The IPO was a failure but LIC policyholders and investors will get their money’s worth in course of time
The insurance industry is now at a crossroads. The regulator is busy changing the rules of the game. Insurers are changing business models, disrupting the traditional value chain. Foreign insurers and reinsurers are taking more interest in the business, as the insurance market is growing, following the rising prosperity of people despite a recessionary situation. Yet, insurers are still at their wits’ end as to how to take insurance penetration to the next level.
Amidst this scenario, LIC launched its IPO by offering 3.5 per cent of its shares to retail and institutional investors. This has enabled the government to mop up about Rs 21,000 crore from the market. As much as 10 per cent of the offloaded LIC shares have been allotted to policyholders and 5 per cent to employees. In fact, this was the biggest IPO in India’s corporate history.
About a month has elapsed since the listing of LIC’s shares in stock exchanges. At the moment, LIC shares are traded about 30 per cent below the issue price. Some doomsayer analysts have already started fear-mongering in the market, proclaiming this as a bad omen for the market leader. In this article, I would try to dispel this notion.
Certain facts merit special attention of those who have invested money in LIC’s IPO. This article is all about instilling confidence in LIC policyholders and shareholders by reassuring that they will get their money’s worth in the days to come.
Let us see how LIC is placed in the market vis-à-vis its competitors. It has customers all over the country and across all sections of society. It has 30 crore in-force policies in its books as on date. On the other hand, none of the private insurers has a strong presence in rural India, as most of them are engaged in picking up low-hanging fruits of the metro and Tier-I cities. None of the private life insurers has even 1 crore of in-force policies. Most Indians living outside metros and Tier-I cities have not even heard the names of leading private insurers. For them, life insurance means LIC.
Besides, LIC is insuring the lives of crores of poorer citizens through low-cost group insurance schemes. Some financial analysts go to the extent of saying that LIC’s products are not innovative enough. The fact is all insurers have innovative products. It is more important to check whether the insurers are able to sell those products in the market. Even on this count, LIC is much ahead of the competition. LIC sells all types of insurance products in large numbers—endowment, term, whole life, or even annuities. On the other hand, private insurers as a whole earn 40 per cent of the premium income by selling Ulips only.
While Ulips are not necessarily undesirable products, they are more investment-oriented than insurance. Indians need more protection, savings, and annuity products than investment products with some element of insurance. And LIC has been selling more protection/savings products, to take the benefits of insurance to the remotest corners of the country.
Let’s talk a little bit about the technicality of this business. Embedded value (EV) is defined as the present value of future profits plus adjusted net asset value. EV of LIC was calculated to be Rs 5.4 lakh crore before the launch of IPO. This was arrived at, on the basis of realistic assumptions on future mortality, expenses and interest rates. Insurers and their consultants made pretty conservative assumptions on these parameters. All these bases of valuation are, however, more or less the same for all the insurers (except to some extent the expenses).
What then can make the difference? I would say persistency ratios of insurers (especially 61-month persistency) can determine EV of the insurers a lot. For LIC, this ratio is 48 per cent in terms of policies (the industry average being 33 per cent and 59 per cent in terms of premiums). This is very close to the global standard. A satisfactory persistency ratio of LIC means there will be a satisfactory flow of premium income in future, resulting in better surpluses. If there are better surpluses, there will be higher dividends and also higher share price.
Nobody can belittle the contribution of private insurers. But people need to know certain facts which prove LIC’s dominance in the industry across the country. LIC is respected not just for its holding 66 per cent market share but also for its omnipresence in the country, making it convenient for ordinary people to visit the insurer's offices. The hallmark of its operations is the honesty and integrity with which the employees have been discharging their duties and clean image that the organisation has been able to maintain in the midst of corporations getting entangled in recurring financial scams. LIC is one organisation which has worked from their brick-and-mortar offices even during the worst of pandemic times, keeping the interests of crores of its customers and one million plus intermediaries in sight.
Now, let’s talk about the movement of share price of LIC. As have already been mentioned, only 10 per cent shares have been sold to policyholders and 5 per cent to employees. A bulk was sold to anchor investors. Hence, the people reposing faith in LIC as policyholders and the people investing in IPO are completely different.
A section of investors is being made to believe that the IPO was overpriced and that the price would slide even further as the fundamentals of the organisation were below par. They were also fed on the rumour that anchor investors would offload their shares immediately after lock-in period. All such negative publicity contributed to the fall in share price so rapidly. But there is a limit to such fall as regards the share price of an organisation as financially sound as LIC.
Let’s remember some basics of the investment game. Once Warren Buffet said, “In the short run, stocks behave like a slot machine, but in the long run, they behave like a weighing machine.” Now the share price of LIC is moving randomly and is getting determined purely by forces of demand and supply. These random movements cannot be used to predict the long-term value of the stock.
In the long run, the intrinsic value of a company remains constant, irrespective of what the traders of stocks do every day in the market. In the long run, the share price will be equal to the intrinsic value of a company. This is true for all the markets and for all the stocks. The annual report of LIC is in the public domain and investors can access that. All successful investors of the world muster the skill of making sense out of financial and industry data, and wait patiently for the fair value of a company to emerge.
Every Indian knows what LIC stands for. The organisation has weathered many storms in its 66-year journey since 1956. Yes, there is a need for the business model of the organisation to undergo change; it is already working towards that.
Finally, we must remember that not all analysts are
in the business of misguiding investors. JP Morgan said in its recently released report on LIC that the market failed to understand the strength of LIC.
The price to embedded value ratio (P/EV) is unrealistically low. This means that both the LIC policyholders and investors will get their money’s worth in course of time.
(The author is an insurance industry analyst)
