The government must list LIC, but not disinvest for now. It should allow LIC to raise the capital it needs to remain competitive and profitable.
The Life Insurance Corporation (LIC) has been the government’s go-to institution whenever it needs money. Whether it is to bail out a public sector IPO (one has lost count how many the LIC has rescued), or dump a losing bank on it (IDBI Bank), or to fund infrastructure (railways), LIC is like the rich NRI son-in-law one can count on.
However, the government cannot presume that LIC is the proverbial Kamadhenu, with ever-flowing monetary udders. It is fast reaching the stage where it is the government that will have to step in to do the right thing for LIC, so that it can continue to be its investor of last resort.
While LIC has also made money from issues it bailed out, and the IDBI Bank buy may well turn out to be a strategic one to expand its distribution clout through bank branches, the reality is that the government-owned company faces real challenges in the years ahead, as private insurers grow more aggressive.
Given the kind of clout private insurers are beginning to acquire in terms of market valuations, it is only a matter of time before they are able to gain significant market share, as has happened with banks. The current market valuation of listed life insurers may be paper wealth, but this represents a potential for future leveraging and an ability to raise capital on favourable terms. Capital is key to expansion and solvency.
For example, just two major listed private life insurers, HDFC Standard Life and ICICI Prudential, have a market valuation of Rs 1.47 lakh crore – when their market shares in terms of total premiums collected are a small proportion of LIC’s dominant 72 per cent.
It is a safe prediction that in the years ahead, it is LIC’s dominance and profitability that will be under threat, while the private insurers will be able to raise cheaper capital more easily and build scale and size.
To be sure, the LIC’s financials are strong, and it also has the government standing four-square behind it. It is too big to fail. But if you were the government, you should be hoping that you don’t ever have to bail out the LIC.
Consider some numbers: among all life insurers, LIC is the one with the lowest solvency ratio of 1.58 as at the end of March 2017. Compare that with HDFC Standard Life’s 1.92, ICICI Prudential’s 2.81, and Bajaj Allianz’s 5.82.
The solvency ratio measures an insurer’s capital as a proportion of the risks it has undertaken – that is, its assets minus liabilities.
Sure, the sheer size of the LIC makes its solvency ratio reasonable, even if it looks small compared to some private insurers. Reason: since its liabilities are spread over a much larger number of policyholders, it is less vulnerable to sudden shocks.
However, the LIC also has the smallest capital base among all insurers, of just Rs 100 crore (the rest of the private life insurers have Rs 27,000 crore between them).
Under the LIC Act, the insurer has to retain 95 per cent of its yearly surplus in favour of policyholders, and the remaining 5 per cent can be given back to the government, which owns 100 per cent of LIC, as dividend.
Clearly, a company which has a 72 per cent market share should have more capital, and this is where the government should help. Not by investing capital in LIC, but by allowing it to list and raise capital from the market.
This has two advantages.
First, the market will give LIC a huge valuation, since the money raised will beef up the insurer’s own capital and ability to grow its business. An LIC with a stronger capital base and higher solvency ratio will be able to sustain its profitability much better than an LIC that is only investing where the government asks it to.
Second, a listing will give the government a fair idea of how the market values this giant insurer, and further disinvestments can be undertaken later to bring the government’s holdings down to 51 per cent over the next few years, raising money for the exchequer. LIC will remain a Kamadhenu in the foreseeable future.
In short: the government must list LIC, but not disinvest for now. It should allow LIC to raise the capital it needs to remain competitive and profitable.