MUMBAI: The Life Insurance Corporation of India, or LIC, has an obligation to pay out the highest-ever benefits to policyholders this fiscal at a time earning sufficient returns from investment in equities and bonds has become uncertain because of the gyrations of the market.
LIC may have to pay Rs 90,000 crore in defined maturity benefits and survival benefits, up 20% from an approximate Rs 75,000 crore in FY13, said an official.
“LIC earned good returns on equity investments last year and matching that will be a challenge this year. But we are confident of doing it,” said LIC Chairman SK Roy. “One always wonders about LIC’s business performance and investment operations, but this (benefit payments) one is very significant for LIC.”
The state-run insurer’s payout showcases its dominance over the industry a decade after private companies were permitted to set up insurance companies, resulting in the entry of ICICI, Aviva and HDFC into the sector. Despite this, LIC’s settlements will nearly equal the total premium income of the entire private sector for last fiscal.
But investment returns at LIC, the country’s biggest institutional investor that controls three-fourths of the insurance industry, have become a cause for concern among some experts as it loads up on shares of state-run companies, in many cases to bail out the government. The increase in market volatility this year, especially after May, is whipsawing investors amid selling by FIIs.
The BSE Sensex is down 0.3% since May 1. Government bond yields are 48 basis points higher from year lows of 7.09% on May 17. Bond prices and yields move in opposite direction.
LIC holds on to its investments for years, a practice that has yielded high returns over the past two decades as the global liquidity tide drove two stock market rallies that helped lift Indian stocks.
But the investment strategies of the past may not yield equally high returns. “Market performance gets masked out with different pool arrangements,” said Ashwin Parekh of E&Y, referring to the practice of clubbing of premium incomes of various products in different baskets. “Weighted average yield in these kinds of cases will always be in a small range because of the large pool of investments (where returns – higher or lower – get evened out over years).”
Although investing in state-run companies have yielded high returns in the past, it may not be the case in future given intensifying competition and governmental interference. For example, in MTNL â€” the loss-making telecom company that was once a blue chip â€” Life Insurance Corporation (LIC) owns 19%. But Roy says LIC will continue playing a long-term game.
“From the investment point of view, the perspective will be 15-year plus,” says Roy. “What happens in two or six months is a not a significant impacting event. We are very bullish on the economy, and we are certain this will turn out to be a very good India story. If the markets are rising, we will like to book profits wherever possible.” In 2012-13, LIC had paid maturity benefits of around Rs 75,000 crore.
In 2011-12, LIC had paid maturity claims of Rs 63,348 crore while the figure was Rs 49,548 crore in 2010-11. In both these years, its investment income was superior.
It had generated investment income of Rs 90,267 crore when the Sensex lost 10.38% in 2011-12 and Rs 77,667 crore in 2010-11 when the benchmark gained 10.94%. But the industry is now facing pressure.
LIC had reported a 6.3% drop in new business income in 2012-13. Total income growth was flat at Rs 2.03 lakh crore, including income from selling new policies and renewal income. (Source:ET)
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