LIC IPO opens today. Here are 5 things you need to know before applying.
You may have come across a lot of articles, discussing the price, valuations, reservation quota, about the LIC IPO; worry not because we aren’t going to just add to the noise and discuss the usual stuff today. In today's article we will discuss 5 key things that no one would tell you about the LIC IPO.
1. Not just an Insurance company: LIC is not just the biggest insurance company in India but also the biggest asset manager of our nation, as of Sept 2021, LIC’s assets under management (AUM) were ~Rs 39,60,000 crore ($526 billion), which is more than AUM of entire Indian mutual fund industry by 8%.
According to information sourced from Prime Database, a capital markets data provider,, its equity investments as of feb 2022 were Rs. 9,71,000 crore ($129 billion), This is more than the combined holdings of the next four largest investors. And it doesn’t include companies in which the LIC holds less than 1%.
So, LIC is basically a mutual fund company? Yes, Sort of. Name any big company in the Indian stock market, chances are LIC holds a stake in it. Among the 30 companies in the Sensex, LIC has a stake in 28 of them, so if you are investing in LIC, you are kind of buying an index fund.
Operating as a mutual fund company has its own drawbacks, in case of LIC its profits depend largely on how the market performs; in case of a bear market, its AUM as well as embedded value will decline.
2. LIC distributes 95% of its profits to policyholders: Broadly, insurance companies sell two kinds of policies, participating and non-participating. Participating policies give the policyholder a part in the profits of the insurance company; currently LIC has a ratio of 95:5, under which they distribute 95% of their profits to the policyholders and 5% to the shareholders.
The insurance behemoth has changed this split, and now shareholders would be eligible for 10% share in the profits. Although they have changed the split in shareholders favor, only 10% of the profits would be flowing to the bottom line.
3. Insurance Industry, star of the pandemic: Insurance industry is just like an actor, which was ignored for years even after good performances. But just one blockbuster movie, and he is gathering all the eyeballs now. For years, optimism in people has led them to dismiss the importance of insurance, but one pandemic and boom, people have realized how uncertain lives are.
No wonder, Insurance is one of the fastest growing sectors; new business premiums are growing at a CAGR of 17% and LIC, the insurance king in India, is bound to benefit from this growth.
4. LIC is a government company: No matter how giant LIC is, it is a government organization and you see government’s job is not to do the business; rather it is to work for people and at the end of day, they would always keep the interests of the economy and general public over the interests of the shareholders.
And why should it worry investors? Well, the past records have not really been great. You must have heard “Bure waqt mai apne hi kam aate hai” , the government has taken the quote quite seriously, whenever there is an economic crisis, it sends LIC to the rescue.
Be it bailing out IDBI, or crisis ridden IL&FS, has been as that “bada bhai”, which manages all the chaos.
As a shareholder, this isn’t a great thing, as in the long run these kinds of investments could really hurt the business of LIC.
5. LIC is a market leader: LIC as a brand has garnered a lot of trust from Indians, and due to that it has been the market leader even 2 decades after the industry has been privatized.
While in other sectors like banking and telecom, private players killed the government companies after privatization. In Insurance, LIC continues to dominate the market and it will continue to do so.
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