State-owned Life Insurance Corp of India, with its distinctive blue and yellow logo, is ubiquitous across the country of 1.4 billion people. LIC controls nearly two-thirds of the Indian market, with about 282 million policies and more than 1.3 million agents, 100,000 employees, 2,000 branches and 1,500 satellite offices. The government sold a small stake in LIC in May in India’s biggest-ever initial public offering, part of Prime Minister Narendra Modi’s plans to expand the nation’s capital markets and modernize the economy.
1. Why did the government sell a stake in LIC?
The long-delayed IPO was the biggest chunk of a US$10.4-billion asset-sale program to plug India’s budget deficit. The government plans to push borrowing to a record as it tries to spend its way out of a Covid-19-induced downturn, and as rising fuel prices force it to spend more on subsidies. The IPO paved the way for future sales when cash is needed, although the government said it won’t sell another stake for at least a year. By forcing the 65-year-old insurer to open its books and making it accountable to public shareholders, the government hopes it can better compete with more nimble private insurers.
2. Why was the sale delayed?
The IPO was supposed to happen in the fiscal year to March 2021 but was postponed, first by the pandemic, then by Russia’s invasion of Ukraine in February, which sent markets into a tailspin. The government decided to press ahead after cutting the price and the number of shares on offer. It raised 206 billion rupees (US$2.7 billion), well below its earlier target of 500 billion rupees. It still surpassed the biggest Indian IPO to date -- that of digital payments provider Paytm in November 2021.
3. How was the sale structured?
The government sold 3.5% of LIC stock. Retail investors were alloted 35% of those shares in the offer and given a discount of 45 rupees from the IPO price; another 10% was earmarked for LIC’s policyholders, who received a bigger discount. The sale drew in anchor investors including Norway’s sovereign wealth fund and the Singaporean government.
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4. Why was valuing the company so difficult?
The shares slumped on their market debut in Mumbai on May 17. LIC’s size and its special status made assessing its worth a unique challenge. It holds almost US$500 billion of assets, more than the total size of the country’s mutual fund industry. Milliman and Ernst & Young, the firms appointed to work on the valuation, sifted through millions of policies to account for parameters including mortalities, morbidities, lapses in premium payments and policy cancellations. They also had to weigh the value of LIC’s fixed property across its 2,000 branches.
5. Why did this IPO matter?
Firstly, because of its size: The sale valued the company at the equivalent of US$77 billion. LIC has exerted a towering presence over India’s financial landscape since Jawaharlal Nehru’s government combined the country’s 245 insurance companies and provident fund societies in 1956 with a mandate to offer life insurance to all sections of society. For many Indians, insurance is still synonymous with the company, even after the industry opened up to private firms two decades ago.
6. Are there parallels in other nations?
Some bankers described the sale as India’s Aramco moment. Oil giant Saudi Aramco, which staged the world’s biggest IPO in 2019, was likewise a symbol of Saudi Arabia’s economic might, generating almost 90% of the Saudi government’s income. Japan Post, whose privatization started in 2015, was the country’s biggest holder of bank deposits and its largest insurer while it ran the national postal service. Like LIC, it was highly visible, with the biggest chain of storefronts in Japan and a fleet of 86,000 motorbikes for mail delivery.
7. What’s the outlook for LIC?
LIC benefits from a 1956 parliamentary act that gives it a special status in the industry, distinct from the law governing its newer rivals. It enjoys a sovereign guarantee of its policies, allowing it to operate with a thinner capital base than competitors. Yet some investors were skeptical that the business can compete against privately controlled insurers. Over the years, it’s been deployed as the investor of last resort by governments to support markets and bail out other state-run companies, as it did in 2019 with IDBI Bank Ltd. Some bankers say global investors worry LIC could be forced to rescue other floundering state assets even after it became a publicly listed company. - Bloomberg Quicktake
