New Delhi: The Narendra Modi government has kick-started the process of listing state-run Life Insurance Corporation of India (LIC), but valuation of the insurance giant will be one of the biggest challenges.
On Friday, the department of investment and public asset management issued the tender document for engaging up to two pre-initial public offer (IPO) transaction advisors, formally starting the long and arduous process that will require among other things an amendment to the Life Insurance Corporation of India Act, 1956.
According to a senior government official, getting LIC’s correct valuation will be one of the biggest challenges. The impact of business due to Covid-19 related contraction in business premiums will also have to be taken into consideration.
The new business premiums of India’s largest life insurer have contracted sharply in the first two months of the ongoing fiscal but industry experts say the impact on valuations on account of this will be negligible, given the corporation’s size.
While the new business premiums of the insurer had grown by 25 per cent on 2019-20, it contracted by 26 per cent in April-May this year.
The government is also likely to struggle to meet the 31 March 2021 deadline for the stake sale, with many steps like amendments to the LIC Act and valuation unlikely to be completed in time to facilitate the listing this fiscal.
In her 1 February budget, Finance Minister Nirmala Sitharaman had announced the Modi government’s intention of an IPO wherein the government would offload a minority stake in LIC.
Also read: LIC has lost more than Rs 20,000 crore in just 5 PSU stocks Modi govt made it buy in 2 yrs
‘Many factors’
Kamalji Sahay, former managing director and chief executive of Star Union Daiichi Life Insurance Company, pointed out that determining LIC’s valuation is going to be challenging given its size, and will need a telescopic vision and a team of actuarial professionals who understand the life insurance business well.
“Many factors go into the valuation of a company. The surplus and the investable amount arising out of the difference between the inflow of premiums and outgo on account of different expenditures is one of the factors. Then there is the quality of the investments made, the quality of the underwriting portfolio,” said Sahay, who has also held senior positions in LIC.
He added that the impact of the contraction of premiums on the valuation will be minuscule given the size of LIC.
LIC has a market share of around 70 per cent and assets under management of more than Rs 30 lakh crore. Analysts peg the valuation of the insurer at around Rs 10-12 lakh crore but this estimate, made in the absence of the embedded value of the company, could see a change.
Embedded value is the present value of future profits to shareholders and forms the basis of valuation of a life insurance company.
Also read: LIC put Rs 10.7 lakh cr in PSUs under Modi, almost same as investments in 6 decades to 2014
The LIC issues
Several sectoral experts consider LIC to be akin to a black box due to its poor disclosures but the insurer will need to increase its disclosures ahead of the listing.
The amendments to the LIC Act will also have to facilitate a higher share of profits to the shareholders, in line with the practice followed by other life insurance companies, to make it more attractive for other shareholders who will come in after the listing.
At present, only 5 per cent of LIC’s profits go to its shareholders while the remaining 95 per cent goes to policy holders. Private sector life insurers offer at least 10 per cent of their profits to shareholders.
According to the tender document, the transaction advisors will have to assist the government on the modalities and timing of the minority stake along with detailed timelines for the entire process. They will also help the government in appointing professional insurance industry experts to assist in the stake sale, and will also evaluate the capital structure of LIC to determine the restructuring of the capital base.
The advisors will also need to help LIC in preparing the “restated consolidated financial statements for the past three years for the LIC group including its subsidiaries, branches and overseas operations”.
Also read: LIC to be listed for IPO, employees say sale is against ‘national interest’
As mentd Lic has lost 20000 Crore in 5 PSU stocks which present Govt forced Lic to buy. Also mentioned in last 6 years from 2014 to 2020 of present Govt, Lic has been asked to invest 10.7 lac crore in PSU stocks., which has never happened in last Sixty years of Freedom
Also Sale or IPO of Lic wiil be against National Interest as said by Employees of Lic.
Lets not forget this Govt is also wanting to sell MTNL, BSNL, Air India. Because their valuation will not fetch them much they have trained their eyes on Lic. By any means & ways Govt wants to meet their Disinvestment target.
No regards about National Interest or Job creation or protecting current employment. Very sad state of affairs & economy.
Judiciary should intervene & not allow such a irrational action by the Govt.
No need for IPO of LIC
Excellent and a very well argued article that must be noted by the Finance Ministry as well as the LIC authorities who have all along taken advantage of the liberty allowed to this monolith from even the minimum disclosure requirements. It would appear that the points validly raised in this article must first be addressed before finalising the matter and going for the IPO. The question of valuation of any commercial entity, especially of the size and operational scope like that of the monolith–LIC–is bound to be a vexed one for numerous commercial and political reasons as well as for the existence of too many hidden factors which are historically built into the business model of this ill-managed entity which never cares to be responsible for those who pay premiums to run it. I congratulate the author for this enlightening piece and request the govt to go slow on this though I support the idea of the IPO issue, from my experience as a former director (finance) of the steel ministry and a supporter (in the late 80s) of selling the shares of the then MSTC, a most profitable PSU then, which I was a director too. In that case also, a miniscule entity as compared o the LIC, valuation was a very big problem. Anyway, the proposal to issue an IPO for MSTC was stalled then.