In two minds about LIC IPO? Here’s a SWOT analysis

Ever since the government’s plan to dilute a stake in Life Insurance Corporation of India (LIC) was announced in Budget 2021, it has been creating a buzz. Rather than selling a stake in the insurance behemoth to a private player, the Centre is launching an initial public offering (IPO) for it, which retail investors can also subscribe to.

LIC is estimated to have nearly 30 crore policyholders, and they are all eligible to apply for the IPO under a 10 per cent quota. But, for this, they first need to link their permanent account number (PAN) with their LIC policies, for which Monday, February 28, is the last day. So, if you are applying for LIC shares under the reserved portion for policyholders, hurry up and link your PAN with your policy.

Apart from PAN-policy link, policyholders also need to have a demat account to apply for the IPO. The good news is that they, apart from employees, get a discount on the floor price, the details of which will be released a couple of days before the bid opens.

Also read: FM says Centre firm on going ahead with LIC IPO despite Ukraine crisis

The upcoming IPO is billed as India’s largest ever, but is investing in it a sound idea? We do a SWOT (Strengths, Weaknesses, Opportunities and Threats) analysis for you.

Strengths: The size, the volumes, the spread

LIC is India’s biggest insurance company, easily dwarfing its private sector peers. In FY20, it was estimated to have a market share of 69 per cent. Of every four life policies sold in India, three are LIC’s. According to an Edelweiss report, LIC collected first-year premiums of ₹1.78 trillion in FY20, an increase of 25.2 per cent over the previous fiscal.

The PSU insurer manages assets of nearly ₹40 lakh-crore, which is greater than the entire amount managed by India’s mutual fund industry, according to media reports.

The government holds a roughly 95 per cent stake in LIC at present, which offers the firm a lot of stability. Even with the government selling over 31 crore shares in the IPO, its residual stake in it is big enough to offer comfort to investors. Further, LIC is a trusted entity that has been operational for nearly seven decades.

Also read: As LIC gears up for IPO, what explains its 5-fold jump in embedded value?

Plus, the state-owned insurer is a profitable, cash-rich entity with a nationwide network. It has a presence in lakhs of Tier 1, 2, 3 and 4 centres, and even caters to the smallest of villages via lakhs of agents.

Weaknesses: People-heavy organisation

According to estimates, LIC has nearly 1.15 lakh employees. While this is what allows it to run a massive pan-India network, the huge employee cost is also a disadvantage. The insurer caters to the smallest of small towns, where internet penetration is not high, so the cost of manual transactions is a minus.

Secondly, while the fall is not steep, LIC has been losing market share to private insurance firms, say analysts. According to a MoneyControl report, in the first half of FY22, its persistency ratio declined 78.8 per cent for the 13th month, 70.9 per cent for the 25th month, and 60.6 per cent for the 61st month. (‘Persistency ratio’ refers to the number of policyholders who paid their renewal premium vis-à-vis the total number of policyholders.) This ratio is stated to be better for private players.

Opportunities: Increased demand

There is far greater awareness about insurance in India now than there was even 10 years ago. The recent pandemic has only sharpened the awareness among people about the need for insurance. As more and more people buy life policies, LIC, the biggest insurer, is poised to gain from the trend. Its spread — eight zonal offices, 113 divisional offices, 2,048 digitally equipped branch offices, and 1,381 satellite offices nationwide — can fully tap the opportunity.

The rising internet penetration across the country can also help the company expand its reach while reining in its people cost.

LIC can also better deploy bancassurance — wherein life assurance, among other insurance products, are sold by banking entities. It can tie up with both private and public sector banks to sell its products as well as use them as premium collection points.

Threats: Intensified competition

LIC faces heightened competition on two fronts. One, private insurance players, often backed by foreign joint venture partners, are upping the game. Two, numerous online insurance platforms — referred to as insurtech start-ups — have mushroomed. Though each of these is too tiny to take on LIC, as a group they may pose a formidable threat in the near future.

The fact that LIC is a PSU could curb its aggressiveness when it comes to business operations. The bureaucracy it is attached to may hinder its nimbleness and quick decision-taking, which are critical for survival today.

The PSU status also means it may get roped in to ‘rescue’ struggling financial institutions. State Bank of India picking up a stake in distressed Yes Bank is a case in point. LIC itself had to infuse funds into IDBI Bank in October 2019. Such events could erode shareholder value going forward.