eager about [the IPO],” mentioned the Asia head of 1 worldwide asset supervisor. “In an Indian context, it does look affordable,” the particular person added.

However some overseas traders had been postpone by the insurer’s state possession, which in sure methods made it “extra like a paperwork” than an unbiased monetary establishment, the asset administration govt added.

Some analysts argue that the IPO will carry extra transparency, though the state will proceed to personal 95 per cent of the corporate. Nevertheless, the IPO prospectus notes LIC “could also be required to take sure actions in furtherance of the [government’s] financial or coverage goals”. Authorities pursuits, the prospectus says, “may very well be in battle with the pursuits of our different shareholders”.

“It’s virtually like a banker to the federal government generally,” mentioned the insurance coverage govt, referring to LIC investments corresponding to its takeover of ailing lender IDBI Financial institution in 2019. LIC had typically proved to be an “astute asset picker”, the particular person mentioned, however added: “The fear ‘will they be arm-twisted into doing one thing related once more?’ persists.”

LIC branding and people getting on a train at a metro station in Mumbai
LIC branding at a metro station in Mumbai © Ashish Vaishnav/SOPA Photographs/Shutterstock

For traders, the valuation can be a significant unknown. Shares in Indian funds firm Paytm struggled after it listed final yr. The query is whether or not the market is able to welcome an IPO of the dimensions of LIC.

Timing will likely be key. New Delhi desires the IPO to occur shortly to make the proceeds out there for the nationwide price range within the present monetary yr, which ends in March. However after a promising begin this yr, Indian equities have fallen into the crimson, with overseas traders promoting at a document tempo. There are market worries a couple of fallout from anticipated rises in US rates of interest, whereas crude costs soared in anticipation of Russia’s invasion of Ukraine — a significant concern for India’s oil-importing economic system.

However Nirmala Sitharaman, India’s finance minister, shrugged off the potential issues, saying the IPO “has been a long-awaited step and I’m glad we’ve come by with it . . . The present volatility doesn’t matter to us, doesn’t preoccupy us within the context of LIC”.

Retail traders, at the very least, don’t appear to have misplaced their enthusiasm — and that features Sant.

He might purchase most of his insurance policies elsewhere now however he’s eager on LIC shares and thinks the federal government’s continued involvement is a promoting level. State backing brings “safety”, he mentioned. “A minimum of your cash is just not going to get caught.”

Further reporting by Benjamin Parkin in New Delhi

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