Life Insurance Corp. of India was sown through the efforts of government officials from New Delhi. But nourishing the seedling into a massive with 39.6 trillion ($525 billion) in assets under management as well as more lives insured than the population of Pakistan has impacted the generations of customers who have been loyal for decades.

It is the reason LIC’s Initial Public Offering, which is India’s largest shares sale ever, poses an unanswerable question: Will the cash-strapped state become too greedy and shake the money tree so violently that it doesn’t produce the fruit it was intended to bear for the future policyholders?

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LIC was established in 1956 after the private insurance companies failed in India following World War II. Incredulous at the loss of the savings market in this newly independent country and determined to extend coverage beyond the minuscule urban affluent population, a socialist-minded state government made insurance a national business and gave the state-owned company around $10 million in seed capital and a natural monopoly.

The monopoly came to an end in 2000, and however, the moat is still in place. Even today, as it is competing with over twenty-six non-state competitors, LIC has a 64 per cent share of the total written premiums. It has three of India’s four policies and owns 4 per cent of all listed shares traded in India. The vast role LIC has in the financial world of India has resulted in the IPO, an unpopular decision similar to it was the decision to privatize Japan Post.

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To make money from the national insurance company in the first place, the government needed to raise around $850 million of capital gains which LIC didn’t require. It did this by letting its dividends grow over the years. The next step is New Delhi will sell 5 per cent of this over puffed stake to close the gap to $213 billion in its budget.

The price for the sale remains undetermined. There is a risk that the deal will appeal to investors worldwide who are concerned regarding U.S. monetary tightening and the possibility of conflict in Ukraine. The government could be willing to sacrifice the long-term interest of the small savers, which are the same ones who contributed to the company and helped keep it running.

This controversy is centred around embedded value, a method employed in the insurance business that blends surplus and capital accumulated over time together with the present value of future gains from policies in force. The IPO prospectus filed on Sunday estimated LIC’s embedded value of $72 billion. The tweaking of its policy on sharing surplus profits has provided five times more actual value of future earnings within just six months. However, some critics say the procedure is grossly ineffective and undervalues the franchise, including an extensive real estate portfolio.

The economy is shifting towards investors. The proportion of surpluses from investments owed to policyholders who participate will decrease gradually up to 90% before the financial year 2025. Shareholders will be entitled to an additional 10%, in addition to the total surplus generated from the use of money from non-participating policyholders like those who purchase term insurance. Up until recently, participants in the policy received 95% of the surpluses.

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According to the IPO prospectus states, the recalibration is expected to bring LIC to par with its competitors in the private sector. However, it could “reduce the attractiveness of our participating products, which could hurt our business, financial condition, results of operations and cash flows.”

This disadvantage may not be a problem for current customers, who are getting a chance to become owners. Many new accounts for securities opened this month in India in the hope that LIC policyholders sought to acquire shares at a bargain.

Ten per cent of the IPO is set aside for customers who are not yet born. Even if a small part from the 282 million owners of existing policies can be allocated a share the prospective customers — a lot of who aren’t yet born the same.

In the past, India’s government utilized LIC as a piggybank to purchase shares in government companies nobody would like or as a loaner for the Food Corporation, which helps run the subsidized grain program.

In the last quarter of 2018, New Delhi dumped IDBI Bank Ltd. into the insurer’s lap after failing to find a legitimate buyer for the loan-soaked lender.

It doesn’t matter since the Indian population is younger and uninsured. With a cost of $78, India’s insurance density, which is the ratio of rates divided into the people, has increased sevenfold in two decades. Yet, it’s still less than the levels of $400 to $500 found in Malaysia, Thailand and China. LIC is still on a long road ahead as new money keeps flowing into the paper to cover any flaws in suboptimal investment decisions.

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At some point, however, losing a competitive advantage could be a problem. Even after reducing its stake even further shortly, the government will not take the stance of a non-interventionist. It will serve as a stabilizing tool for larger goals that might not align with customers’ needs. The LIC’s agent network might be around. However, Gen Z customers may buy more financial services on the internet, which gives rivals a chance to catch on.

SBI Life Insurance Co. is the no. 2 player traded at three times its embedded value. Applying the same calculation, the LIC’s market capitalization post-IPO of $216 billion might be a bit over billionaire Mukesh Ambani’s Reliance Industries Ltd. as the most valuable publicly-traded company. It’s not a secret that Life Insurance Corp. is a perfect money tree. However, as investors and the government attempt to push it away in the future, the roots that a loyal Indian middle class has nurtured for sixty years could soon become dry.

Source: Economic times Indiatimes

By Vil Joe

A writer and editor based out of San Francisco, Vil has worked for The Wirecutter, PCWorld, MaximumPC and TechHive. Her work has also appeared on InfoWorld, MacWorld, Details, Apartment Therapy and Broke-Ass Stuart. In her spare time, she takes too many pictures of her cats, watches too much CSI and obsesses over her bullet journal.

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