on Sep 06, 2021)MUMBAI: Valuations of listed private life insurers cannot be a basis for the valuation of LIC, according to former Irdai member Nilesh Sathe.
With the government appointing merchant bankers for what is likely to be the largest government divestment and largest IPO, there is speculation on LIC’s valuation. Many have used the private sector listed companies or SBI Life as a proxy for embedded value (EV) and EV multiple at which LIC shares could be offered.
According to Sathe, the corporation’s valuation would be influenced by the extent of contribution from single premium policies to its assets under management (AUM) that would determine valuation. According to numbers released by LIC, its asset base has crossed Rs 38 lakh crore which is more than 15 times the AUM of the top private life companies like
or ICICI Prudential.
“Taking into consideration the AUM, if we think its embedded value will be 15-20 times of private listed companies it will be wrong because the calculation of embedded value is based on the actuarial calculation, which takes into account present value of future benefits,” said Sathe while speaking at the Indian Insurance Institute Kolkata recently. “Since single premium policies have less EV (present value of future benefits) and it reduces profitability, private insurers are reluctant to do single premium policies,” he said. Besides being with the insurance regulator, Sathe has been executive director at LIC earlier.
The distribution of surplus in the life fund among policyholders and shareholders is different for LIC compared to private players. While private companies are allowed to distribute 10% of their surplus to shareholders, LIC has been paying out only 5% to the government with the rest given to shareholders. “IRDAI regulations state that consequent to listing 10% of surplus can be given to shareholders. “But it is unlikely that LIC will suddenly bring down the surplus distribution to 90%,” said Sathe. He suggested that this could be brought down gradually as a prudent measure.
Sathe said that to clear the way for an IPO the government has increased the paid-up capital in LIC from Rs 100 crore to Rs 25,000 crore and has allowed the board to be reconstituted where 50% of the directors will be independent with expertise in specific areas.
