LIC will need float or govt funds to solve solvency issue

Life Insurance Corporation (LIC) of India chairman S B Mathur said the corporation will either have to hit the capital market with an initial public offer (IPO) soon or the government would need to capitalise the institution. This is because LIC needs Rs 2,000 to Rs 3,000 crore annually to meet the norms on solvency.

"Either the government will need to contribute to the capital of LIC "" as it did in the case of IDBI, wherein it put in Rs 9,000 crore "" or the funds need to come from the market," Mathur said.

The Parliament will have to change the LIC Act to allow the state-run insurance company to tap the market. The government would also need to recapitalise the financial institution in order to make the pricing of LIC's shares attractive for public participation.

Growing at a rate of 60 per cent in terms of new business income, LIC needs to ensure adequate solvency margin as per the norms laid down by the regulator "" the Insurance Regulatory and Development Authority (IRDA).

Solvency margins are calculated at four per cent of the reserves (that is the liabilities the insurance company could face) plus 0.3 per cent of the sum at risk.

"We have tackled the solvency margin issue for now, having provided for Rs 14,000 crore as on March 2004 for the business underwritten to date," said Mathur.

This accounts for 110 per cent of the solvency margin, against the requisite 150 per cent laid down by the IRDA. The total requirement stands at Rs 16,800 crore as on March 31, 2004, which will be provided for by March 31, 2005.

During the current financial, LIC's new premium income rose by 62.71 per cent to Rs 3,476.34 crore in the first six months against Rs 2,136.57 crore in the corresponding period of 2003-04.

Mathur anticipates that LIC would need to put in an additional Rs 6,000 crore by March 2005. "Currently we are meeting the required solvency margins from surplus funds, which cannot be a continuous practice," he added.

Hence LIC's plans to go for an IPO is critical to its ability to meet regulatory norms. This is similar to shareholders of private life insurance companies infusing additional capital to support the exponential business growth.

Capital is required to meet the statutory reserves requirement as laid down by the insurance regulator. LIC is looking at an IPO as recommended by its consultant, Deloitte & Touche.

Private insurance companies, on the other hand, are hoping that the cap on foreign direct investment (FDI) be raised from the current 26 per cent to 49 per cent.

This will ease the financial burden on Indian promoters who are required to infuse the majority of funds in accordance with their stakeholding.

"Recapitalisation is necessary to dilute the earnings per share, since the minuscule Rs 5 crore paid-up capital of the corporation would result in an abnormal pricing of its shares during a public float," said industry sources.

Today LIC is running a balance sheet size of Rs 3,40,000 crore on a share capital base of just Rs 5 crore. According to latest available data, the surplus for fiscal 2002-03 amounted to Rs 40,101 crore. The surplus helps calculate the profitability of the corporation in terms of income minus expenses.

In a bind

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• LIC needs Rs 2,000-3,000 crore annually to meet solvency norms
• Fresh capital required to meet the statutory reserves norm as laid down by the Irda
• The government will have to change the LIC Act to allow the insurer to tap the stock market
• New-premium income shot up 62.71 per cent to Rs 3,476.34 cr in the first half of this fiscal from Rs 2,136.57 cr last year