Disclose embedded value for September-March period: Centre to LIC

Sharing embedded value expected to instill confidence in the markets about the insurer's transparency

The Centre has asked LIC to disclose its embedded value (EV) for the September-March period as against the insurer’s plan to declare the same only one year after it shared its last embedded value of Rs 5.39 trillion.  

The management of LIC had not asked its reporting actuary to start the process of the embedded value derivation as of March 2022 as it was expected to drop on account of decline in mark-to-market gains of about Rs 40,000-50,000 crore, said an official. The embedded value — an important metric that indicates an insurance company’s performance — is the sum of adjusted net worth and value of in-force business or estimated future profits.

After a muted listing on the bourses, the Centre’s advice to the insurer to disclose its embedded value is expected to instill confidence in the stock markets about the insurer’s transparency. The insurer had earlier planned to come out with all declarations in its annual report, except its embedded value, the official said. Generally, insurance companies disclose their embedded value once in six months and value of new business once a year. Earlier, LIC was not planning to share the year-to-date value of new business (VNB) as of March 2022, the official quoted above said.

Queries to LIC and the Ministry of Finance did not elicit a response.

The LIC, only after its listing, has asked its reporting actuary Milliman Advisors to work on the derivation of embedded value as on March 2022. LIC had disclosed its embedded value for the first time in its draft red herring prospectus (DRHP) that increased from Rs 95,605 crore in March 2021 to Rs 5.39 trillion in September 2021 after segregation of its fund into participating and non-participating funds.

Macquarie Research in its recent report stated that almost 70 per cent of LIC’s embedded value consists of equity mark-to-market gains, which inherently makes the EV more volatile and vulnerable to market fluctuations. The sensitivity of the insurer’s embedded value to equity market corrections is far higher than its private-sector peers, it said. After the declaration of the Russia-Ukraine war, the markets corrected about 7-8 per cent, and this would reflect in LIC’s embedded value as on March 2022, the official quoted above said. Based on the sensitivity analysis shared in LIC’s DRHP, a 10 per cent fall in equity prices can result in nearly a 7 per cent decline in LIC’s embedded value. The same has also been flagged as a concern by Macquarie in its report. It also states that volatility in embedded value is a worry as a large part is linked to mark-to-market equity gains.