Declaration: The author holds Insurance Policy and Savings related policies underwritten / sold by the corporation.
For an average Bharatiya (I am continuing to address Indian as Bharatiya), the received wisdom is once you start earning take insurance policy from LIC. LIC is currently 100% owned by Government of India and hence there is a engrained belief that government will honour the obligation arising from Insurance policy if any. The insurance business under LIC will be run under a not for profit ideology and thus ensuring equity in management of the business which deals in risk of common man.
One can identify business plan of LIC is two broad categories -
plans in which the plan subscriber (called policy holder) participates in profits of the corporation
plans in which the plan subscriber (called policy holder) does not participate in profits.
Based on this distinction, the annual profit / loss statement of LIC for 2020-21 is summarised in tabulation below:
Particulars (all amounts in INR lakh crores) | Participating plans | Non participating plans | Total |
Gross receipts (A) | 4.44 | 2.37 | 6.81 |
Operating costs (commissions / salaries / et al) (B) | 0.67 | 0.03 | 0.70 |
attributable liabilities of the plan payable to plan subscribers (C) | 3.74 | 2.34 | 6.08 |
Surplus available to shareholders (A - B - C) | 0.03 | 0 | 0.03 |
A key aspect to be noted is that about 65% of the annual gross income (INR 4.4 lakh crores) of LIC is from products is from participating plans and only that contributes towards profits of the corporation. The non participating plan business (35%) is not profitable.
How does the above situation playout once the IPO is done. At a fundamental level, once IPO is completed, a portion of shares of LIC would be held by private investors. These private investors would work for "wealth maximisation" philosophy. This would mean that expectations of LIC private shareholders would be that the profits attributable to shareholders of LIC continues to increase. The substantive way to increase profits of LIC shareholders would be by reducing profits allocated to Participating plan subscribers. This is the embedded conflict which will arise on IPO. As long as government of India was the owner of the corporation, this conflict was non existent as there was no direct expectations of profits from the corporations. The equation below captures this ethos.
GAIN OF PRIVATE SHAREHOLDERS OF LIC = LOSS OF PARTICIPATING PLAN SUBSCRIBERS OF LIC.
Now I will examine the extent of potential damage this IPO can create:
1. Growth vs profit share: The indicative valuation of LIC based on market estimates if INR 5.4 lakh crores. We have seen that the profits of LIC is around 0.03 lakh crores. This would result into a PE multiple of 180 times. Contrast this with valuation of HDFC Bank which is at around 25 times. The general idea being touted for such rich valuation is that insurance is highly under penetrated market in India and thus there is a fantastic growth potential and LIC is the leader and hence is best placed to capture this growth. I have no qualms in accepting that insurance market can grow at good rate. However claims on any profits from such growth also vests with participating plan subscribers. Would that get their fair share or would the growth belong to private shareholders? There would be a major force to tilt the balance towards private shareholders.
2. Change in Management principles: Private shareholders would bring the pressures of performance on the operating management. I don't have.a problem with improving performance. However the likely change in management philosophy of profit maximisation for shareholders would drive various decisions of the executive (wrt investments / cost allocations / risk taking orientation). This would be again at the cost of participating and non participating subscribers (reflecting in claim settlements process too).
In closing:
there are about 28 crores individual assurances in force issued by LIC as of March 2021. How many of these are assurances are participating in nature is not known to the author. If LIC IPO happens, then Government of India is doing a big disservice to the average individual. LIC is a profitable and critical business impacting larger masses. It is not like Air India. Decision makers in the government need to examine this with fresh pair of lens and not think only about meeting divestment target. The divestment, in case of LIC if at all, would be of general public trust.
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