LIC's record surplus is fuelled by booking profits in investments, even as its new premium growth is showing a marginal fall, sources said. "We will end the year with Rs 5,000 crore more surplus than the previous record of Rs 19,000 crore recorded in the pre-crisis years," said an LIC official.
The bulk of the profits were booked in the third quarter, when the Sensex was touching 20,000. During the quarter, LIC sold stake in a number of large companies, as it booked profits. Its equity operations typically involve buying large chunks in blue chips whenever the Sensex crashes after a big event. It also consistently books profits whenever there is a bull run fuelled by foreign institutional investors.
An email sent LIC did not elicit any response.
LIC is in a position to take this contrarian approach because most of its funds come from renewal premium, interest and dividend income and from new business. Mutual funds cannot afford to take this approach because they usually see bulk withdrawals when the markets tank, forcing them to sell stocks. At the same time, they are forced to buy during a bull run because it is during such times that they get the highest inflows.
Part of the profit booking was also because LIC was selling equities held under its traditional portfolio to create headroom to buy public sector undertaking (PSU) shares that were put on the block. LIC typically buys PSU shares under its traditional portfolio as these investments do not have to be marked-to-market (revealed at market prices), unlike unit-linked insurance plan funds.
The higher profits, which come from sale of investments under the life fund – will enable LIC to record a higher valuation surplus. The surplus is the excess available for distribution after providing for present and future liabilities which include maturity and death claims. It is distributed largely to policyholders in the form of bonus and a small part to the government in the form of dividend.
LIC collected new premiums of Rs 60,705.46 crore for the April-January period of FY13, 6.3 per cent less than the Rs 64,820.48 crore it collected in the same period of FY12.