The Life Insurance Corporation of India will need a capital infusion of up to Rs 20,000 crore (Rs 200 billion) to meet the solvency norm set by the Insurance Regulatory and Development Authority.

The state insurer has a share capital of only Rs 5 crore (Rs 50 million), but has managed to remain in business on the strength of the sovereign guarantees backing its commitments.

Even though the government pumped in Rs 100 crore (Rs 1 billion) towards LIC's reserves in 2001-02, it could not qualify as capital since any change in the company's capital base warrants a change in the LIC Act. The company now wants the Centre to raise its share capital base.

In an exclusive interview with Business Standard, LIC chairman S B Mathur said the organisation had a huge stock of "hidden reserves". "These off-balance sheet assets, estimated in excess of Rs 50,000 crore (Rs 500 billion), are, however, locked up in real estate and government securities," he said.

The insurance regulator, however, is not convinced about the hidden reserves argument put forth by the LIC brass. Industry officials said, based on the business underwritten and the guarantees promised by LIC, the state corporation required a Rs 20,000 crore capital infusion.

LIC's surplus life fund of over Rs 200,000 crore (Rs 2,000 billion) is treated as quasi-capital. However, this belongs to the policyholders and technically, therefore, cannot be appropriated by the government. In any case, the IRDA norms do not take the life fund into account while calculating solvency.

Even though Mathur said since LIC policies had government guarantee and "solvency was not an issue", the corporation has suggested to the Centre to contribute some amount out of the government's share in the life fund towards solvency.

On the treatment of the surplus fund as quasi-capital, Mathur said the IRDA Act allowed the government, as a shareholder, to take 10 per cent of the surplus as dividend against the 5 per cent allowed under the LIC Act. Hence, it is technically possible for LIC to set apart Rs 400-500 crore (Rs 405 billion) each year to augment its reserves.

In accordance with the IRDA solvency norms, the state-owned insurer set aside Rs 3,500 crore (Rs 35 billion) of the surplus fund into the reserves as part of the contingency margin. An additional Rs 3,000-4,000 crore (Rs 30-40 billion) would be provided this year as reserves from the surplus fund, Mathur indicated.

"For 46 years, nothing was done. It is not possible for LIC to put everything in one year. If we do so suddenly, it will reduce the policyholders' bonus by a huge amount," he pointed out.

The book value of LIC's government securities portfolio stands at Rs 178,000 crore (Rs 1,780 billion), while its market value is over Rs 2,10,000 crore (Rs 2,100 billion). The market value of its Rs 800 crore (Rs 8 billion) real estate portfolio could be as much as Rs 10,000 crore (Rs 100 billion).

LIC had suggested to IRDA a 20-30 per cent revaluation of these assets. However, the regulator shot down the argument saying, as a long-term holder, revaluation exercise was not available to LIC.

Capital requirement

• Despite low share capital, LIC has managed to remain in business on strength of sovereign guarantees.
• Though government pumped in Rs 100 cr towards LIC's reserves, it could not qualify as capital since any change in capital base warrants a change in the LIC Act.
• LIC wants the Centre to raise its share capital base.