LIC to dip into non-par funds to boost dividend, Board decision soon

With the LIC stock price trading at a third lower than the IPO issue price, the board of the life insurance behemoth will work on five-six key areas to prop up its sagging share price, including higher dividend payouts and bonus issues to shareholders by reallocating funds from non-par corpus.

The insurer will also have a re-look at its investment strategy to generate more income and give added thrust to non-participatory policies to improve returns to shareholders, a senior official told FE.

Ahead of the IPO in May, LIC had bifurcated its single policyholders’ fund corpus into two – participatory and non-participatory – intending to focus on non-par business to boost shareholder returns. As on September 30, 2021, participating policyholders’ fund aggregated to Rs 24.58 trillion and the non-participating policyholders’ fund aggregated to Rs 11.4 trillion.

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Profits from non-par policies belong entirely to shareholders while 90% of profits in par policies belong to policyholders.

A senior official said that the LIC Board will soon take a call on whether to transfer about Rs 1.8 trillion or a sixth of non-par policyholders’ funds or any other amount to shareholders’ fund to boost dividends or issue bonus shares in future. This will be done after taking into account the solvency requirement for the insurer. The next board meeting of LIC is scheduled for November 11.

“If a company is over-reserving funds, then it is not sharing capital with the policyholders and shareholders. It should share,” the official said. “A large organisation like LIC was giving an annual dividend of just about Rs 2,600 crore to the government for so long and no one questioned that,” he noted.

A possible higher dividend by LIC in the current fiscal could boost the non-tax revenues of the government, which is scouting for resources to meet additional funding requirement for subsidies. The Centre now holds 96.5% stake in the insurer after diluted a 3.5% stake via IPO in May to raise Rs 20,516 crore.

However, the stock has taken a beating since the IPO and is now being traded at about Rs 631, 33.5% lower than the issue price of Rs 949/share. The current market value of LIC is about Rs 3.99 trillion compared with the embedded value of Rs 5.41 trillion (as on March 2022).

“Certainly, I think certain expectations from shareholders are there. The LIC Board should look into it and do a proper capital restructuring,” the official said.

The solvency ratio (asset/liabilities) of LIC was 1.88 in Q1FY23 as against the regulatory requirement of 1.5. Non-par funds are also counted in the calculation of this ratio.

LIC is a very large institutional investor with assets under management of about Rs 41 trillion. “LIC’s investment will be tracked more intensively going forward to ensure higher earnings as that is what matters to shareholders and policyholders,” the official said.

LIC has a massive 300 million policyholders, most of which are participatory policies, meaning policyholders get the most of (95% now and to go down to 90% in due course) of profits. It is now aggressively expanding its non-par policy business. In FY22, just 29% of LIC’s new business came from non-participatory products and only 7% of the policies sold were non-par.

Among other measures, LIC may bring in some fresh blood from the private sector to improve the digital experience of the policyholders and focus on the agent as well as staff productivity. LIC’s commission-to-premium ratio was 5.5%, against the median of 4.4% for the top five private players.