For an industry that believes life insurance policies to be push products, the Section 80C deduction benefit was an important nudge. But with the new tax system that aims to make 80C deductions redundant, the life insurance industry is in panic mode. Budget 2020 has proposed lower tax rates for those who offer their entire income to tax and are willing to let go of many deductions and exemptions. This means insurance agents will not be able to sell bundled and complicated life insurance plans as tax-savings tools. This, of course, is a huge setback. But there is another development that the life insurance sector is now carefully tracking, at least the listed insurance companies, and that is the listing of the state-owned insurance behemoth, Life Insurance Corp. of India (LIC). In Budget 2020, the government announced it wanted to partly disinvest its stake in LIC through an IPO; it aims to complete the process by the end of the next financial year.

In her budget speech, finance minister Nirmala Sitharaman said that listing disciplines a company and unlocks its value. While the government could benefit from the unlocking of LIC’s value, the policyholders stand to gain by the disciplining of the company that manages over 28 trillion of householders’ money. Four areas that should come into focus as the company heads to tap the markets are its product mix, persistency ratios, its expenses and its role as the ultimate bailout entity.

LIC does poorly on the first metric of product mix. While the private sector has slowly warmed up to selling unit-linked insurance plans (Ulips), LIC has almost all its money in the non-linked portfolio. Non-linked or traditional plans bundle investments with a thin wrap of insurance. Given their opaque nature and high exit penalties, they are more of wealth-destroying than wealth-creation vehicles. This brings the focus on the second metric of persistency. For a behemoth that’s been in the insurance business much longer than private insurers, it sure has a lot to learn in terms of retaining its customers. According to the public disclosure document of the company, its 13th month persistency ratio for FY19 was 66%. In other words, of the 100 policies sold, only 66 came back for renewal after a year. In comparison, persistency ratios of listed private insurance companies look much better at over 70%.

The third metric is the expense ratio of the insurer that stands at about 9% for FY19. This ratio is defined by operating expenses related to insurance business divided by the premium earned. A single-digit expense ratio is good, but given the size of LIC, it’s no surprise that the company has managed to keep costs low. But compare this with other listed insurers—two out of three insurers have expense ratio at less than 9%—and it seems LIC has some distance to go. The fourth metric to look at is its gross NPA (non-performing asset) ratio which, compared to other listed insurers, is the highest, highlighting its role as the lender of the last resort. In FY19, the gross NPA ratio of LIC was at 6.15% compared to nil for the listed entities.

Of course, given the size of LIC, these numbers may not stoke worries, but they are bound to reflect in the embedded value (EV) of the company. The value of a life insurance company is assessed by future profits that the current business is able to generate. This is captured by the EV that represents the sum of the present value of all future profits from the existing business and shareholders’ net worth. There are, however, many things that work in favour of the behemoth other than the brand value, which is a subjective but a very important factor in valuations. The distribution network of LIC is worth its weight in gold. It has nearly 1.2 million agents compared to the overall strength of a little more than 1 million agents in the private sector that has made the sector compete over banks for distribution. It continues to command a lion’s share of the market and despite the fact that its books mainly comprise traditional portfolio, where it returns 95% of the profits back to the customers, it has consistently generated dividends for the government.

Add to this, the past experience of life insurance companies that got listed at very high valuations. All the three companies that were listed were valued at a multiple of at least three times and continue to trade at high multiples. Compare this with the Asian markets that, despite being in a better position, were valued at multiples ranging from 0.4 to two times the EV. This implies a bullish outlook for the life insurance sector and gives tremendous opportunity to the government to unlock value. This would also bring discipline as LIC will be competing with other listed entities, and this bodes for the policyholders.

Deepti Bhaskaran is editor, personal finance, Mint

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