Summary of the Article recently published in the Economic Times
Well, i am not a market expert, not a tax expert or a Chartered Accountant who can make you understand in detail but I am a retail investor who look after the other means to grow money value other than the old age conventional idea of parking the funds in banks for Fixed Deposit or Recurring Deposit or Ulip Plans etc which actually erodes its value over the period of time due to inflation.
For this, I invest sometimes according to the risk capacity and the size of my pocket.
Recently, the euphoria was going on about the incoming LIC IPO and it surely is the mother of all the IPOs which have been launched in 2021.
I spoke to several people regarding this ( who are not experts but small retail investors like me ) and all of them were so excited about this IPO given the trust, loyalty and brand image LIC commands over the last 65 years. So most of them were like ready to invest by the brand image and trust of LIC. But as a cautious investor one has to look after the data which a company writes in its DHRP at the time of making its application for the IPO.
Here I am not recommending anyone to invest or not to invest in this IPO. It will solely be your decision. All I am doing is writing all the points one has to look before he/she makes any decision.
Pros & Cons :-
Pros:-
1. LIC still sell over 70% of the life insurance policies sold in the country and receives 65% of the new premium.
2. Its AUM ( Asset Under Management ) are nearly 16 times that of the next largest insurer and more than the AUM of the entire mutual fund industry.
3. Lower Cost – LIC’s Expense ratio is lower than it private Peers. Operating expense ratio as a percentage of total premium for 2020-21 ( 8.7%) and Six month of 2021-22 – ( 10.1% ) are less than the median of the top five private players.
Cons:-
1. Interference from Government :- We have seen in the past that LIC money was used to recapitalize PSUs. Example – IDBI Bank. LIC has to remove its image of rescuer of Government’s financial Troubles.
2. High NPA Ratio of 7.78% for the year 2020-21 – highest among all listed insurers.
3. Dwindling market Share – LIC’s market share for the new business premium has dropped from 56% in 2015-16 to 44% in the first half of 2021-22.
4. High dependency on Agents - Well to get a LIC policy you need to contact agent . This is what every 90s kid will tell. Now in this era, everything is digital. Private insurers offers various policies which can buy with the click of a button and without an agent. Number of agents in LIC has been shrinking year after year. LIC’s gross commission ratio which is gross commission paid to gross premium is 5.2% as on September 2021 as compared to 4.2% for HDFC Life % 3.6% for SBI Life.
5. Low Persistency Ratio :- In simple language, persistency ratio is the proportion of policy holders who continue to pay their renewal premium. In LIC’s case it is 78.8% which means every fifth policy it sells is terminated after the first year. Private Insurers maintain this ratio at 84-85%.
6. LIC’s assets mix is skewed towards debt while its rivals take major exposure to the equity market which results in lower yields for LIC in 2020-21.
Question of the Hour – Should you invest in it or not ?
Given the brand image, scale, reach, loyalty & trust LIC commands its offer is very unique. But on several metrics LIC lags behind its peers. How many you have seen buying LIC policy online? When it comes to Customer satisfaction, number of products private players are much ahead than LIC. Private Players have been introducing products according to the customers and market cycles but LIC has been failing to understand this. Its non-linked products accounts 99.7% in its portfolio in 2020-21 where its closest peer, HDFC Life accounts 71% of its premium through non-linked products. Government is coming up with just 5% of this divestment scheme and will keep throwing many more stake in market for the coming future.
So think before you go ahead with this IPO. Choice will always be yours.
Happy Reading!
