Understanding Financial Statements of Life Insurance Corporation of India

Dr. C. P. Gupta

First, we start with

BALANCE SHEET

Every Balance Sheet has two sides

First, we shall start with LIABILITIES

What is it?

Share Capital of Rs. 5 Crores is provided by the Central Government. Reserves and Surplus Retained Earnings. represents

WHAT IRDA REGULATIONS SAYS ABOUT IT?

Every application for registration must be accompanied by

a) Evidence of having rupees ONE HUNDRED CRORES OR MORE paid up equity share capital for life insurance business or general insurance business; b) Evidence of having rupees TWO HUNDRED CRORES OR MORE paid up equity share capital for reinsurance business.

WHAT LIFE INSURANCE

CORPORATION ACT, 1956 SAYS

ABOUT RESERVES AND SURPLUS?

Section 28: If any surplus emerges from life

insurance business, 95% of such surplus or such higher percentage as the Central Government may approve shall be allocated to or reserved for the life insurance policy holders and the reminder shall be paid to the Central Government.

Section 28A: If for any financial year profits

accrue from any business other than life insurance business, then after making necessary reserves, the balance of such profits shall be paid to the Central Government.

What is it?

There is a Credit Value in Fair Value Change Account.???

WHAT IRDA REGULATIONS SAYS ABOUT IT?

Unrealized gains/losses arising due to changes in the fair value of listed equities and derivative instruments shall be taken to equity under the head of Fair Value Change Account. The profit on sale of investments or loss on sale of investments shall include accumulated changes in the fair value previously recognized in equity under the heading Fair Value Change Account in respect to a particular security and being recycled to the relevant Revenue Account or Profit and Loss Account on actual sale of that listed security.

What is it?

Policy Liabilities of Rs. 4,49,688.48 Crores as at March 31, 2006.???

WHAT IRDA REGULATIONS SAYS ABOUT IT?

The estimate of liabilities against life policies shall be determined by the appointed actuary of the insurer pursuant to his annual investigation of the life insurance business. Actuarial assumptions are to be disclosed by way of notes to the account.

LIFE IN SURA N CE CORPORA TIO N OF IN D IA

BALANC E SHEET AS AT M ARC H 31 IN RESPEC T OF TOT AL BUSINESS (Rs. in Lakhs) (Rs. in Lakh SOURC ES OF FUNDS APPLIC ATIONS OF FUNDS 2004 2005 2006 2004 2005 200
SH A REH O L D ERS' FU N D Share C apital Reserves and Surpluses Sub-Total
500.00 12,042.55 12,542.55 500.00 13,218.89 13,718.89

BO RRO W IN GS PO L IC Y H O L D ERS' FU N D C redit/ (D ebit) Fair V alue C 2,167,262.59 2,822,634.84 6,522,245.43 U RREN T A SSETS C hange A ccount Policy L iabilities 32,135,683.05 38,102,228.72 44,968,847.99 C ash and Bank Balances

IN V ESTM EN TS 500.00 Shareholders' 11,612.79 12,063.27 16,640 17,199.85 Policyholders' 29,696,517.75 35,568,557.53 45,278,642 A SSETS H EL D TO C O V ER 17,699.85 20,987.46 243,867.76 1,231,528. L IN K ED L IA BIL ITIES LOA N S 4,355,817.95 5,199,192.55 5,512,437. FIXED A SSETS 113,897.05 121,842.79 126,214.

Insurance Reserves
Provision for L inked L iabilities Sub-Total Funds for Future A ppropriations C U RREN T L IA BIL ITIES L iabilities Provisions

1,529,761.20 1,627,006.78 1,824,125. 247,095.12 290,775.36 284,328.17 A dvances and O ther A ssets 37,172.82 459,712.04 1,343,190.12

What is it?

1,007,389.43 1,035,391.42 1,031,250.

2,537,150.63 2,662,398.20 2,855,376.

34,587,213.58 41,675,350.96 53,118,611.71 2,497.56 1,966.02 2,723.73

Insurance Reserve of Rs. 2,843.28 Crores as at March 31, 2006.???

583,141.05 551,913.86 325,321.92 1,550,588.89 1,564,972.37 1,556,482.65

TO TA L 36,735,983.63 43,807,922.10 55,020,839.86

TO TA L 36,735,983.63 43,807,922.10 55,020,839

What INSURANCE RESERVES represents?

Insurance Reserve is like Reserves and Surplus of Shareholders.

It shows accumulated gains arising out of insurance business and belongs to policyholders losses have to be met out of these reserves and gains have to be transferred to it till it is certain that such a profit now belongs to shareholders.

What is it?

Provision for Linked Liabilities is 13,431.90 Crores as at March 2006.???

Rs. 31,

WHAT IRDA REGULATIONS SAYS ABOUT IT?

Every insurer has to maintain separate set of financial statements for each segregated fund of the linked businesses. As a result, provisions for linked liabilities are created to meet the liabilities arising out of such businesses. For linked business, two reserves are created

One, Unit Reserve: it is based on liabilities associated with units allocated to the policies in force using unit values at the valuation date. Another, General Fund Reserve: it is determined considering the benefits extended over and above the value of units like death benefits, any guarantee provided, management charges etc.

 Funds for Future Appropriations is Rs. 27.24 Crores as at March 31, 2006.???

What is it?

WHAT IRDA REGULATIONS SAYS ABOUT IT?

The Funds for Future Appropriations shall be presented separately.

The Funds for Future Appropriations represent all funds, the allocation of which, either to the policyholders or to the shareholders, has not been determined by the end of the financial year.

Current Liabilities .???

What is it?

What CURRENT LIABILITIES represents?

Liabilities includes Balances due to other Insurance Companies Premiums received in Advance Claims Outstanding Annuities Due Sundry Creditors Outstanding Commission ..

Provisions includes Proposed Dividend Provision for reserve for Solvency Margin (as on 31-0306, Rs. 14943.05 crores) .

NOW

We shall start with ASSETS

What is it?

Investments of Shareholders is Rs. 166.40 Crores and that of Policyholders is 4,52,786.42 Crores as at March 31, 2006.???

WHAT IRDA REGULATIONS SAYS ABOUT IT?

An insurer shall determine the values of investments in the following manner:

REAL ESTATE-INVESTMENT PROPERTY: Such assets are valued at historical cost, subject to revaluation at least once in every three years and any change in the value due to revaluation shall be taken to Revaluation Account. DEBT SECURITIES: Debt Securities and redeemable preference shares shall be considered as held to maturity and shall be measured at historical cost

WHAT IRDA REGULATIONS SAYS ABOUT IT?

(continued)

An insurer shall determine the values of investments in the following manner:

LISTED EQUITY SECURITIES AND DERIVATIVE INSTRUMENTS: Such assets are valued at their fair value on the Balance Sheet date. Unrealized gains/losses arising due to change in the fair value shall be taken to under liabilities under the heading of FAIR VALUE CHANGE ACCOUNT. UNLISTED EQUITY SECURITIES AND DERIVATIVE INSTRUMENTS: These assets shall be measured at historical cost. Provision shall be made for any diminution in the value of such investments. The provision may be reversed in subsequent periods if estimates based on some external evidence show an increase in the value. However, in no case, such a value can exceed the

WHAT IRDA REGULATIONS SAYS ABOUT IT?

(continued)

Investments in subsidiary/holding companies, joint ventures and associates shall be shown separately at cost.

What is it?

Assets Held to Cover Linked Liabilities is Rs. 12,315.28 Crores as on March 31, 2006.??? These assets are valued Investment Property. as per the

What is it?

Loans are Rs. 55,124.38 Crores for the year 2006.???

What is it?

Fixed Assets are Rs. 1,262.42 Crores for the year 2006.???

WHAT IRDA REGULATIONS SAYS ABOUT FIXED ASSETS?

The following assets should be placed with values zero

Furniture, fixtures, dead stock and stationery Deferred Expenses

The value of computer equipment including software shall be computed as under

75% of its cost in the year of purchase; 50 % of its cost in the second year; 25 % of its cost in the third year; and 0 % of its cost in the second year.

What is it?
Total Current Assets for are the Rs. year

28,553.77

Crores

What CURRENT ASSETS represents?

Cash and Bank Balances includes Cash including cheques, drafts and stamps Bank Balances in deposit accounts Balance in currents accounts Money at call and short notices ..

Advances and other assets includes Application money for investments Prepaid Expenses Advance Tax Advances to Employees Income outstanding on Investments Outstanding Premiums Agents Balances .

Now, we move to

REVENUE ACCOUNT TECHNICAL ACCOUNT

REVENUE ACCOUNT has two sidesINCOME SIDE AND EXPENSES SIDE

First, we shall start with INCOME SIDE

LIFE INSURANCE CORPORATION OF INDIA

REVENUE ACCOUNT FOR THE YEAR ENDED ON MARCH 31 IN RESPECT OF TOTAL BUSINESS Policyholders' Account (Technical Account) PARTICIPATING
2004 2005

(Rs. In Lakhs)

2006

PREMIUMS EARNED (a) Premium

5,573,695.04 6,325,016.33 7,281,655.75

(b) Reinsurance Ceded (c) Reinsurance Accepted

(3,723.51) 2.30

(4,158.39) 8.57

(3,334.55) 66.71

Sub-Total 5,569,973.83 6,320,866.51 7,278,387.91

INCOME FROM INVESTMENTS (a) Interest, Dividend and Rent - Gross (b) Profit on sale/redemption of investments 2,438,288.02 348,256.56 3,017,154.92 409,691.25 (89,434.61) 12,943.92 3,121,813.14 538,166.71 (143,478.58) 15,235.80

(c) (Loss on sale/redemption of investments)

(d) Transfer/Gain on Revaluation/Change in Fair Value (e) Other Income (i) Amounts Written back

ow is it H mined? deter
(80,445.57) 8,014.89

WHAT IRDA REGULATIONS SAYS ABOUT THESE ITEMS?

Premium shall be recognized when due. For linked business, the due date for payment may be taken as the date when associated units are created. Reinsurance premiums whether on business ceded or accepted are to brought into books on gross (i.e. before deducting commissions) under the head of reinsurance premiums.

LIFE INSURANCE CORPORATION OF INDIA

REVENUE ACCOUNT FOR THE YEAR ENDED ON MARCH 31 IN RESPECT OF TOTAL BUSINESS Policyholders' Account (Technical Account)
PREMIUMS EARNED (a) Premium (b) Reinsurance Ceded (c) Reinsurance Accepted Sub-Total

How is it determined?
PARTICIPATING
5,573,695.04 (3,723.51) 2.30 5,569,973.83

(Rs. In Lakhs)
2005 6,325,016.33 (4,158.39) 8.57 6,320,866.51 7,281,655.75 (3,334.55) 66.71 7,278,387.91

2004

2006

INCOME FROM INVESTMENTS (a) Interest, Dividend and Rent - Gross (b) Profit on sale/redemption of investments (c) (Loss on sale/redemption of investments) (d) Transfer/Gain on Revaluation/Change in Fair Value (e) Other Income (i) Amounts Written back (ii) Sundry Receipts

2,438,288.02 348,256.56 (80,445.57) 8,014.89 2,450.07

3,017,154.92 409,691.25 (89,434.61) 12,943.92 2,470.90

3,121,813.14 538,166.71 (143,478.58) 15,235.80 72,343.42

WHAT IRDA REGULATIONS SAYS ABOUT THESE ITEMS?

Interest, dividend and rentals receivable in connection with an investment should be stated as gross amount, the amount of income tax deducted at source being included under advance taxes paid and taxes deducted at source. Income from rent shall include only the realized rent. It shall not include any notional rent.

LIFE INSURANCE CORPORATION OF INDIA

REVENUE ACCOUNT FOR THE YEAR ENDED ON MARCH 31 IN RESPECT OF TOTAL BUSINESS Policyholders' Account (Technical Account) PARTICIPATING

Commission

How is it determined?
568,330.98 506,602.57 (14,416.79) 50,834.17 150,619.42 (2,697.43) 679,694.91 43,595.98 Sub-Total 720,593.46 TOTAL (B) 1,982,563.81

(Rs. In Lakhs)
2005

2004

2006

612,113.66 557,249.55 (518.31) 109,935.75 536,504.24 9,929.97 2,786.59 12,716.56 1,828,001.45

684,648.01 489,231.63 5,110.14 20,967.23 396,762.09 (2,653.42) 9,178.76 6,525.34

Operating Expenses related to Insurance Business Other Expenses-Exchange Provision for Doubtful Debts Provision for Taxation Provisions (Other than Taxation) (a) For Diminution in the value of Investments (Net) (b) Provision for Required Solvency Provision (c) Others

1,603,244.44

WHAT IRDA REGULATIONS SAYS ABOUT THESE ITEMS?

Items of expenses or income in excess of one per cent of the total premiums (less reinsurance) or Rs. 5,00,000 whichever is higher, shall be shown as a separate line item. Any cost incurred primarily for the acquisition of new and renewal insurance contracts shall be expensed in the period in which they are incurred.

LIFE INSURANCE CORPORATION OF INDIA

REVENUE ACCOUNT FOR THE YEAR ENDED ON MARCH 31 IN RESPECT OF TOTAL BUSINESS Policyholders' Account (Technical Account)

PARTICIPATING

How is it determined?
2004

(Rs. In Lakhs)
2005

2006

Benefits Paid (Net) 2,067,735.82 Interim Bonuses Paid 23,361.58 Change in the valuation of Liabilities in respect of life policies (a) Gross 4,158,063.54 (b) Amount ceded in Reinsurance 5,255,539.24
6,249,160.94 7,776,031.28

2,500,962.55 19,529.49 -

2,992,136.56 29,723.82 6,195,186.53

9,217,046.91

(c) Amount Accepted in Reinsurance

TOTAL (C)

WHAT IRDA REGULATIONS SAYS ABOUT THESE ITEMS?

The ultimate cost of claims shall comprise the policy benefit amount, claims paid, and specific claims settlement costs wherever applicable and change in the outstanding provisions for claims at the year-end. Surveyor fees, Legal and other fees and expenses concerned with claims shall be included in claims.

LIFE INSURANCE CORPORATION OF INDIA

REVENUE ACCOUNT FOR THE YEAR ENDED ON MARCH 31 IN RESPECT OF TOTAL BUSINESS Policyholders' Account (Technical Account)

PARTICIPATING
SURPLUS/(DEFICIT) D = (A)-(B)(C) APPROPRIATIONS Transfer to Shareholders' Account Transfer to Policy Holders Transfer to Funds for Future Appropriations 54,813.05 54,813.05 2004 69,660.16 69,660.16 2005

(Rs. In Lakhs)

2006

62,177.05 62,177.05

TOTAL (D) 54,813.05

69,660.16

62,177.05

Similarly, REVENUE ACCOUNT TECHNICAL ACCOUNT (NONPARTICIPATING) can be understood

Of course, with better UNDERSTANDING

Now, we move to

PROFIT AND LOSS ACCOUNT SHAREHOLDERS ACCOUNT (NON-TECHNICAL ACCOUNT)

NEXT

CASH FLOW STATEMENT

WHAT IRDA REGULATIONS SAYS ABOUT THESE ITEMS?

Every insurer has to prepare a CASH FLOW STATEMENT.

Cash Flow Statement shall be prepared as per AS-3 and only under the direct method.

By now, we can say that we are comfortable with the financial statements of LIC!!!!!!!!!
Now, all these make some sense to me!!!!!!