In her Budget 2020 speech, Finance Minister Nirmala Sitharaman announced the government would sell a part of its holding in Life Insurance Corporation, which has so far remained fully government-owned, by way of an IPO. Should you invest in LIC when an offer is announced? If yes, why? Sai Manish looks at the journey of LIC since it was set up under the LIC Act of 1956, and examines why it continues to control the bulk of India’s insurance market even 20 years after its monopoly ended with private players being allowed in the sector
Life Insurance Corporation of India (LIC) was a baby of former PM Jawaharlal Nehru’s socialist sweep, which led to the nationalisation of insurance business in India in 1956. Set up under the Life Insurance Corporation Act of 1956, LIC has remained a fully government-owned corporation to this day. It was established with a paid-up capital of Rs 5 crore, and the legislation envisaged a board of not more than 16 directors to run it.
LIC continued to enjoy a monopoly in the insurance sector for 44 years until the sector was opened up to private sector in 2000. When its monopoly ended, it already had a customer base of 2 million people, who held various policies assuring them a sum of Rs 1.2 trillion.
LIC has had a long history of an ever expanding network of agents who bring it brisk business by selling policies in every nook and cranny of this vast nation. In 1957, when it started out, it had enlisted a network of 8,900 agents, each of whom would bring it an average business of Rs 31,000 a year. By the time its monopoly ended in 2000, it had 680,000 agents, each bringing an average Rs 13 lakh in business annually.
Clearly, LIC has been a beacon of hope for millions who have bought its policies, in addition to being a cash cow for the government. In 1957, the first full year of its operation, it settled claims worth Rs 28 crore and had a settlement ratio of 55 per cent.
Many innocent investors seem to have been fooled into thinking that LIC is being privatised. It is time they woke up and smelt the coffee. The government is NOT privatising or selling off LIC, unlike it is doing with Air India. The misconception initially arose when the LIC employees’ union leader Siva Subramanian used the word ‘privatisation’ while criticising the government’s move to launch an initial public offering (IPO). The confusion was further exacerbated when Congress leader Rahul Gandhi launched a scathing attack on the Narendra Modi-led government on the floor of Parliament “for trying to damage LIC”.
The reality, however, is that the government is not privatising LIC. In her Budget 2020 speech, Finance Minister Nirmala Sitharaman had announced: “Listing of companies on stock exchanges disciplines a company and provides access to financial markets and unlocks its value. It also gives retail investors an opportunity to participate in the wealth so created. The government now proposes to sell a part of its holding in LIC by way of an IPO.” This means, the government will only sell part of its stake, and anyone who invests in the stock market can buy into the IPO.
LIC has used its massive cash reserves to buy stakes in some of the most valuable and high-performing companies of India, such as Kotak Mahindra Bank, ITC, Britannia, Larsen & Toubro, Maruti Suzuki, Tata Chemicals and Bajaj Auto. As India’s largest domestic institutional investors, it also holds stakes to varying extents in public-sector banks like State Bank of India and Bank of Baroda. Among public-sector enterprises, it holds stakes in NTPC, MMTC, NHPC and Dredging Corporation of India, among others. Many of these companies give it impressive returns. For instance, as of March 2019, ITC declared an equity dividend of 575 per cent, Maruti Suzuki 1,600 per cent, Bajaj Auto 600 per cent, and Larsen & Toubro 900 per cent. Clearly, LIC has put its money in all the right places.
LIC has also invested in infrastructure and social sector from its corpus. In 2018-19, its investment in infrastructure was Rs 20,596 crore, of which almost Rs 11,000 crore was invested in the severely distressed power and housing sectors. It has also invested Rs 18 trillion in long- and short-term government bonds and securities. In January 2019, LIC had acquired a majority stake in IDBI Bank.
LIC’s paid-up capital was increased to Rs 100 crore in 2011 – all of that paid by the central government. It had 29 million policy holders as of March 2019, and it had received Rs 3.4 trillion as premiums and advance premiums from its policy holders. It had paid Rs 2.5 trillion in claims, and Rs 19,436 crore in commissions and brokerages to millions of its agents across the country. It earned a profit of Rs 2,688 crore in 2018-19 – up 10 per cent from the previous year. Of its total profit, 90 per cent is distributed to policyholders and the remaining to the central government.
The erstwhile United Progressive Alliance (UPA) government in 2011 reduced LIC’s obligation of sharing its profits with policyholders to 90 per cent from 95 per cent earlier by amending the LIC Act of 1956. Its gross non-performing assets (NPAs) in 2018-19 stood at 6.15 per cent of its total debt. The Congress has claimed that this translates into NPAs of Rs 30,000 crore. It settled more than 20 million maturity claims in 2018-19 by paying out Rs 1.5 trillion. It also settled almost 10 million death claims by paying out Rs 17,468 crore.
Though LIC is synonymous with India, it operates across the globe. It has branch offices in Fiji, Mauritius and the UK. It has a fully owned subsidiary in Singapore and it has formed joint ventures in Nepal, Bangladesh, Bahrain, Saudi Arabia and Sri Lanka. In 2018-19, its foreign branches issued more than 14,000 policies, earning it a premium income of Rs 370 crore.
LIC, which has a 66 per cent share of the insurance market, earned Rs 1.4 trillion in 2018-19 in new business premiums – twice as much as earned by all private insurance companies put together. Its total premium income, too, is twice as much as that of all private insurers combined. The number of policies issued by LIC and the benefits paid to policyholders are thrice the size of the entire private sector.
While all private-sector insurance players have reduced the number of their officers over the past decade, LIC has expanded its footprint. It has also made a splash in the micro-insurance sector, where the number of policies it has sold is almost thrice as much as that of the private sector. More than a third of all micro insurance agents work for LIC. The entire insurance industry paid Rs 8.6 trillion as settlements; 87 per cent of them was paid by LIC alone. However, LIC’s life insurance premium income has grown at half the rate of the entire industry since it was opened to private sector in 2000.
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