State-owned Life Insurance Corporation of India (LIC) on April 27 announced the country’s largest initial public offering (IPO), which opens for subscription on May 4.
Market participants are labeling the offer for sale by the government, expected to raise Rs. 21,000 crore, as “the mother of all IPOs” and comparing LIC’s scale and size with the world's largest oil-producing company Saudi Aramco.
To be fair, LIC has been providing life insurance for more than 65 years and penetrated across regions and geographies. It is the largest life insurer in India, topping private-sector rivals like HDFC Life Insurance Company Ltd, SBI Life Insurance Company Ltd and ICICI Prudential Life Insurance Company Ltd.
Key challenges for the insurance behemoth will begin after it lists on the stock markets, experts said. The company has the uphill task of maintaining market share, sustaining profitability and revenue growth, and boosting investments in technology.
Here are the five key challenges that LIC could confront in the aftermath of its IPO:
Strengthening non-participating policy business
LIC’s non-participating products currently include savings insurance and term insurance products, health insurance policies and annuity and pension products, among others.
Typically, in a non-participating policy, a policyholder does not participate in the profits of the life insurance provider and policy premiums are usually priced lower than those for participating policies.
Experts said it could be challenging for LIC to strike a balance between expanding the non-participating business and sustaining margins, especially with private-sector entities offering these products at a much lower price.
The non-participating business will be key source of capital accretion and ensure that capital adequacy is maintained.
“For LIC, the major challenge will be to strengthen their non-participating policy business to enhance value for retail shareholders. This segment is currently not widely tapped by LIC and offers high margins,” said Rajnath Yadav, analyst at Choice Broking.
“LIC will have to attractively market its products so as to withstand competition from private peers in the market,” Yadav added.
Restructuring investment books
Historically, LIC has built a legacy portfolio of both stocks and government bonds. As of December 31, 2021, around 25 percent of LIC’s assets under management were invested in equity, 38 percent in government securities and 24 percent in state development loans.
At least three bond and equity market participants Moneycontrol spoke to said LIC has often acted like a last resort for the government to support its borrowing plan and rescuing cash-strapped companies from collapsing. This has come at the cost of making its investment book profitable.
“Especially in weekly debt auctions, both by state and central government, there have been multiple instances when LIC bid at lower yields for ultra-long-end securities, even when the overall market demand for bonds is not that high,” said a treasury official at a state-run bank, requesting anonymity.
If LIC sells such investment assets at below market value, it could materially affect its financial condition over the coming quarters. The return on portfolio for LIC has been declining systematically over the years, and this has been exacerbated by falling interest rates.
With equities now consolidating and returns low, maintaining overall returns and managing investor expectations will be a huge challenge.
Dealing with COVID-19 pressures
The COVID-19 pandemic has had a significant impact on the Indian life insurance sector as death claims soared. With uncertainty over new COVID waves, private insurers are choosing to keep high buffers or COVID-related provisions to insulate their balance sheets, which in turn hurts their profitability.
To put it in context, for financial years 2019, 2020, 2021 and for the nine months ending December 2021, insurance claims for death paid by LIC were a net Rs. 16,963.7 crore, Rs. 17,341.8 crore, Rs. 23,483.3 crore and Rs. 29,310.7 crore, respectively.
Once listed, LIC will have to keep a lump-sum COVID reserve to be able to pay the rising death claims, analysts said. This comes in the backdrop of an adverse effect of lockdowns on LIC’s and its distribution partners’ ability to distribute products.
This means that LIC may also spend more to strengthen its product distribution channel. That could, in turn, hurt revenue over the coming quarters, weigh on profitability and impact shareholder returns, analysts said.
Navigating digital disruptions
The COVID-19 pandemic has shifted the focus onto digitising insurance products and making them accessible through user-friendly technology. LIC’s private sector rivals are coming up with innovative product launches, engaging in cut-throat pricing and tying up with banks and financial technology firms to offer insurance products at the click of a button.
After the listing, LIC may have to undertake new consumer awareness campaigns, emphasise the ease of purchasing life insurance online and innovate technology-friendly products targeting the younger generation, which could take a couple of more quarters, analysts said. This risks narrowing the market share differential with private entities significantly.
Already, LIC’s market share differential within the life insurance industry has started to dwindle. For financial years 2019, 2020, 2021 and the nine months ended December 31, 2021, LIC had a market share of 66.4 percent, 66.2 percent, 64.1 percent and 61.6 percent, respectively, in terms of total premiums in life insurance.
“Private sector insurance companies have been growing faster than LIC and gaining market share,” said Kajal Gandhi, research analyst at ICICI Direct. “Accordingly, there is no assurance that LIC will not lose further market share.”
To overcome this, “LIC should focus on high technology upgrades with artificial intelligence technology to compete with private players and innovate new-age products to catch up with the new millennial needs,” said Prashanth Tapse, vice president (research) at Mehta Equities.
Maintaining high persistency ratios
The persistence ratio is the total number of policies that an insurer has to the policies that are renewed or in force. So, for instance, an insurance company sells 100 policies, but only 80 of them are renewed or active at a given time, the persistency ratio is 80 percent.
As of December 31, LIC’s 13th-month persistency ratio by individual regular premiums was 77 percent.
According to analysts, maintaining a high persistency ratio is important for LIC’s operations, as a large block of in-force policies provides regular revenue in the form of renewal premiums.
If LIC is unable to maintain this ratio due to rising competition from private-sector entities, it would have to find alternatives to fund surrender payments and that could ultimately prove to be a drag on its fundamentals.“In an extreme-case scenario where a large number of customers surrender their policies, leading to payouts exceeding cash flows, LIC may have to dispose of investment assets, possibly at unfavourable prices, in order to make the significant amount of surrender payments,” said ICICI Direct’s Gandhi.