LIC has a ₹6,028 cr problem on its books

Mark-to-market rules require companies to use the market values of financial assets, including bonds and stocks, they own and make appropriate entries in their income statements as prices fluctuate, even if they have no immediate plans to sell the assets. The idea is to make financial statement more transparent, though many criticize its application to illiquid securities.

For the nine months to 31 December, the nation’s largest insurer reported a profit of ₹1,715.31 crore, which analysts said was possible because mark-to-market losses arising from investments in certain illiquid securities are yet to reflect in the insurer’s profit and loss statement ahead of the public issue.

To be sure, the insurance regulator gave LIC time till 31 January 2023 to ensure the value of the loss-making investments reflects in its income statement.

LIC owns a massive amount of assets, and analysts said it could comfortably address the ₹6,028 crore loss by selling some of its investments but warned a potential sale of assets to make good the losses could impact returns to policyholders. Therefore, it has to be done in a manner that no policyholder is adversely impacted.

Notably, the updated IPO documents mention that despite several previous attempts, LIC has failed to sell the securities in the secondary market. LIC’s IPO prospectus acknowledges that the company is in violation of a key regulatory norm by not having transferred these investments to the shareholders’ account.

LIC said of the ₹11,264.6 crore worth of debt papers of the mispriced insurance policies, papers worth ₹5,350.6 crore are non-performing assets (NPAs) for which full provisioning has been done at an amortized cost, and if this transaction is shown in the balance sheet, LIC would have to show a loss of ₹6,028.15 crore. “Certain investments of our corporation’s pension and group and life annuity funds, which had previously been invested in approved investments, have been re-classified as other investments, and as such other investments have not been transferred to shareholders’ funds at amortized cost after 90 days, our corporation is not in compliance with the IRDAI Master Circular on Investments version two issued in May 2017. The loss that would have accrued in the profit and loss account (shareholders’ account) had these investments been transferred to shareholders’ funds at amortized cost was ₹60,281.58 million ( ₹6,028 crore)as of 31 December 2021," LIC said in its prospectus. “In the event our corporation is unable to dispose of the other investments in the pension and group and life annuity funds by 31 January 2023, the value of such other investments is required to be made good by transfer to our shareholders’ funds at amortized cost," LIC said.

On 24 November 2010, Mint reported that LIC, with an asset base of ₹12 trillion then, was running a valuation deficit of around ₹14,000 crore in three plans of its guaranteed-return annuity policies—Jeevan Dhara, Jeevan Suraksha and Jeevan Akshay.

Those three plans were launched in the 1980s and the 1990s with assured returns of 11-12%, but with the drop in interest rates, the actual yield on investments was much less than what investors had been earning. Subsequent schemes launched under the same brands have not reported any notional losses.

The latest revelation indicates continuing valuation mismatch with regard to the pricing of insurance policies. However, with assets worth ₹41 trillion and about 280 million life policies in force, LIC is the largest of 24 life insurers in the country.