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

In the group business LIC is targeting non-governmental organisations (NGOs). Last year, the life insurance giant logged 119 per cent growth earning Rs3,612 crore. As per Bhardwaj, the current fiscal will see a 50 per cent growth over last year's income. In the case of alternate channels, LIC has tied up with thirty banks to sell its policies. The tie-up has resulted in an additional 10,000 distribution outlets, at no additional cost.

LIC is at the top of the pecking order among India's 13 life insurers. However, when it comes to per policy size and average premium per policy (APPP), it ranks last. Explaining this anomaly, Bhardwaj says: "LIC's mandate is to spread the message of insurance amongst the masses. Given our client profile, the average size per policy and the APPP is bound to be low. But private insurers mostly sell unit-linked insurance policies, which have more to do with investment rather than insurance." This is true. Last year, LIC sold 2.69 crore policies as against 16.58 lakh sold by the remaining 12 private life insurers. Its claims / maturity payout totalled a whopping Rs23,000 crore.

But that doesn't mean it shuns the investor customer. In line with the current industry trend of selling unit-linked policies, LIC has been pushing its Bima Plus; nearly 30 per cent of LIC's new premium income is from this product. Bhardwaj feels a slight change in product profile would do wonders for the corporation. This was evident in the case of Jeevan Saral, a unique product launched recently. That's not the only area of change. One of the most heavily networked organisations — next only to the Indian Railways — LIC will be investing around Rs75 crore on technology. It also plans to implement a data warehousing project.

Real estate bonanza
LIC is also the country's biggest landlord — ranking first in terms of market value and second in terms of holdings after the Indian Railways. Recently, it has taken steps to get more revenue out of its real estate. With the falling interest rates impacting its yield on investments — which in turn resulted in reduced bonuses to policyholders (95 per cent of the operational surplus / profit is distributed to policyholders as bonus) — LIC wanted to shore up its other income.

A SBU was formed some time ago to increase its returns from real estate, but the task has been far easy. The corporation has two kinds of properties — those inherited at the time of nationalisation from insurers who were banded under the umbrella of the LIC and those acquired since. The returns from the acquired properties — mostly for housing purposes — are marked to the market. But the inherited properties, though huge in number, generate a pittance by way of revenue — even in metros like Mumbai, Delhi, Kolkata and Chennai.

While it currently nets around Rs150 crore from rentals, LIC is in the process of upping this income by constructing new buildings, modernising the existing ones and renegotiating lease terms with long-time tenants. "We hope to increase the rental revenue by at least 15 per cent," says Bhardwaj.

A start towards this was made in Chennai, where LIC inaugurated its newly built 24,000 sq ft building, Jeevan Anand, which cost Rs2 crore. Apart from housing LIC's investment division and a branch office, the building will also generate rental revenues. Says regional manager (E&OS) B Venugopal: "We will recover the outlay in three years." LIC plans to build around 2 lakh sq ft in Chennai alone. Presently, it earns around Rs5 crore from rentals in the Chennai zone. "We have renegotiated several lease agreements already. All our inherited buildings will be modernised and air conditioned for letting out," says Venugopal.

LIC will also be promoting housing projects for its policyholders in Chennai, Kozhikode and other places. The corporation's expertise in construction is sought after by other organisations like Indian Overseas Bank, Corporation Bank and others.

The corporation is also revamping its investment operations with the help of a foreign consultancy firm. Last fiscal, LIC earned an investment income of Rs27,000 crore. The corporation booked a Rs1,000-crore profit trading in government securities. "Nearly 25 per cent of the Government of India's borrowings are from LIC. Our investment in infrastructure is Rs40,000 crore and in equity it is Rs30,000 crore. The market value of our equity investments is around Rs60,000 crore," Bhardwaj explains. But while the investment income does show growth, Bhardwaj agrees that the yield on investments is on the downslide, in line with the interest rates; another sector which needs innovation.