LIC shares its total surplus between policyholders and shareholders in the ratio of 95:5, irrespective of policy product mix so lower profits are shared with the shareholders.
Two months after the government announced its plan to list the Life Insurance Corporation of India (LIC), leading independent valuation firm RBSA Advisors has estimated valuation of Life Insurance Corporation of India (LIC) in the range of Rs 9.90 lakh crore to Rs 11.50 lakh crore. This valuation is on the basis of market capitalisation as a percentage of assets under management (AUM), which is lower for LIC than other listed life insurers like SBI Life Insurance, HDFC Life Insurance and ICICI Prudential Life Insurance.
AUM of LIC stood at Rs 33.20 lakh crore as on December 2019, while AUM of SBI Life and HDFC Life was at `1.64 lakh crore and 1.36 lakh crore, respectively. But market capitalisation as a percentage of AUM for SBI Life and HDFC Life stood at 59% and 93%, respectively. The market capitalisation taken for the calculation was as on December 31, 2019, which was Rs 96,200 crore for SBI Life Insurance and Rs 1.26 lakh crore for HDFC Life.
But for LIC, RBSA believe the reasonable range for valuation of LIC may be between 30% to 35% of AUM. There are various factors constraining a higher valuation of LIC like PSU tag and capital allocation issues, earnings efficiency of LIC for its shareholders, among others. “LIC has a relatively lower earning power because of relatively higher distribution of surplus to shareholders, lower investment yield and possibly sub-optimal underwriting practices,” said RBSA in its report on valuation analysis of LIC.
LIC shares its total surplus between policyholders and shareholders in the ratio of 95:5, irrespective of policy product mix so lower profits are shared with the shareholders. In the case of private players, 100% of surplus generated from non-participating bonuses and 10% of surplus generated from participating business are normally attributed to shareholders.
Participating plan offers a baseline guarantee and pegs the investment returns from the profits that the participating fund makes. The profits from the participating fund get distributed between the policyholder and the shareholder. While in non-participating plan, which comes with defined benefits or guaranteed returns. Here, the benefits are defined upfront and so this fund pool doesn’t participate in profit-sharing. Term policies or traditional plans where the investment benefits are defined upfront are all non-participating in nature and the insurer can pocket the entire profits after provisioning for the guarantees.
However, there are some factors that favour LIC like high market share, highest claim settlement ratio and sovereign guarantee by Government of India (GoI). Typically, life insurance players use multiple of either embedded value or implied value of new business, but LIC does not publish either its embedded value or its value of new business and, hence, RBSA Advisors have adopted valuation multiple based on AUM.