Life Insurance Corporation of India's key valuation measure has surged fivefold in six months.
India's largest life insurer revealed its embedded for the first time in the draft red herring prospectus filed with the Securities and Exchange Board of India for its initial public offering, billed to be the largest by an Indian company.
The embedded stood at Rs 5.4 lakh crore as on Sept. 30, the filing stated. And it surged 4.6 times from Rs 95,605 crore as on March 31.
That's because LIC amended its fund distribution policy, to bring it in line with that of listed private insurers.
The embedded takes into account:
The present of future profits.
Free surplus and capital.
Assets backing the statutory liabilities.
Shareholders’ interest in the market of policyholders’ fund or a pool of premium paid by policyholders.
The embedded jumped after LIC changed the way how surplus from this pool will be distributed among policyholders and shareholders.
Buyers of participating policies are entitled to a share in the profit of the insurance company. 90% of this profit or surplus is distributed by listed private insurers to policyholders, while the rest goes to shareholders.
Holders of non-participating plans have no share in the surplus, which is entirely paid to shareholders.
LIC had a single fund for both participating and non-participating plans, and any surplus was shared with policyholders and shareholders in the 95:5 ratio.
Till 2018-19 fiscal, LIC paid the government, its only shareholder, 5% of the surplus. For FY20 and FY21, it issued bonus equity shares to the government in lieu of its share in the surplus.
In the run-up to the LIC IPO, the government amended the Life Insurance Corporation Act, 1956, to provide for separate policyholders' funds for the two categories. As on Sept. 30, the policyholders’ fund for:
participating plans aggregated to Rs 24.5 lakh crore.
non-participating policies stood at Rs 11.4 lakh crore.
After segregation, shareholders will get 5% of the surplus from participating fund and 100% of the surplus from the non-participating policyholders' fund. That caused its embedded to spike.
The insurer will increase the share of shareholders in the participating fund surplus to 90:10 by FY24-25. That would bring it in line with private insurers.
The LIC IPO filing, however, left one thing unexplained.
The insurer had 244 in-force products as on March 31. Yet, to calculate its embedded , it factored in 94 products contributing more than 90% of both in-force reserves and the new business annualised premium equivalent.
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