“We see the arrival of external shareholders with experience of the insurance industry as a further key benefit of the IPO. We believe the presence of foreign stakeholders will bring particular benefits in the areas of capital adequacy, financial flexibility and governance standards, enhancing LIC’s credit profile,” commented Moody’s
As a listed company, Life Insurance Corporation (LIC) will face more demanding disclosure requirements, resulting in increased transparency over its operations, and encouraging it to prioritize profitable underwriting and risk management. This will, in turn, boost its capacity to generate and grow capital internally, said international rating agency Moody’s.
“We see the arrival of external shareholders with experience of the insurance industry as a further key benefit of the IPO. We believe the presence of foreign stakeholders will bring particular benefits in the areas of capital adequacy, financial flexibility and governance standards, enhancing LIC’s credit profile,” commented Moody’s
Additionally their influence could aid operational and distribution efficiencies, for example, by encouraging LIC, whose online distribution is currently limited to its own portal, to negotiate wider online distribution agreements with third parties. This would support LIC’s sales growth, given the increasing importance of digital distribution in the life industry, and the greater geographic reach of online sales, said Moody’s.
However, these benefits will likely remain somewhat limited until the government sells a larger stake, allowing external investors to build a more strategic stake in the company, pointed out Moody’s.
While LIC complies with the Insurance Regulatory and Development Authority of India’s (IRDAI’s) solvency requirements, its capital adequacy is weaker than that of global life insurance peers. LIC’s shareholders’ equity accounts for less than 1% of total assets, compared with, for example, 4.9% for Ping An Life Insurance Company of China, Ltd. (Ping An Life, insurance financial strength rating A2 stable) and 4.2% for Aviva Plc (insurance financial strength rating Aa3 stable).
“We expect post-IPO improvements in LIC’s operating performance and profitability to drive comparable changes across the wider life insurance sector. This is because as India’s dominant life insurer, LIC often sets the trend for pricing and policy terms, said Moody’s.
The country’s privately owned insurers have already been preparing for the prospect of future profitable growth opportunities, as premium growth continues alongside the government reforms of state-owned insurers (which include LIC’s IPO).
“In FY 2020, four of the 24 life insurers raised capital, and we expect more such transactions, as well as more M&A deals and IPOs. These will improve the Indian insurance sector’s capital adequacy and financial flexibility in the months ahead. We also expect foreign insurers to continue investing in India’s private insurers where the 49% foreign direct investment limit is much higher than the 20% allowed in LIC,” said the rating agency.
Many global companies already present in India through joint ventures may increase their ownership stakes in their local affiliates.