LIC preparing for an IPO?

10 February 2005

Is India's life insurance giant readying itself for an IPO? Venkatachari Jagannathan takes a look at what the leviathan is up to

Item one: Recently, the government-owned Life Insurance Corporation of India (LIC) started to work out its embedded value. Item two: A few days ago, the central government announced that it would set up an investment fund with PSU disinvestment proceeds. Item three: There is a persistent rumour that the government wants its share of profit to increase from the five per cent at present. When we put all three items of information together, it throws up an interesting possibility — that LIC may be preparing for an initial public offering (IPO).

For the first time in its history, LIC is in the process of assessing its embedded value; the present value of future profit calculated on the basis of actuarial assumptions. Some private insurers have already started doing this. According to an industry expert, normally a life insurer would calculate its embedded value either at the time of public issue or during a merger-and-acquisition (M&A). LIC's embedded value will be not less than Rs50,000 crore.

Large as it may sound, it is not a fancy figure. Take the case of private life insurer ICICI Prudential Life Insurance Company Limited. Its embedded value for the first nine months of this fiscal has been estimated at Rs184 crore, though the company posted a loss of Rs138 crore. The company labels embedded value as `new business achieved profit.'

LIC chairman R N Bhardwaj says: "The government has offered to reduce its share of surplus by half, so that LIC can meet its overseas investment outlay. Any increase in the shareholders' share of surplus or profit requires an amendment to the LIC Act." The overseas plans he is talking about are setting up a three-way life insurance joint venture in the Middle East and entering other countries where there is a large non-resident Indian (NRI) population.

The Middle East joint venture will have Alhokair, a Saudi Arabian group and New India Assurance Company Limited, the Indian non-life insurer, as partners. In 2003, LIC started its operations in Sri Lanka, partnering with Bartleet & Co Ltd. The other places where LIC is present are Nepal and Bahrain. LIC shelved its US expansion plans after the American life insurer for whom it planned to act as a corporate agent got into difficulties after the 9/11 terrorist attacks.

International operations are one of LIC's recent strategic business units (SBU). The corporation earns around 2.5 per cent of its income from foreign ventures. The other SBUs are group and superannuation business, alternate channels like bancassurance, and real estate. "Our long term strategy was chalked out with the help of the National Insurance Academy, Pune," says Bhardwaj