Ahead of IPO, LIC's Q3 net profit zooms on surplus model change

Under the new model, the surplus distribution in the participating policyholders’ fund has been modified to 90:10 in a phased manner, wherein 90 per cent will go to policyholders and 10 per cent to shareholders. Further, 100 per cent of the surplus generated out of the non-participating business will be available for distribution to all shareholders.

Ahead of its initial public offering, Life Insurance Corporation of India’s net profit surged to Rs 234.91 crore in September–December quarter (Q3FY22). This is on the back of the change in surplus distribution model, wherein shareholders will get a larger share of the surplus than earlier.

In the same period last financial year, LIC’s profit totalled to Rs 0.91 crore. For the nine months ended FY22 (April–December), net profit of the insurer stood at Rs 1,671.56 crore.

LIC had a single “life fund” before Section 24 of the LIC Act was amended by the government to bring its surplus distribution mechanism on par with private life insurers. Now, the life fund has been segregated to two funds -- participating policyholders fund and non-participating policyholders’ fund.

Consequently, the surplus distribution in the participating policyholders’ fund has been modified to 90:10 in a phased manner, wherein 90 per cent will go to policyholders and 10 per cent to shareholders. Further, 100 per cent of the surplus generated out of the non-participating business will be available for distribution to all shareholders.

This change, LIC chairman MR Kumar had said, would help the insurer increase its profitability, a metric that will be closely tracked once it gets listed. “Going forward, with the change in surplus distribution, profitability will increase. Beyond that, it’s a question of how the product mix changes, penetration, more coverage to people, getting into sectors where we have been missing out. So, that should take care of the profits,” Kumar had said.

The total premium collected by the insurer increased 0.8 per cent to Rs 97,761 crore in Q3 from Rs 97,008 crore in the year-ago period. In the first nine months of FY22 (9MFY22), total premiums of the insurer, which includes premiums for first year, renewal, and single, added up to Rs 2.84 trillion, an increase of 1.67 per cent year on year (YoY).

Persistency ratio of the insurer dipped in Q3, with the 13th month ratio at 69.23 per cent compared to 72.98 per cent in the same period a year ago. But the 61st month persistency inched higher than the year-ago period to stand at 57.28 per cent. The ratio indicates how many policyholders are paying the due premiums regularly on the policies with the insurer.

The solvency ratio, a measurement of the entity’s ability to meet its debt obligations and other financial commitments, of the insurer improved to 1.77 as of December 2021, compared to 1.64 in the same period last year.

The minimum regulatory requirement prescribed by the insurance regulator is 1.5.

The non-performing assets (NPA) ratio of the insurer in its debt portfolio also saw a sharp improvement, with the gross NPA ratio at the end of Q3FY22 standing at 6.32 per cent against 7.78 per cent in the same period a year ago. Net NPA ratio improved to 0.04 per cent compared to 0.14 per cent in the year-ago period. The insurer had brought its gross NPA ratio in the debt portfolio down to 6.57 per cent at the end of the September quarter (H1FY22). Net NPA at the end of H1 was 0.05 per cent.

The Securities and Exchange Board of India has cleared the draft red herring prospectus (DRHP) of LIC, setting the ball in motion for the country’s largest-ever public listing. The government will sell 5 per cent of its stake, or 316.25 million shares of its over 6,325 million shares.

Following the market regulator’s nod to the IPO papers, the insurer can launch its share sale. However, LIC may not launch its IPO immediately given the current volatile market conditions. The government is hoping to launch the IPO as soon as stock market volatility, sparked by the Russian invasion of Ukraine, recedes.