In today’s Finshots, we talk about everybody’s favourite insurance company  that might IPO very soon— LIC.


The Story

LIC is India’s largest financial institution. It manages close to ₹30 lakh crore in assets (out of India’s ₹40 lakh crore insurance industry). It sells 3 out of 4 life insurance policies sold in the country. It’s much bigger than the 23 private sector life insurance companies put together. And it is a profitable entity which has consistently delivered value to its only shareholder — the Government of India. We wrote all of this when we covered how the government could IPO LIC. It was a fairly complicated piece talking about the policy and financial challenges involved in taking the company public. But the thing is, we never really talked about the elephant in the room — LIC's investments. So today we thought we’d look into this subject and see how LIC manages its money.

For starters, as we already noted, LIC manages a lot of it. Like close to ₹30 lakh crores. Most of these investments are attributable to LIC’s non-linked policies. Think life insurance and pension funds — where the company pays out fixed returns to policyholders. Meaning it’s crucial for LIC to protect this capital irrespective of what happens outside. And so LIC has parked close to ₹20 lakh crores in government securities. These investments are highly unlikely to come undone since you can always count on the government to pay back in full. So technically, it’s the safest option out there.

Then there is the slightly risky stuff. Investments in publicly listed companies i.e. the stocks they own. The company held shares worth ₹4.3 lakh crores at the end of March 2020. By the end of July, it was worth ₹5.8 lakh crore s— a 34% rise in a matter of a few months. LIC’s chairman, Mr. Kumar would tell you this is a by-product of their investment philosophy"We buy when the market is down, we are contrarians that way but then we make sure that the policyholder interest is kept at heart.”

However, most of LIC's investments are in blue-chip companies — the best stocks out there. For instance, LIC holds a 5.8% stake in Reliance Industries. And the value of their stake grew by ~₹40,000 crores during March and July. So technically most of their gains were attributable to the likes of Reliance. The point here is that these bets aren’t exactly contrarian in nature. In fact, LIC has so much money, that they couldn’t possibly be contrarians even if they wanted to. The only time you see the company make a contrarian bet is when it's nudged to rescue a failing company.

Think IDBI bank. The company was bleeding money. More than a quarter of its loan book had gone bad. And LIC walked in with ₹ 21,600 crores and bought a 51% stake in the company. At the time, LIC said this was a “strategic investment” in a large bancassurance i.e. a bank selling insurance. The hope was that IDBI’s 800 branches would help LIC sell insurance policies. However, insiders believe LIC had to walk in because the government wanted somebody to rescue the bank.

So maybe the real question we ought to be asking here is — what about LIC’s dodgy investments?

After all, there is always a lot of chatter about how LIC has massive amounts of money invested in companies that are plain struggling or on the verge of bankruptcy. Think DHFL, Reliance Capital, Yes Bank, Reliance Home Finance, IL&FS and Jaypee Infratech. All of these big-name firms have defaulted on their payment obligations and it’s quite possible that LIC’s investments in these companies might not pay off.

How much you ask? Well, at least ₹32,000 crores as of December 2019. These investments have gone bad. The chance of recovering these funds are slim to none. For all practical reasons, LIC assumes this money won’t come back. And while the figure might seem massive in absolute terms, bear in mind, this is roughly 1% of LIC’s entire portfolio (worth ₹30 lakh crore). So despite all the talk about the company’s shoddy investment decisions, LIC is so big, that even ₹32,000 crore is only a drop in the ocean.

Moral of the story — There is big, bigger, biggest. And then there is LIC.

Until next time…

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Also don't forget to check our daily brief. In today's issue we talk about whether we'll soon see more foreign universities in India, and Moderna's decision not to enforce its vaccine patents. Do read the full draft here.