What should LIC IPO investors keep an eye on?
Will regulatory requirements, competition, COVID-19, government retaining majority control affect the company?
the story So Far: The Life Insurance Corporation of India (LIC) on Sunday filed its draft red herring prospectus with capital markets regulator SEBI. The IPO is likely to hit the market in the first half of March, considering the importance of proceeds for the Center to meet its disinvestment targets for this financial year and citing undisclosed official sources. With the government planning to sell 5% of its 100% stake in the insurer, market participants expect the IPO to raise at least Rs 60,000 crore for the exchequer.
What are the risks that can hinder returns?
A potential investor should first take note of the fact that with the government offering to sell ₹31.62 crore equity shares, the main objective of the IPO is to get the benefits of listing LIC’s shares on the stock exchanges. Since the stake belongs to the promoter (government), LIC will not receive any proceeds from the share sale. Instead, the government would be entitled to the full income after deducting the proposed expenditure and relevant taxes. The main types of risks that could affect LIC and consequently shareholder returns are related to regulatory requirements, competition, the impact of the pandemic, the government still maintaining majority control, as well as specific ones such as the separation of its single consolidated ‘Life Fund’. do.
What are the ‘complex regulatory requirements’ LIC says it needs to comply with?
The only state-owned company and market leader in life insurance is the Insurance Regulatory and Development Authority of India (IRDAI) and other regulatory/statutory/government authorities in India, which control its operations. These include investment restrictions; issuing capital; foreign investment restrictions; Solvency ratio requirement; restrictions on the place of business; Appointment of certain key managerial personnel and approval for remuneration and remuneration guidelines; limits on commission or remuneration to agents and insurance intermediaries; Regulations for unit-linked and non-linked insurance products; As well as obligations to the rural and social sectors. In addition, LIC is a domestic systemically important insurer, in other words an insurer deemed too large to fail, and therefore subject to increased regulatory oversight.
Although becoming a listed entity would pave the way for more disclosures, the management control of LIC would remain with the government indirectly. This can prove to be both beneficial, especially in attracting potential policyholders, as well as harming the insurer as it will lack the operational flexibility of private competitors.
LIC has also pointed out that an increase in the FDI limit in insurance to 74 per cent (from 49%) could result in new entrants, better capitalization of existing competitors and a general increase in the level of competition. While increased competition may lead to overall growth, it may also adversely affect its market share, margins, increase in new business premium and customer acquisition.
How has competition affected LIC?
A monopoly until India opened up insurance to private players at the turn of the millennium, LIC remained the largest insurer, with a vast network of offices, an army of agents, a 66% market share in terms of new business premiums took command, accounting for 75% of the number of individual policies issued, and 81% of the number of group policies issued for the fiscal year 2021.
What this shows is also that private players—23 currently—are munching on the pie.
LIC said, “Private sector insurers have been growing and gaining market share faster than us since our entry into the Indian insurance industry in 2001.” “From FY 2016 to FY 2011, the total premiums for private sector life insurance players in the life insurance industry in India grew at a CAGR of 18%, while the total premiums of our corporation in India grew at a CAGR of 9%. Period,” it adds.
What are the risks involved in the separation of LIC’s single, ‘consolidated life fund’?
The Consolidated Life Fund of insurers has been bifurcated into two funds- Participating Policyholders Fund and Non-Participating Policyholders Fund with effect from September 30, 2021. Prior to the separation, the surplus was distributed in the ratio of 95:5 between the policyholders and the shareholder. , Post separation, 100% of the surplus generated from the non-participating business is available for distribution to all the shareholders and the surplus from the participating business is distributed among the policyholders and the shareholder in the ratio of 95:5 for FY-2022 Will be done. The consequent reduction in surplus available to participating policyholders may reduce the attractiveness of LIC’s products to certain categories of customers. In turn, this may adversely affect the business, financial position, results and cash flow, says LIC.
How has the COVID-19 pandemic affected LIC?
Since the start of the pandemic, the insurer has experienced a surge in death claims, including those arising due to COVID-19. From ₹17,128.84 crore in the financial year ended March 2019, death pay insurance claims increased to ₹23,926.89 crore in FY15. For the six months ended September 30, 2021, death claims were paid ₹21,734.15 crore on a consolidated basis.
The lockdown and social distancing measures also limited the ability of LIC’s insurance agents to sell products. Without ruling out the possibility of similar challenges in future, LIC said that the current pandemic could significantly increase the expenses due to changes in laws and regulations.
What about the acquisition of LIC’s stake in IDBI Bank?
IDBI Bank became a subsidiary in January 2019 after LIC acquired a 51% stake and in October the insurer invested ₹4,743 crore in the bank using policyholders’ funds. In December 2020, IDBI Bank raised ₹1,435.18 crore through a qualified institutional placement, which reduced LIC’s stake to 49.24% and made the bank an associate.
While IDBI Bank exited the RBI’s prompt corrective action framework in March 2021, reflecting its improved financial health, LIC said, “While we believe that IDBI Bank does not need to raise any further capital at this juncture, We may require additional funds. IDBI Bank in future.”