Ahead of IPO, LIC on track to reduce NPA ratio, improve persistency

The Cabinet Committee of Economic Affairs (CCEA) cleared the disinvestment of Life Insurance Corporation of India (LIC) on July 12.

While the initial public offering (IPO) is expected to come in in Q4FY22, LIC has begun the process of sprucing up its books ahead of the listing.

Sources told Moneycontrol that a three-pronged strategy is being adopted by LIC, which includes improving persistency, reducing its Non-Performing Asset (NPA) ratio (in the debt portfolio) as well as planned exits of non-core assets like IDBI Bank.

The Department of Investment and Public Asset Management (DIPAM) had in January appointed actuarial firm Milliman Advisors LLP India to assess the embedded value of LIC ahead of its proposed listing.

The valuation process of the insurers will take into multiple factors like business in the books (new business and renewals), assets and equity shareholding in other companies. The valuation could be revealed by the December quarter (Q3FY22). LIC did not respond to a query sent by Moneycontrol.

Reduction of NPA ratio in debt portfolio

In FY20, LIC's gross NPA ratio (as a percentage of its debt portfolio) had touched an all-time high of 8.17 percent. However, there has been a gradual reduction in both gross NPA ratio and net NPA ratio at the end of FY21.

Data showed that its gross NPA ratio (as a percentage of debt portfolio) came down to 7.78 percent while net NPA ratio reduced to 0.05 percent at the end of FY21 from 0.79 percent a year-ago. LIC does not disclose absolute NPA numbers.

M.R. Kumar, chairman of LIC had earlier said that the gross NPA and net NPA ratio of LIC should not be compared to that of the banking sector. He had added that LIC makes full provisions for all NPA in the debt book. He had also pointed out that the stress threshold for banks is different from that for insurers.

For LIC, most investments comprise government securities, equity, and a small portion of corporate debt. LIC had a balance sheet of Rs 37.28 lakh crore as of March 31, 2021.

Improving persistency

Improving the persistency or the renewals is part of the core strategy ahead of the IPO. In this, the 61st month persistency, which had fallen below 55 percent, is being accorded special focus.

Persistency is key to better value of new business (VNB) margins. This is because the longer the business stays on an insurer's book, the better it is. Since LIC has a higher share of traditional products, an improvement in persistency would further boost the valuations.

Data sourced from LIC's quarterly disclosures to the regulator, IRDAI (Insurance Regulatory and Development Authority of India), showed that there has been improvement in the 61st month persistency (by annualised premium) from 54 percent in FY20-end to 59 percent at the end of FY21. Here, 61st month persistency refers to policies that are continuing to be renewed even after five years.

There is an improvement across all cohorts of persistency, be it 13th month (after first year), 25th month (after second year), 37th month (after third year) and 49th month (after fourth year). Sandeep Wadhwani, a Delhi-based insurance consultant, said that the 61st month persistency is crucial especially because it shows how regular your customers are.

"For international investors, persistency after the fifth year is very important. Being the country's largest insurer, LIC's persistency numbers also reflect a general trend of the policyholder behaviour and efforts taken to ensure that premiums are being paid," he added. For the 13th month, the persistency (by annualised premium) rose from 72 percent in FY20 to 79 percent in FY21.

Paring down IDBI Bank stake

On July 9, the Department of Investment and Public Asset Management said the Cabinet Committee of Economic Affairs has given its go-ahead to the government and the LIC to offload 100 percent of their entire stakes in IDBI Bank, along with a transfer of management.

At present, IDBI Bank is classified as a private sector bank by the RBI with the government's shareholding at 45.5 percent, LIC's at 49.24 percent and the non-promoter shareholding at 5.29 percent. However, as reported by Moneycontrol earlier, LIC will not sell its entire stake at once. Sources said that stake sale will be made in multiple tranches to ensure value unlocking ahead of the IPO.

The first step prior to the IPO is determining LIC’s embedded value (EV). The insurer had a balance sheet of Rs 37 lakh crore as of Q3FY21. Value unlocking will help in the valuation process, which will be done through calculating the embedded value. The embedded value of a life insurance company comprises two key elements. First, it includes the net asset value or the net worth of the company, which represents the market value of the company’s assets attributable to the shareholders.

Secondly, EV also comprises the present value of the company’s future expected profits from its existing business portfolio, as on the date of valuation. The valuation will be a multiple of the EV.

Source: Money Control