‘Roughly for every taxpayer we have one policy holder in LIC. So it’s literally saying they own the insurance space, and probably all of India’s financial services place, because nobody else has this kind of penetration. The mutual fund companies added together have probably less than half of this. So there is substantial size difference here.’
On today’s show, Deepak Shenoy (CEO) and Aditya Jaiswal (Analyst) try to understand the ₹30 trillion behemoth, the Life Insurance Corporation of India (LIC).
Transcript:
(The transcript has been sourced from a premium transcription provider. Yet, it may contain inaccuracies.)
Deepak: Hi and welcome to another episode of Capitalmind’s podcast. Today, we will have a very interesting discussion around a subject we know very little about, to be honest. We’ve got a lot of numbers. We’re putting them all together. Has been quite fascinating, even for us. It’s about this behemoth called Life Insurance Corporation of India, or LIC, and Aditya and me are going to discuss about the various aspects of this very large insurer that India has and the fact that the government is announced that at some point in the future they are going to list it on the public market. So we will take a look at the numbers, the market, the size of this company in comparison with all of the other players out there in the financial services space and perhaps give a small inkling of what we think the IPOs will look like. So firstly, welcome, Aditya, to the show and let’s get it going.
Aditya: Hey, Deepak. Amazing to be here. So it was really exciting for me when I was collecting the data because LIC is very opaque and since it’s not listed, most of the data is not available. So I had to look for public disclosures and the annual reports. But as you rightly pointed out it’s a behemoth. Just look at the numbers. LIC manages about 30 lakh crore in the life insurance sector, 30 lakh crore, and has an annual premium book of over 3 lakh crore and it holds 76% market share in new policy issues. Now let’s take a breath to absorb these numbers. These are amazing set of numbers.
Aditya: So for example, look at the asset base. They are managing around 30 lakh crore. The entire AUM, of all the mutual funds in India combined, is what? 26.50 lakh crore. And that’s about roughly, 26-27. So that’s the number. And then I was looking at the commission LIC pays, so I’m just throwing some random numbers. Guess what would be the commissions that LIC pays to its agents? It’s 19,300 crores per year. And the salary is 19,800 crores, and the employee cost is 40,000 crore. This is insane. TCS pays 50,000 crores and here is LIC paying 19,000 crore just as commissions.
Deepak: I think where you are is also the fact that these guys have been in existence for the longest time. They’re proven the only insurer until insurance was thrown open to the private space. Even today, the largest insurers are LIC, it collects about 3.8 lakh crores of premiums. 3.8 lakh crores is probably more money than flows into mutual funds added up in the entire year. So that’s one way to look at it. They manage more money than all of the mutual fund companies put together. The second largest life insurer is another public sector company called SBI. SBI Life, which collects about 93,000 crores, one fourth. They are four times as big as the next competitor. HDFC Life is probably fourth in the game, about 58,000 crores or something like that. And then so that’s like saying the private insurers are ICICI and HDFC, in that order are a fraction of LIC size in terms of what new premium collected.
Deepak: And remember that the growth of LIC’s first new premium, or accurate total premium collected is a over 10% a year. So they grew from a 320,000 crore premium collected in 2017 to, in 2019, they made about 3.8 lakh crores. So that’s about 60,000 crores, roughly 20% in two years. So they have been growing at that pace, and of course-
Aditya: Even at that base.
Deepak: And at that base, because if you look at the fact that even SBI Life has gone up from 60,000 to 90,000. So in the same time SBI Life was able to collect 30,000 crores in two years, whereas LIC was able to collect 60,000 crores in two years.
Aditya: Amazing.
Deepak: I mean I understand the bases are different, but when you’re talking about total premium collected, you’re roughly looking at these extremely large numbers, right. I believe they have one of the largest renewal premiums as well. So they have got a fairly large take of renewal premiums. They have a very large take of single premiums, first year … I mean it’s just the numbers are mind boggling when it compares to pretty much anything else we see on the investment front, apart from maybe fixed deposits, which are probably the only real comparison that you could make in terms of the same size.
Aditya: And just look at the individual insurance policies in full. So LIC has 28 crore individual insurance policies in full. Now let us compare their to total folios. It’s around just 8.5 crore, right. And the demand account, another 3.65 crore. So again here, these numbers are huge.
Deepak: Yeah, I mean if you consider also that many people have multiple policies, they have multiple folios. If you consider that each business four folios, that’s seven crore. There are five and a half to six crore taxpayers in the FY19, maybe six, six and a half. Roughly for every taxpayer we have one policy holder in LIC. So it’s literally saying they own the insurance space, and probably all of India’s financial services place, because nobody else has this kind of penetration. The mutual fund companies added together have probably less than half of this. So there is substantial size difference here.
Aditya: Yeah, serious. This is some sort of an achievement. So let us try to understand the basics of the business model. So there are two kinds of traditional products, right, non-participating and participating. And then there’s also market linked and not market linked plans. So could you please explain us what is participating, non-participating and the other stuff?
Deepak: Yeah, so I think one of the things that happens is if you take a term policy, right. If you die, they give you a premium and then they give you a certain amount of money. This is a non-participating policy. You don’t get any money back if you don’t die. This is your term policy, does not participate. When I say participate, it means if the LIC policy holders put together make a profit, a part of that profit is paid out into the policy holders account and that part then corresponds to the kind of bonuses you will get, and therefore a participating policy will get these. Now typically, you might have heard of policies called money back, or endowment. The idea of endowment or money back policies is that they participate in the profits. So they might actually tell you, “Listen, you’ll pay a one lakh premium and we’ll give you back 15,000 after five years, and another 15,000 in 10 years,” and something. It’s almost like you pay them and they give you a premium back.
Deepak: But at the same time they’ll say at the end there’ll be a big bonus and that big bonus will kind of make you decent returns. The returns actually add up to just four, four and a half percent or something, it’s not better than a bank deposit, but a lot of people find that useful for being a forced saving. There’s some tax saving that used to exist in the early years, may not quite so in future years. But the important thing to understand about this participating, non-participating point is about how much LIC chooses to share with them. Of course, there’s a certain limited amount that it has to, I think 5% or so, but I mean you’re left at the mercy of LIC to choose how much your policy will get versus some others.
Deepak: And then there’s also the fact that there is linked and non-linked. When I say non-linked, it means if you buy a policy and then it’s a non-linked policy, your typical endowment policy is not linked, an endowment policy that is not linked will say that they will offer you a certain sum assured, or a return, or a bonus that’s actually not linked to the performance or the investments made with your money in order to service the policies. You give an insurer money. The insurer can say, “Listen, I’ll pay you money if you die. But if you don’t die, I’ll invest the money so we’ll run some return, and I’ll share some of that returns with you.” So that is your endowment non-participating … Sorry, participating non-linked. When I say non-linked, that means they won’t tell you exactly what they bought with your money, they’ll just say, “Listen, we’ll give you some bonus. It’s based on overall profits for the company.”
Aditya: So when you say non-linked, does that mean that if they incur losses, I am not at all bothered. They’re still going to pay me from their own pocket?
Deepak: Yes. Not from their pocket. Well, there won’t be any bonuses to distribute, but they take into account the fact that over a long period of time, because most of their money’s going to be invested in debt securities and perhaps a large percentage in common bonds, there is unlikely to be a default of that kind of size that will overshadow the kind of returns they make just from their government safe policies. So if you, for instance, invest 90% of your money in one sort of investment, which gives you say guaranteed 7% a year, that means you’re earning 6 rupees 30 paise just from that 90%. So to lose 6 rupees 30 paise from the remaining 10%, you’d have to lose 63% of your … which is unlikely. So what happens is that profit pool therefore is likely to be smaller if there are losses but larger if there are profits. So the sensitivity to the profit may not necessarily take the profits to below zero, and even if they do go below zero, they will not be lost you.
Deepak: Of course, you won’t know it because you’ll get paid after 15 years. Over a 15 year period, unlikely again that you will see a loss. So in whatever it’s worth, there is no loss transferred to you as a policy holder. Whereas a linked portfolio, what they will do is link your money, your premium, to a fund which is actually investing in certain set of market security, so maybe equities, maybe bonds, whatever. So those bonds go up or equities go up, you make money, and you make as much money as is bought, and if it goes down you actually lose that money. So LIC itself does not take that risk. Therefore, LIC does not profit from that fact. They only charge a management fee, and they can charge that management fee in any case, but LIC does not participate in your profits. So in a linked policy you are a participating policy holder to the extreme that LIC does not participate. In a non-linked policy you could be participating, but LIC will also participate, okay.
Aditya: Okay, I get that.
Deepak: So that’s the difference between the two.
Aditya: And Deepak, I was looking at some competitors such as HDFC Life. So I notice that LIC has the highest dependence on non-linked products among Indian peers. So the dependence for LIC is 98%, whereas for HDFC it’s a clear 50-50 mix.
Deepak: This is also because of the vintage of the company. So the company has existed for the longest more time. For the most time it invested only in government securities and therefore it sold largely endowment policy. These are non-transparent policies. You didn’t know what kind of bonuses you’re going to get, left to the mercy of LIC would decide at the end of the year what bonus you would get. Now linked products came into work only recently, and what happened there, when I say recently I’m talking 10 to 20 years ago, so roughly the private insurers embraced that much more because they didn’t ever take the risk on their own balance sheet. Their balance sheet was not strong enough to take a larger risk, so they had to pass the risk over to the policy holder. All right, like you said, if they invest in equities, the equities fall.
Deepak: Now LIC can take that risk because it’s saying, “Listen, I got a very big balance sheet, so if it falls about 10, 20%, I’m fine.” Whereas these other insurers didn’t have that kind of a deep balance sheet, but they would always go in and say, “Listen, we want to offer you a better return, but we can’t guarantee that to you because we don’t have the balance sheet to do it, so why don’t you take a linked policy insurance?” So a lot of the other companies went more linked. It also has to do with commissions. There’re a lot higher commissions in linked policies than there are non-linked.
Deepak: There’s a lot more demand for linked policies in urban areas than there are in rural areas. Rural is where LIC is very strong, urban is where the other insurers have some kind of levy. So people in urban areas will understand linked policies better. They understand the ability to take a loss. The rural consumer is not one of those guys who will find it very nice to lose money no matter what, and LIC has always given that feeling of if you’re with LIC you won’t lose money, therefore they’ve always sold or pushed their people to sell endowment kind of policies, non-linked policies, which have been a substantial amount. Of course, in the middle they also saw their linked policies go up, but it’s nowhere compared to the size of the non-linked policies that they have.
Aditya: So Deepak, I have pulled the claims data for 2018 and ’19. So maturity is the highest component of the claim data. It’s about 1.5 lakh crore. Second comes the surrenders, third is debt. So clearly debt, which I believe is the lowest margin product, it’s a pure term … these products are pure term plans and margins are lowest, has the second lowest composition to the claims data, whereas majority is 1.5 lakh crore. And I see a lot of murky products here, isn’t it?
Deepak: Yeah, so what has happened is India has traditionally been this nation where agents have gone to people and said, “Why do you want to take a term policy when you can take a policy where you’ll get your premium back if you survive?” So the idea is that everybody says, “Oh, well you know what? If I die, you’ll give me money, you’ll give my family money, but if I live, my premium is gone, right?” So the sold is people will go and buy these crazy … No, the difference is this, if I want to take a insurance policy that is giving me a one crore worth of insurance, a policy might actually cost me something, an insurance policy from LIC might actually cost me something like 25,000 rupees per year. The same policy where they’ll give me my money back with some bonus, some 4%, 3% something kind of a return, sometimes they’ll just give me whatever I paid. Only that much back. That policy will cost one lakh rupees. It’s strictly Forex.
Deepak: This is a simple concept. It costs me 25,000 to insure you, right. 25,000 minus the commission, maybe 20,000. Or maybe 15,000, some number. That number is required to insure you because if I insure you at 15,000 rupees per crore, then I should insure maybe 600 people like you. So 1 in 600 will die, and 1 in 600 I’ll pay out, or I assume that less than 1 in 600 will die so I will make some money out of the fact that let’s say 1 in 1,000 die, so if 1,000 people have paid me this 25,000 rupees, have paid me two and a half crores, I pay out one crore, I make one and a half crores roughly as a profit on that year. So if one in thousand dies, and of course if more die then I have a problem, if less die then I make a profit, so it’s always an actuarial game over there.
Deepak: But in the case of a policy where they give you your money back, where there’s a maturity value to the policy, which means at maturity you will actually get something. What do they do? They take your one lakh rupees premium, put 15 or 20,000 rupees against the policy to be kept in case you die, they invest the remaining 80. So the remaining 80 over a small period of time 80 will become 100. If you get 5% a year in 4 years or 5 years, it’ll become 100. So if you survive the policy, which will typically be a 15, 20 year timeframe, that 80,000 which they have taken from you will actually become probably one and a half, two lakhs. They’ll give you a lakh, they’ll keep a lakh profit, and everybody’s happy. You think you’ve got your premium back, whereas what you don’t realize is the equivalent term plan cost you one fourth what it would have cost you to get your money back. Therefore, if you’d ask a person, “I want my money back and I have only 25,000,” they will take a policy whose assurance value or insured value.
Aditya: Would be very less.
Deepak: Would be 25 lakhs. So 25 lakhs is not enough for you. If you’re going to pay 25,000 rupee premium, 25 lakhs is not enough. But if you pay 25 lakhs for a term premium, one crore is what your assured value is, which is so much more better. So it’s really a function of how badly designed products actually appeal to investors simply because you use terms like, “I get your money back.” So you always appeal to that irrational sense, which is semi rational in a way, of the investor, and that’s why majority proceeds even today for LIC are the largest chunk. As we go forward, we’ll see probably where debt claims will become higher, and higher, and higher as a percentage as people start to realize the value of term plans, but contrary to popular opinion, debt plans are actually more profitable as a percentage basis to LIC because India’s lifespans are increasing.
Deepak: We’re talking about India’s lifespan being 35 in 1950 to probably around 75 today. Every 10 year plan, India’s lifespan increases by between three to five years. I’m sure in 2021, when they do the census, they will find out that India’s lifespan has increased to 78 or something like that. So over time, if people live longer, they are paying premiums for longer, sometimes their policies are getting matured before they die. So in a lot of term insurance, you basically pay premium until the guy has a term. So if he has a 30 year term and he lives 30 years, you don’t pay anything back. So your term plans are actually more profitable as India gets healthier and as people live longer almost naturally. So to give you a crazy example, in a term plan, neither the individual, your customer, nor you want to see this plan paid out, because I don’t want to die.
Deepak: I don’t want to die just because my relatives will get money, right. So it’s a stupid assertion now, but you have now me also working towards the goal of not dying and LIC also being happy that I am working on … So both of us are winning, except LIC’s making the money out of this, and the more healthy I get, the happier LIC is. So at some point in time they’ll start offering things like, “Did you do this health checkup? I’ll give you some extra this thing.” They’re doing it already in health insurance policies, not LIC, of course, but other health insurers, but life insurers too will start getting into that act as well. But you have to think about the fact that the mix today remains largely majority.
Deepak: A good part surrender. So one lakh 50,000 crores is a majority value payouts. Surrenders are 70,000 crores, which means people have gotten these products and then they’ve decided that this is a bad idea for them, or that they need the money urgently. They’ve surrendered the policy. Every surrender is a profit to LIC because what happens when you surrender the monies, you surrender a policy, typically policies are badly designed and therefore when you surrender a policy, they’ll give you only 30, 40, 50% of the amount that is available. So many people surrender in the third, fourth, fifth, sixth years of the policies, or try to surrender in those years. The payouts typically end up enriching LIC. So when you have a 70,000 crore surrender, consider the fact that this is probably 100,000 crore surrender, only they paid out only 70. 30,000 crores just went as profits to LIC.
Deepak: Of course, they don’t show it that way. This goes as parts of the profits of a profit pool that might eventually be used later to pay for other calamities like today you have coronavirus. That coronavirus gets big in India. A lot of people are going to die. LIC’s going to have to pay that out. LIC then take some of this profit, the returns from surrenders and all that stuff, and keeps it as provisions just in case such crazy situations arise. Until now, LIC have to answer to nobody except its own masters, which is the government of India. The government of India doesn’t care if LIC makes profits or not because either way it’s not paying any taxes as an insurance company. So therefore they don’t care whether these profits sit in provisions or not. There will be some income tax component at some point, but there is not so much available now.
Deepak: So there is actually now a significant amount. So if you look at the total payouts that they do, they do about 2 lakh 50,000 crores. They earn, like you said before, the total premiums they earned this year were 3 lakh 81,000 crores. So you earn 3.81 lakh crores. You spend 2.5 lakh crores. Earn 3.8, spend 2.5, you literally on a cashflow basis made 1.3 extra. Of course, that has to be invested, but 1.3 extra. Out of that 1.3 extra, you use some money to pay for salaries, like we talked about, 50,000 crores roughly. So 130,000 crores was your excess premium collected, 50,000 you paid in salaries and commissions and management expenses. You still have 80,000 extra money that’s floating around. They’d go and put that into a buffer as provisions and leave it.
Deepak: But roughly this 80,000 crores is just simply accessible. You don’t actually need all of it to be put as provisions. You might be able to sequester a significant part of it, maybe 10,000 crores, maybe 20,000 crores, but a good portion of that can be taken out as profit. This profit is what LIC would have actually been earning. It’s difficult because the books don’t show it that way, but you need to look at deeper numbers in order to surface the actual amount, but roughly speaking. And these are just premium incomes, right. We also need to look at the other income from investments. So that brings me to the next section where we talk about investments made by LIC.
Deepak: Now when I was going through the public disclosure of LIC, I came across a word a lot of times, it was mentioned in a lot of line items where they were talking about approved securities. So I searched for it. So basically approved securities, so IRD has a rule where LIC or any other insurer is required to invest the bulk of its policyholder money in approved securities, which are basically central in state government bonds and highly rated corporate bonds, okay. So LIC has invested about 20.6 lakh crore in government bonds. Amazing, right? So what would be the total size of the government bond market in India? So just look at the central government borrowing. It’s about 60 lakh crore outstanding as audit. I think 15 lakh crore of that is held by LIC. That’s like 25%. Now think about the fact that LIC is so big that it takes one fourth of every government bond issued and put it on its books.
Aditya: Amazing.
Deepak: So that’s the size of this market. This is greater than all the … So LIC’s probably the second largest player after banks. Banks as a whole probably own maybe 30 lakh, 30, 32 lakh crores of the Indian government bond market, 15 lakh crores is held by LIC alone, so 47. The rest is mutual funds, other insurers, pension funds, and so on, who are regulatory required to own a certain amount of-
Aditya: Government security.
Deepak: Government security. So LIC is therefore one of the largest players in the government bond market per se. Also, like you’ve noted, if 15 lakh crore is the central government bonds, what is the rest? It’s probably state government.
Aditya: State government, correct.
Deepak: So state government bonds also now a significant player happens to be LIC. It’s simply that if state government want to issue, they were not financially savvy, they asked LIC, LIC said, “How, whatever.” And they would go and buy these bonds off state government, which leads us to some interesting discoveries there as well, hey.
Aditya: Correct, yeah. So I just noticed that a few state governments, such as a government of Jharkhand, Chhattisgarh, and Assam, they have defaulted on a few minor bonds, the total would be maybe a few crores, so it means nothing, but at least this was really interesting for me that the state governments have defaulted. I believe this is more on purpose, like it’s LIC, it’s a cash cow. So it’s not that the government of Assam cannot pay five crore rupees to LIC, isn’t it?
Deepak: Yeah. Well I think sometimes defaults are pre-planned saying who takes the risk, and many of these are much earlier, done at a point where five crores was actually a reasonable number. But having said that, since in recent times I think we’ve not had any major defaults other than maybe a few small road projects or SPVs or something like that, which have been isolated where they’ve actually seen some kind of a default and the LIC has taken provision. Now roughly add it all up, it’s only 32,000 crores in total NPA. But if you add everything up, including the fact that they invested in DHFL, they invested in this, they invested in that, 32 lakh crores of investments, out of its 32,000 crores are NPS. That’s 1% NPS. That would be a bank I would want to buy because if you have a bank who’s got only 1% NPS at that size, you want to buy it because even ICICI has 4% gross NPS.
Deepak: And these are gross because LIC has provision for all of these losses for the most part. Only a very few of them are 25% or 50%, everything else is 100% provisioning. So if you’ve got 100% provision, you’ve taken the loss on your balance sheet, it no longer appears on your balance sheet as a loss. You’ve set it aside as a 100% provision, which means if you had to lose money you already lost. That means only new incremental NPS will hurt you. The old ones will not because if you had a 25% provision, that can go from 25 to 100 and hurt you. So if you have very little sitting at 25 or 50%, then the chances of your old NPS hurting you is relatively small. So essentially you got a bank with 1% gross NPS and 0.1% net NPS. Put it another way. That is actually a very interesting proposition because this is a very mature financial institution in that respect and they have managed to diversify substantially well, and even though they’ve had defaults, even from state government, they managed this process quite well.
Aditya: So talking about proposition, as you said, this brings me to the IPO. So as the government said that they’re going to list LIC, so how should one value LIC and how do you see the market cap?
Deepak: That’s interesting. See, LIC owns a significant amount of the market itself. It owns 4.7 lakh crore. Now 4.7 lakh crore is roughly. It’s got that much of security. It owns 34 of the top-
Aditya: They have stake in 34 out of 51 nifty companies.
Deepak: Nifty companies. They own a bank, IDBI Bank. They own a housing finance company called LIC Housing Finance. They own a mutual fund called LIC Mutual Fund. They own real estate assets in almost every town in India. They have a franchise that goes from probably the Western tip to the Eastern tip, and another into Southern. You can find LIC agents everywhere. So you’ve got all of this to value. How do you value this? I mean you don’t know where you can take the sum of the parts. So let’s say the real estate valuation is X, and that value may be 50,000 crores. I don’t know. I don’t know the numbers because they haven’t come out with the IPO numbers yet.
Aditya: So if you look at the investments, so they have made investments in real estate for about one lakh crore. So 20.6 is in government debt, 4.7 is in equity, and they have 2 lakh crore in other approved bond, which I’m assuming would be AAA corporate rated bonds, and then they have one lakh crore in real estate.
Deepak: Yeah, that one lakh crore in real estate would be at the price of which that was purchased. So in Bangalore, for instance, they have an iconic office, a couple of them actually, one near the town hall, one on M.G. Road. These buildings alone are probably bought for, I don’t know, less than maybe 10 lakhs because this was bought many, many, many years ago. And today they will be valued at probably tens of crores or hundreds of crores. In that way they’ve got Delhi, they’ve got Bombay, they’ve got other places, so the real estate portfolio alone may be worth more than three, four lakh crores. I don’t know the numbers yet. So that is one part of the whole game.
Deepak: Then you’ve got the LIC Housing Finance stake, the IDBI stake, the LIC Mutual Fund stake, all of these have a certain value. And then on top of that you’ve got the base businesses. If you’re earning 3 lakh 81,000 crores off premium every year and you’re paying out 2 lakh 50, and you’re keeping a little bit here and there for everything else, and salaries, and so on, you actually have a business where your costs … So roughly, if you look at the total AUM, which is 3.2 lakh crores, now premiums are one thing. Sorry 32 lakh crores.
Aditya: Yeah. Correct.
Deepak: And then you’ve got an asset management fee that comes out of the current … So every year out of that … So let’s say you can extract out half a percent, or 1%. So just looking at the fact that I’m managing 32 lakh crores of AUM and I can get out maybe half a percent to 1%, of course unless you can get much more, I’m just saying, plus you’re getting an additional 10% of that every year as premium, or 10 to 15% of that, so growing at 10 to 15% a year, you are in a business that says,” I’m currently earning, just as premium … sorry, the asset management fee on my insurance, I’m probably earning roughly 50 to 60,000 crores a year, 1 to 1.5%. I mean 0.5 to 1.5%. And probably earning 60,000 crores and will spend about 40, 45,000 crores, I have other actuarial expenses and things to be kept aside.
Deepak: But I also have the fact that I make a lot of profits from policies that surrender early that have a certain termination fee that I don’t have to share all my profits with my policy holders, of which substantial amount come in through non … sorry, participating, but non-linked plans. So my earning capacity is probably a revenue … If I looked at it traditionally, it might be a revenue of 70, 80,000 crores a year of which I might profit maybe 10, 20, 30,000 crores. If I’m profiting at about 20,000 crores and I were looking at it as a PE perspective, I would say 50 times earnings. That’s 10 lakh crores. 50 times earnings is ridiculous for a company the size of LIC, so take 10 times earnings at the lower end, you’ll end up with something like 2 lakh crores.
Deepak: So now you’ve got a very wide valuation game between 2 lakh and 10 lakh. All other Indian insurers are valued at a multiple of embedded value. LIC does not declare its embedded value. We don’t know what is embedded value is. So roughly some people have said it’s 25,000 crores, but I think that’s too less. It’s probably of the order of maybe 50,000 to 75,000 crores. So if you take it is a multiple of the embedded value for the core insurance business of two times or three times. So you are talking about 2 lakh crores as a core valuation of the business. Properties may add up another two to three lakh crores, so you’re talking four to five lakh crores. So I think this is one of the largest companies in India to list if it does. And you’ll talk about a base valuation of around five lakh crores.
Deepak: Assuming that the properties are actually owned by LIC and not by the government. Assuming a lot of things that we don’t know anything about, because we haven’t seen a DRHP. Assuming also that the LIC acts are amended suitably. Remember LIC actually doesn’t make any profits, okay. It puts everything back into the pool. It doesn’t have to declare profits. So tomorrow as a corporate ISO, so it may declare a very different set of books compared to what it does today. So when it does that, we don’t know how the numbers will change. So if we’re taking four to five lakh crores off it, the government will probably offload only 10 to 12%. There will be a substantial premium for the float because everybody will want to buy LIC. Remember, it’ll go to the nifty, so everybody’s going to want to buy it. All the institutions, the mutual funds, the pension funds-
Aditya: ETFs.
Deepak: The ETFs from abroad, they’ll all want a piece of this pie. If they all buy a piece of this pie, the amount of it available for trading will be probably very small, 2, 3,000 crores or so. If 2, 3,000 crores is all there is to be treated in a company worth 5 to 7 lakh crores, what’s going to happen? The prices are going to shoot up the way IRCTC, the way so many other companies do simply because of there’s a low float. So you’re going to find that the IPO will find the company, make the company very attractive and at some point it’ll fizzle out, because it’s a government company in the end and it’s not designed to make the best for the shareholders. It’s designed, of course, to make the best for the ultimate shareholder, which is the government, but not necessarily for other shareholders.
Deepak: So I think it’s a very interesting play. I think valuation-wise we’ll see what eventually comes out. I may be pleasantly surprised to hear that there’s a much larger company than I thought, but I also feel that we could be disappointed in seeing this company actually has much lower earning potential than we think it does right now.
Aditya: Okay. So I hope we do another podcast when the IPO actually comes out and thanks a lot for the discussion.
Deepak: It was awesome. I think we’ve had so many fun discussions and I know that LIC’s been a topic that’s just come out because the budget announcements came in. And what surprised me about this whole thing was the size. It’s like comparing India and China, right. Sometimes you say, “Oh India and China, same breath,” but then you look at China’s numbers and you say it can’t be same breath. They make 10 times or 20 times the amount of steel India does, and India is so small in comparison with everything. They have 40 cities of the size where we have probably four or five. Similarly LIC compared with any other financial services firm that’s in the investment or insurance space is literally like comparing a very big giant to a pebble. It’s just not possible to imagine the size of this company with everything else, the tentacles it has all over the place. I don’t mean tentacles in a bad way, but I’m just saying.
Deepak: Also, to the fact that there are so many people buying its product, despite us and hundreds of other people having written on the internet that some of these products are not the best in terms of returns, in terms of assurances, guarantees, you could get better products elsewhere, it doesn’t matter. To these people, LIC is one of the best, most stable companies in the space, it’s quasi guaranteed with the government of India and it will continue to hold its shine, so even if they pay more or get less returns, the safety, the attraction of it is so strong that you would look at this company and say, “If it were a public listed company, I’d want to own it simply because it has that brand.”
Deepak: Now it is coming for an IPO. We don’t know when. It will hopefully happen in our lifetimes and in our lifetimes we’ll get to see their DRHP. And I admire the moneymaking validity of this company in this behemoth that we are seeing in this space. And like you said, let’s do another podcast when that happens. So it’s been wonderful having you on the show, and we’ve been doing a lot of these discussions. Wish you the very best and we have a great set of people listening in. Throw us your comments at capitalmind_in. I’m at @DeepakShenoy. Aditya’s @AstuteAditya. We’re always happy to hear your feedback, questions, clarifications, and do visit capitalmind.in for our commentary and our opinion pieces, and capitalmindwealth.com where we, as a very tiny asset manager, manage a certain amount of portfolios in a relatively low cost and efficient manner. So glad to have spoken, Aditya, and lovely to have you all listening. Thanks for listening.
Aditya: Thanks a lot, Deepak. Thanks.
