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LIC IPO: Top risks that come with the biggest public issue

LIC IPO: Top risks that come with the biggest public issue

Every company has risks attached with it and LIC is no different even though it enjoys the largest market share in the life insurance sector in India.

LIC IPO: Risks attached to the biggest public issue LIC IPO: Risks attached to the biggest public issue

The much-awaited initial public offer (IPO) of Life Insurance Corporation of India (LIC) was formally set in motion on Sunday with the government filing the draft red herring prospectus (DRHP) of the insurance behemoth. 

While there seems to be no dearth in demand and curiosity for the government-owned life insurer, there are also a set of risks attached with the company that is all set to launch the biggest public issue till date in the country. 

Here are the main risk factors, in LICs own words: 

COVID-19 and its impact on business 

“The ongoing COVID-19 pandemic could adversely affect all aspects of our business, including: (i) restricting the ability of our agents to sell our products; (ii) significantly increasing our expenses due to changes in laws and regulations and investing in new methodologies to overcome the restrictions brought in to address the spread of COVID-19 and the adverse changes in population mortality/morbidity or utilisation behaviours; (iii) adversely affecting our investment portfolio; (iv) adversely affecting our operational effectiveness; and (v) heightening the risks we face in our business…” states the DRHP. 

Between March and September 2021, the number of individual agents fell by 17.48 per cent. This assumes significance as nearly 97 per cent of LIC’s policies are sold by individual agents. Further, the total number of individual policies and group policies (in terms of lives insured) issued in India decreased in both FY20 and FY21. 

Concentrated business in five states; low digital marketing 

As per disclosures made in the DRHP, nearly 50 per cent of the individual new business premium is concentrated in the five states of Maharashtra, West Bengal, Uttar Pradesh, Gujarat and Tamil Nadu.  

“For Fiscal 2019, Fiscal 2020, Fiscal 2021 and the six months ended September 30, 2021, our top five states in India in terms of individual NBP contributed… 49.77%, 48.99%, 49.21% and 47.54% of our total individual NBP in India, respectively,” stated the DRHP. 

Further, LIC products are primarily distributed by individual agents even as there is a trend of online distribution through third-party websites, including Policybazaar. As per LIC’s DRHP, some of its products are available for online purchase on its website but none are available on any third-party websites.  

If our products remain unavailable for purchase on third-party websites, we may lose market share, it says. 

Brand, reputation and perception hit 

“Our brand name, reputation and perception are critical in maintaining our leading position in the Indian life insurance industry and any unfavourable publicity concerning us could have an adverse effect on our brand name and consequently adversely affect our business, financial condition, results of operations and cash flows,” states the DRHP. 

We are exposed to the risk that litigation, misconduct by our employees, agents or other distribution partners, operational failure and negative publicity could harm our brand, reputation, customer trust and business, it added. 

Regulatory policies, volatility, customer confidence 

Adverse persistence metrics or an adverse variation in persistence metrics could have a material adverse effect on our financial condition, results of operations and cash flows, as per the DRHP. 

“… if we do not achieve satisfactory investment returns or underperform in relation to our competitors, or if the market environment changes such that our products become less attractive, or if there is an actual or perceived deterioration in our financial strength, our customers may decide to surrender their policies,” it added. 

Interest rate fluctuations, limited fixed-income products 

“Interest rate fluctuations may materially and adversely affect our profitability. In addition, the limited amounts and types of long-term fixed income products in the Indian capital markets and the legal and regulatory requirements on the types of investment and amount of investment assets that insurance entities are permitted to make could severely limit our ability to closely match the duration of our assets and liabilities and thereby decrease our interest rate risk,” mentions the LIC DRHP. 

The insurance major, however, added that while it has not experienced such instances in FY19, FY20, FY21 and the six months ended September 30, 2021, “rising interest rates could lead to higher levels of surrenders and withdrawals of existing policies as policyholders seek to buy products with perceived higher returns.” This, as per LIC, could lead to the company selling its invested assets and making cash payments to policyholders at a time when prices of those assets are declining, which, in turn, would lead to LIC incurring losses. 

Legal proceedings, regulatory violations 

As on February 6, 2022, LIC, either by itself or through its officials, agents and employees was involved in approximately 26,919 criminal, consumer, civil proceedings, tax proceedings and actions taken by statutory or regulatory authority. 

LIC is also in breach of the Securities and Exchange Board of India (Mutual Funds) Regulations, 1996, which prohibit any shareholder from holding over 10 per cent in more than one asset management company. LIC owns 45 per cent in LIC Mutual Fund and also a significant stake in IDBI Mutual Fund as a result of acquiring IDBI Bank in January 2019. The process, however, is on to merge the schemes of IDBI MF with that of LIC MF on an “arm’s length basis” that will help LIC become compliant with the SEBI regulations. 

Housing finance activities 

In January 2019, LIC acquired IDBI Bank, which also offers housing finance services – similar to LIC Housing Finance. The Reserve Bank of India (RBI), while granting approval to the merger of IDBI Bank with LIC stipulated that only one entity can continue with housing finance activities and hence this “may have an adverse effect on our financial condition, results of operations and cash flows,” as per LIC. 

“… the RBI in its Approval Letter has stipulated that either IDBI Bank or LIC Housing Finance Limited… will have to cease conducting housing finance activity within a period of five years from the date of the Approval Letter and that housing finance activity shall be conducted only by one entity,” stated the DRHP. 

Also read: LIC IPO: Govt's acquisition cost of shares at only Rs 0.16/share

Also read: LIC IPO could be priced in the range of Rs 1,700 to Rs 3,500

Disclaimer: Business Today provides stock market news for informational purposes only and should not be construed as investment advice. Readers are encouraged to consult with a qualified financial advisor before making any investment decisions.
Published on: Feb 14, 2022, 10:32 AM IST
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