2012 - The LIC ONGC story so far

For this fiscal ending March 2012 the Government of India had a firm target of acquiring Rs 40,000 crores through its disinvestment strategies. Part of its strategy to achieve the target was the 5% stake offer of Oil and Natural Gas Commission (ONGC). However a flurry of over expectation, bad marketing and perilous economic scenario threatened to completely pulverize this move. Once again, as we have seen in the past, Life Insurance Corporation of India (LIC) came to its rescue.

How LIC saved the day –

The average quoted price per share was Rs 303.67, which is actually about 5% higher than its floor price of Rs 290. The auction got lukewarm response from foreign financial institutions and domestic banks. The over estimation almost lead to an embarrassing flop. But when things started to look bad, LIC opted to buy about 4.6% stake (of the available 5% stake) or about 40 crore shares thus pushing its investment to about Rs Rs 12,146.80. Till the October – December quarter of this fiscal, LIC already had 3.23% stake in ONGC. With this new investment their total stake has risen to about 8%. This is of course less than the 10% cap imposed by Insurance Regulatory Authority of India (IRDA) on any insurance companies.

What was the cost of this investment to LIC?

The value of share came down to Rs 280 in just two days. That means in just two days, LIC made a loss of about Rs 912 crores. The recent Union Budget added to its woes. Finance Minister Mr Pranab Mukherjee hiked the cess on crude and petroleum oil to Rs 4500 per tone from Rs 2500 per tone. This move would eventually bring down ONGC profit before tax by Rs 5500 crore. Obviously a decrease in stock price was on its way. As I write this article, ONGC’s stock price was hovering over Rs 272 – 273. If you do the math it is not difficult to understand that the loss is around Rs. 1200 crores. The budgetary move has also encouraged Bank of America Merril Lynch to downgrade ONGC shares to “neutral” from its earlier recommendation of “buy”.

What’s ahead?

Government of India’s strategy of transferring money from one pocket (LIC) to the other pocket (Government of India) worked out in the above case. It remains to be seen what interesting episodes awaits this eco-political drama when it sets out to achieve its remaining target.

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LIC comes out with its new Single Premium Product

Not many companies remain so active during a pessimistic phase in the market as Life Insurance Corporation of India (LIC). Apart from investing heavily during these turbulent times, it now plans to launch a new product especially suited for the volatile market. The new product would be a single premium policy and is expected to be released in the month of September.A single premium policy is one where a lump sum payment is made into the policy in return for a death benefit. With this the cash invested builds up rapidly as the policy becomes fully funded. The size of the death benefit depends on the amount invested and the age and health of the insured. However these are relatively expensive.

LIC’s latest single premium policy comes after a gap of two and a half years when it launched “Jeevan Aastha”. The success of “Jeevan Aastha” clearly laid down that people prefer paying single payments against periodic payments albeit the higher costs incurred. For the records, “Jeevan Aastha” raised Rs 10,235 crore in just 45 days with around 1.8 million policies sold. With this new product LIC plans to raise in excess of Rs 10,000 crore because of the inclusion of 5-10 tenure term.

However experts and Financial Planners are skeptical of such policies. A simple math would show that investing in FD and using little bits of returns and capitals would generate better results.

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Life Insurance Corporation appoints New Chairman

LIC has announced the appointment of Mr Rakesh Singh, additional secretary in the department of financial services, as the interim chairman. The incumbent, Mr T S Vijayan, will continue in the post of the Managing Director. The announcement from LIC, which has traditionally combined the post of Managing Director and CHairman, has taken the industry by surprise and many have read it as a demotion for Mr Vijayan. Mr Vijayan's performance report may have been adversely affected by the loan for money scandal that hit LIC housing finance a few months back. However, that is not to take away from LIC's brilliant performance in the last financial year when they increased their market share from 64.86% to 68.7 %. At a time when there was significant degrowth among the private life insurance players becasue of the changes on ULIPS, LIC exploited the field perfectly by selling more traditional products.

LIC plans to invest Rs 60,000 cr into equities

LIC plans to invest upto Rs 60000 crores in the equity markets in India. Out of a total deployment of funds of Rs 2 lakh crores across different asset classes, about 30% i.e Rs 60,000 crores would be invested into equities. The amount that LIC invests in equities has come under pressure due to the reduced sale of ULIPS, 90% of which would be invested in the equities market. Typically a long term investor, LIC is a much needed source of stability for the Indian equity markets.

Life Insurance Industry Performance: Apr 2010-Mar 2011

The annual sales figure of the Indian life insurance industry for 2010-11 are now available.

This has indeed been a tumultuous year for the industry, with the new regulations on Unit Linked Insurance Plans (ULIPs) coming into force from Sep 1, 2010. In certain cases, the private life insurance players have had a sales dip of as much as 35% post the new regulations taking effect. However, the overall dip has got masked due to the robust performance in the first half of the financial year. Gradually, the life insurance industry is finding its feet post the regulations and reported traction in sales during the month of March, 2011. The biggest beneficiary of the new regulations has been LIC, the big daddy of insurance in India.

At an overall level, the life insurance industry has reported a growth of 15% over the previous year. The industry grossed new business premium of Rs 1.26 lakh crores in FY10-11 over Rs 1.09 lakh crores in FY 09-10. However, most of this growth was accounted for by LIC which recorded a 22% increase in premium to Rs 86,444 crores from an earlier 70,891 crores. In the process, LIC increased its market share of the overall life insurance market by 4% from 64.86 % to 68.7%.

The private life insurance players, with a combined premium of Rs 39,381 crores and a market share of 31.3%, reported only a 3% growth in new business premium in this financial year. However, that tells only part of the story. In the last 6 months since when the ULIP regulations came into force, the private life insurance industry would have had a significant de-growth which has been hidden by the stronger performance prior to the regulations taking effect.

The New business premium and the market share of the private players is as follows:

Company New Business Premium in (Crs) Market Share
ICICI Prudential........7861............................6.3%
SBI Life................7571............................6.0%
HDFC Life...............4065............................3.2%
Bajaj Allianz...........3462............................2.8%
Reliance Life...........3035............................2.4%
Birla Sunlife...........2077............................1.7%
Max New York............2060............................1.6%
Tata AIG................1331............................1.1%
Kotak Mahindra..........1253............................1.0%
Canara HSBC OBC Life....823.............................0.7%
Star Union Dai-ichi.....759.............................0.6%
Aviva...................745.............................0.6%
IndiaFirst..............705.............................0.6%
Met Life................704.............................0.6%
ING Vysya...............660.............................0.5%
Shriram Life............575.............................0.5%
Future Generali Life....449.............................0.4%
IDBI Federal............445.............................0.4%
Bharti Axa Life.........362.............................0.3%
Aegon Religare..........275.............................0.2%
Sahara Life.............91..............................0.1%
DLF Pramerica...........74..............................0.1%
Total...................39381...........................31.3%

Clearly, the top 5 private players are ICICI Prudential, SBI Life, HDFC, Bajaj Allianz and Reliance Life while there are 14 life insurance companies at a market share of less than 1%. A detailed look at the business premiums of the private companies throws up a list of companies which have had a significant increase in premium, while at the same time, a few have lost ground. IndiaFirst Life has recorded a significant increase of 250% premium growth, though on a significantly low base. DLF Pramerica and Aegon Religare have also shown an increase on a low base, but the most impressive increases are for Canara HSBC Oriental, HDFC Life and ICICI Prudential Life , all of whom have recorded increase of +25%.

IndiaFirst..............250%
DLF Pramerica...........98%
Aegon Religare..........83%
Star Union Dai-ichi.....46%
Shriram Life............37%
Canara HSBC OBC Life....29%
HDFC Standard...........25%
ICICI Prudential........24%

However, a few private life insurance companies have registered significant degrowth. MetLife, which lost the Axis Bank relationship, registered a decrease in premium income of as much as 34% (it is in the final shortlist for the PNB Bancassurance relationship, and could possibly make up the lost ground). Birla SunLife’s new business premium was 30% less than last year, while Bajaj Allianz Life Insurance had a 22% decrease.

It would be interesting to see how the life insurance industry performs in the current financial year, which would be the first full year since the watershed regulations on ULIPs took effect. In the long term, the changes brought about would be healthy for the life insurance market in India. The pensions product, which used to account for 30% of the market and for all practical purposes was killed by the new regulations, would also come back to life in this financial year as IRDA is planning to bring about changes from its earlier guidelines. All in all, it promises to be an interesting year ahead.

Is LIC India’s most valuable company?

When privatization of the Insurance sector started in 2000, many experts were predicting the gradual weakening and ultimate demise of Life Insurance Corporation of India (LIC0). The state owned life insurance monopoly was perceived to be slow, inefficient and behind the curve. But the situation has turned out drastically different.
In the face of intense competition, LIC has held on to its own and still commands an awesome 70% of the market share . Even more interesting is the fact that in recent months and years, this percentage has gradually creeped up. While the private life insurance companies have tended to pay higher commission margins to their distributors so that they can generate more sales, LIC has been conservative in their commission payouts and generated sustainable, profitable business.

So what then is LIC’s worth. With 2 crore policy holders, assts of Rs 11 lakh crores and 71 % market share in a growth market, LIC’s embedded value has been estimated to be at Rs 2.5 lakh crores, give or take a few thousand crores. Embedded value is essentially the present value of profits from the future, and adjusted net asset value. The recent capping on ULIP charges that IRDA has mandated will help LIC in sales as they have a huge bouquet of traditional products. On top of that, a buoyant stock market and an economy growing at 9% can only lead to an increase in valuations. Though it is difficult to establish a clear ratio between market capitalization and embedded value, India’s most valuable company by market capitalization is Reliance Industries at Rs 3 lakh crores. LIC, with an embedded value of Rs 2.5 lakh crores is not too far from that. Add in the fact that there will be a premium attached with being the leader in a growth industry, LIC can easily command a market capitalization higher than Rs 3 lakhs, were it ever to list in the stock market. And thus become India’s most valuable life insurance company!!

Compared with the valuations that Insurance companies have in China, this will not be surprising at all. China Life commands a market cap of 111 billion USD. LIC could very well have a market value of in excess of 65 billion USD, ie approximately Rs 3 lakh crores.