Until about five years ago, when India wasn’t on the radar of many foreign institutional investors (FIIs), the Life Insurance Corp. of India (LIC)—the country’s largest life insurance company—along with the Unit Trust of India (UTI)—the largest mutual fund—used to rule the stock market.
LIC was the market-maker and always ready to cushion any fall in the market by its liberal support, often at the unofficial call of the government.
UTI has since collapsed. But LIC, which follows a very conservative investment policy, continues to be there with a kitty that is getting bigger every year, even if FIIs and hedge funds are the ones moving the markets these days.
“We don’t get tempted by the rise in market and rush to put in money,” said LIC managing director D.K. Mehrotra in an interview with Mint. “We need to respect the trust our policy holders have in us.”
Mehrotra oversees the insurance behemoth’s investment portfolio. The size of LIC’s investment book is Rs6 trillion and it expects to add Rs1.15 trillion to it in 2007-08. LIC has 200 million policyholders and an agency force of 1.1 million.
“Out of Rs1.15 trillion, we expect the unit-linked schemes to garner at least Rs35,000 crore. About 8-10% of the rest Rs80,000 will be invested in equities,” says Mehrotra. That translates into some Rs8,000 crore of LIC money flowing into the Indian equity market this year.
Unit-linked policies are those where investors choose to play in the capital market and are ready to bear the risk.
Under the investment norms of insurance firms, LIC needs to invest 50% of its money in Union and state government bonds and another 15% in infrastructure projects. This means it can use 35% of its funds to invest in equities. That’s not a small amount, considering the fact that last year it mopped up Rs1.25 trillion as premium income, out of which Rs40,000 crore was new premium.
But LIC does not want to play aggressively in the equity market.
“We can’t put all our eggs in one basket. We put money in corporate bonds, give project loans and even long-term working capital loans. About 8-10% of our funds is invested in equities,” says Sushobhan Sarkar, executive director (investment).
The average return from investments in the Indian market over the past five years has been 33.12%.
At LIC, an eight-member investment committee, supported by a 10-member research team, helps India’s largest insurance firm in making investment decisions.
“We do not invest in mid-caps. Our focus is the frontline stocks,” says Sarkar. Thirty frontline stocks form the Sensex, the benchmark index of the Bombay Stock Exchange. LIC primarily focuses on them and, beyond them, the top 200 stocks. It has at least 1% stake in more than 300 top Indian firms.
LIC’s outstanding equity investment is about Rs40,000-45,000 crore, says Sarkar. This is the book value of its investments, or the price at which it has bought shares. The market value could be anywhere above Rs1 trillion. That is roughly a fourth of the assets under management of the entire Indian mutual fund industry.
“We are a long-term investor,” says Mehrotra. Does that mean LIC never sells stocks?
“Of course, we sell and make money. All the money we generate through market operations goes to a pool of surplus and after adjusting for all expenses, 95% of the surpluses are distributed among our policy-holders in form of bonus and 5% goes to the owner, the government,” Mehrotra says. LIC describes its profits as “surplus”.
Technically, it does not book profit in the stock market by selling stocks. It books “appreciation” of stock prices.
Even though it has huge amounts of cash to invest, LIC does not want to play the role of a private-equity player, invest in unlisted firms and hand-hold them to the stock market. “We won’t do that,” says Sarkar, as such investments do not necessarily offer handsome returns.
However, given a choice, the insurance major would like to float a bank. “We have relationship with 28 banks that distribute our policies. Ideally, we should have a bank of our own as it is in sync with our business,” says Mehrotra. It holds 27% in Managalore-based Corporation Bank and close to 10% in Delhi-based Oriental Bank of Commerce. It has recently moved the government to raise its 26.32% stake in UTI Bank to over 50%.
(Rachna Monga contributed to this story.)