The Hidden Mismanagement of Life Insurance Corporation of India

Over the last many years, the LIC of India has repeatedly acted as a savior of the Government when it came to the Government's disinvestment program. Here are some instances -

2012, 2013, 2014, 2015, 2016, 2017

LIC has the financial muscle to fund these activities easily. In 2015-16, its total fund (some of which could be deployed for the disinvestment program) was worth Rs 1998641.6 crores ($ 307 Billion assuming dollar at 65), in 2016-17, this went up further to Rs 2263289.1 (or $ 348.2 Billion at dollar at 65). The whole Mutual Fund Industry AUM was about $ 300 B in 2016-17

What is the role of LIC?

a. Provide insurance coverage to the vast number of Indians?

b. Act as a Sovereign Wealth Fund?

Coming to the issue of insurance coverage, it is fairly clear that LIC ensures that a large number of Indians are covered by its policies. Last year alone for example, LIC covered some 57 million lives (Through its group insurance policies, all the private sector companies covered about 126.6 million lives through their group policies last year). Over its many years of existence, overall national coverage could extend in the many hundred of millions. However, Indians are poorly covered in terms of Life Insurance as a ratio of their annual income. My surveys in the past show a ratio in the range of 1-2 times annual income as most of us Indians donot buy term Insurance policies and instead purchase low Insurance coverage Participative and Linked policies. For example, this sheet shows that for bulk of the policies, the coverage amount varies between 1.7 lacs to 2.5 lacs. This is about 2-3 times per capita income, not enough to cover most families. Lastly, LIC's persistency ratios aren't exactly great, which means their agents donot necessarily sell policies that many customers want (only 64% persist after the 13 month, ICICI is at some 80%). In sum, while there is no doubt that LIC covers a large proportion of the country that many private players may avoid, the overall lives covered and coverage per customer data suggests that there is some good and some ordinary.

On the issue of it being a Sovereign Wealth Fund, it is clear, LIC is not an SWF. There are some behaviors that are similar to a SWF but it is not an SWF. Unlike SWFs that use Government reserves to take investment decisions, LIC uses the money of common people like you and me to take investment decisions that 'appear' to be in the country's interest (Particularly the non-ULIP funds)

At the end of the day, all of us also own LIC through the Government, let us see how the Government is delivering value out of LIC given the above direct and indirect objectives.

a. In 2015-16, LIC delivered a PAT of 2232 crores, when compared with the other leading insurers, it is the highest, LIC at 2232 is however, some 10% lower than the combination of HDFC and LIC, why is this comparison important?

b. LIC manages some 348 billion dollars of assets, while HDFC and ICICI manage Just 22 billion dollars of assets. So inspite of managing 15 times more Assets, LIC delivers lesser profit than the two leading private sector insurers. This follows a similar pattern of PSUs versus the private sector banking firms, State Bank of India's market cap is 30% higher than ICICI Bank inspite of a deposit base that is 4 time's higher

China Life which is 70% owned by the Chinese Govt delivered a profit 8 times more than LIC inspite of a similar size of Assets Under Management (This is in a bad year)

So it is fairly clear that for shareholders, LIC delivers poor returns for the Government and therefore to the average citizen like me and you (as shareholders). The ordinary persistency ratios suggest that LIC isn't doing a brilliant job for customers either. This is very similar in pattern of the PSU banks . PSU banks continue to struggle versus the Private sector banks. In my previous PSU versus Private sector comparisons, it was argued that PSUs have a social responsibility that Private sector does not have. This is true. However, the differential performances between PSUs and Private sector or versus the Chinese Insurers does not come from increased costs due to social responsibilities, they come from poor decisions on whom to lend or where to invest. For an economy that wishes to grow, inefficient deployment of money causes a loss to the economy as a whole.

Unlike there being a clamour for reduced interference in PSU banks, the workings of LIC are completely under the radar as it is not listed in the stock market or audited by the CAG. It is time for the Government to stop micromanaging all Public Financial services companies including LIC and build systems that ensure these companies are operating independently of political or Government influence. While some progress has been made with the PSU banks (which are listed), LIC continues to be misused like before. This must stop.