Participating policyholders of LIC are unaware of how they have lost on three occasions
26-May-2022 •Arul Selvan
LIC's participating policyholders belong to a rare class of investors who have lost out three times over the same investment. Participating policies are effectively insurance-cum-investment plans wherein policyholders are entitled to returns that vary with the profits of the insurance company. With the interests of both policyholders and insurance companies aligned together, the quantum of returns accruing every year to participating policyholders is proportional to the insurer's profits, which are based on the insurer's claim experience, investment returns and so on.
Developments in government-owned Life Insurance Corporation are clear tales of caution for investors. One, mixing insurance and investment is always a bad idea, as the returns on the investment portion tend to be much lower than those of comparable investment avenues. Despite that, LIC had around 27 crore individual-participating policies as on December 31, 2021 (Source: Red Herring Prospectus of LIC). It is anybody's guess whether these customers fell prey to misselling or were genuinely unaware of alternate investment avenues. But the fact remains that these individual-participating policyholders had got a raw deal long before things got worse.
Two, as a part of the government's disinvestment exercise, the Parliament made a set of changes to LIC in order to make it suitable for listing on the stock exchanges. While these changes may seem superficial at first glance, one particular change has had a very adverse impact on participating policyholders' financial interests. The new law has slashed the proportion of profits (arising from non-participating policies) shared with participating policyholders from 95 per cent to zero. This change has tremendously increased the value of LIC (and the wealth of the Indian government as its sole shareholder prior to the IPO), with LIC's embedded value shooting up from Rs 1,24,767 crore to Rs 5,39,686 crore - an increase of Rs 4,14,919 crore in just one day (as disclosed in the official valuation report of Milliman Advisors LLP in the RHP). Given that the embedded value is the present value of the future profits, this essentially shows that Rs 4.1 lakh crore belonging to participating policyholders has simply been taken away. The real impact on participating policyholders will become visible going forward as they will get much lower bonuses every year starting from 2022.
The third and final impact has been on those policyholders who have been naive enough to invest in LIC's IPO. Lured by the discount of Rs 60, policyholders have invested additional sums to purchase LIC's shares. While it is anybody's guess about whether or not LIC's shares will outperform the market in the long run, we, at Value Research, have always been staunchly against investing in IPOs or PSUs. And an IPO of a PSU is about as bad as it can get. The newly minted shareholders cum policyholders should perhaps keep this in mind when they reflect upon the losses in their portfolio, as LIC's shares closed around 14 per cent lower than the issue price.
There is a popular saying that 'Fool me once, shame on you; fool me twice, shame on me.' Perhaps it's time to modify it to include what happens when someone is fooled thrice.
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