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

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

While the initial public offering (IPO) is expected to be included in Q4FY22, LIC has started the process of growing his books ahead of listings.

The source told MoneyControl that the three branch strategies were adopted by LIC, which included increasing persistence, reducing the ratio of non-performance assets (NPA) (in the debt portfolio) and out of the adventure of non-core assets such as the IDBI Bank.

The Department of Investment and Management of Public Assets (Depam) in January was appointed as an actuarial company, Milliman Advisors LLP India to assess the value of LIC embedded ahead of the proposed listing.

The process of assessing the insurance company will take many factors such as business in books (new business and update), share ownership of assets and equity in other companies.

Assessment can be disclosed by the December quarter (Q3FY22).

LIC did not respond to requests sent by MoneyControl.

Reduction of the NPA ratio in a debt portfolio

In the ratio of NPA Gross FY20, LIC (as the percentage of its debt portfolio) has touched the highest of all time of 8.17 percent. However, there has been a gradual reduction in the dirty NPA ratio and a clean NPA ratio at the end of FY21.
The data showed that the dirty NPA ratio (as a percentage of the debt portfolio) fell to 7.78 percent while the net NBA ratio was reduced to 0.05 percent at the end of FY21 from 0.79 percent year.

LIC does not reveal absolute NPA numbers.

M.R. Kumar, Chairman Liv previously said that the ratio of NPA and NPA NBO was gross should not be compared to the banking sector. He has added that LIC makes full provisions for all NPAs in debt books.

He also showed that the stress threshold for the bank was different from it for insurance companies.

For LIC, most investments consist of government securities, equity, and a small portion of the company’s debt. LIC has a balance sheet RS 37.28 lakh crore on March 31, 2021.

Increase persistence

Increasing persistence or updates is part of the core strategy in front of the IPO. In this case, the 61st month persistence, which has fallen below 55 percent, is being given a special focus.

Persistence is the key to the value of a better business margin (VNB). This is because the longer the business remains in the book insurance company, the better.

Because LIC has a higher share of traditional products, increasing future persistence will increase the assessment.

Data sourced from the disclosure of LIC quarterly to regulators, IRDAI (Indian Insurance Arrangement and Development and Development Authority), showed that there had been an increase in the 61st month persistence (with an annual premium) of 54 percent at the end of 59 percent in the end of FY21.

Here, the 61st month persistence refers to the policy that is constantly updated even after five years.

There was an increase in all cohort persistence, both the 13 months (after the first year), the 25th month (after the second year), the 37th month (after the third year) and fourth (after the fourth year).

Sandeep Wadhwani, Delhi-based insurance consultant, said that the 61st month persistence is very important especially because it shows how regularly your customers are.

“For international investors, persistence after the fifth year is very important. Being the largest insurance company in the country, the number of lic persistence also reflects the general trend of the behavior of policy holders and efforts taken to ensure that premiums are paid,” he added.

For the 13th month, the persistence (with annual premium) rose from 72 percent at FY20 to 79 percent at FY21.

Peel the IDBI Bank Park

On July 9, the Department of Investment and Management of Public Assets said the Cabinet Committee of the Economy Affairs had provided ahead to the government and LIC to collect 100 percent of their all bets at the IDBI Bank, along with management transfers.

At present, the IDBI Bank is classified as a private sector bank by the RBI with government share ownership of 45.5 percent, LAC by 49.24 percent and non-promoter shareholdings of 5.29 percent.

However, as reported by previous MoneyControl, LIC will not sell all its shares at once. Sources say that peg sales will be made at several stages to ensure the value of opening forward IPO.

The first step before the IPO determines the embedded value of LIC (EV). Insurer has a balance sheet of RS 37 Lakh Crore at Q3FY21.

Unlocking value will help in the assessment process, which will be carried out through calculating embedded value.

The embedded value of life insurance companies consists of two key elements. First, it includes the value of clean assets or the company’s net value, which represents the market value of the company’s assets associated with shareholders.

Second, EV also consists of the present value of the expected benefits in the future of the company from existing business portfolios, such as the date of assessment. Assessment will be a multiple of EV.