BackLIC could book record profits from sale of equities in FY15
The record profit booking from LIC's equity portfolio means a high valuation surplus for the insurer which will benefit policyholders and the government
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Mumbai: Life Insurance Corporation of India (LIC), a long-term investor in equities, is set to book its highest ever profit from the sale of equities in 2014-15, said two top LIC officials.
The net profit booked may be close to ₹ 30,000 crore one of the two said, asking not to be identified.
“Last year, LIC booked profits worth about ₹ 22,000-23,000 crore. This year, the total profit will be substantially higher than that seen in the last fiscal year. It will be a record," this person added, explaining that since most of LIC’s investments are long term in nature, the insurer is in a better position to book profits.
LIC has already booked profits worth more than ₹ 20,000 crore from equity investments of at least ₹ 37,000 crore till January end, he said.
“The profit-booking can be attributed to LIC’s greater ability to do churning in stocks as compared to other entities," said LIC chairman S.K. Roy, while declining to comment on the extent of profit booking for the full year.
The record profit booking from LIC’s equity portfolio will mean a high valuation surplus for the insurer which, in turn, will benefit policyholders and the government. In insurance parlance, surplus is the excess amount available for distribution to shareholders and with-profits policyholders. A with-profits policy is a participating policy under an insurance contract that entitles the policyholder to participate in the profits of an insurance company. After providing for present and future liabilities with regards to maturity and death claim benefits, the profit is distributed among the with-profits policyholders in the form of bonus or dividends. Since the government holds a 95% stake in LIC, the high profits will also mean a higher dividend income for the government.
According to Mint research, LIC sold the most during the September quarter of the current fiscal, followed by the December quarter and the June quarter.
During the December quarter when the 30-share benchmark BSE Sensex gained 3.3%, LIC trimmed its stake the most in Deccan Chronicle Holdings Ltd (5.92%), Tata Global Beverages Ltd (5.09%), Tata Communications Ltd (2.73%), Bharat Electronics Ltd (2.2%), JK Tyre Industries Ltd (1.94%), Tech Mahindra Ltd (1.39%) and IRB Infrastructure Developers Ltd (1.29%).
During the September quarter, while the Sensex gained 4.8%, the insurer cut its holdings the most in Voltas Ltd (2.91%), Gujarat State Petronet Ltd (2.26%), IDFC Ltd (1.88%), Hindalco Industries Ltd (1.77%), Tata Chemicals Ltd (1.22%) and HCL Technologies Ltd (1.15%).
During the June quarter of the fiscal year, while the market gained the most with Sensex rising by 13.5%, LIC pared its stake the most in PTC India Ltd (6.91%), KEC International Ltd (2.71%), Amtek Auto Ltd (2.1%), Andhra Bank (1.32%), TVS Motor Co. Ltd (1.3%) and Tata Global (1.24%).
“In equity markets we are basically a contrarian investor. Portfolio churning is a continuous process and depending on available opportunities we book profits by churning equity portfolio," said an LIC spokesperson in response to an email.
LIC’s record profit-booking can be attributed to its ability to hold a stock for a much longer term than most private sector life insurers or mutual funds. This is because most of its policies (the premium from which is invested in the market) are pure life insurance policies where maturity periods are longer.
Additionally, since a significant corpus of LIC’s collections from policyholders comes from renewal premium under traditional life insurance plans, LIC has more headroom to invest in equities for the longer term.
“LIC has been a contrarian investor in the market, which means it buys stocks when the market is in a sell-off mode and sells stocks when the market is in a buying mode," said Sanjay Sinha, founder, Citrus Advisors.
Sinha added that having a large contrarian investor such as LIC is good for the market because it can support the market when it is falling and bring in a sobering influence during a bull run.
“As compared to mutual funds, a large part of retail money coming to LIC is long-term (money), while a large part retail money coming to MFs is short-term and opportunistic in nature. So MFs do have more redemption pressure from the retail investors than LIC," Sinha said.
There are 24 life insurers in India with LIC being the only state-run insurer. With more than 300 million policyholders and total assets close to ₹ 20 trillion, LIC is the largest insurer in India. However, LIC’s market share has been sliding over the past few years. According to the Insurance Regulatory and Development Authority (Irda), during the nine months ending December, LIC collected a total first- year premium of ₹ 51,667.07 crore compared with the combined collection of ₹ 22,110.31 crore by private insurers. This has brought down LIC’s market share to about 70% from 77% in the comparable year-ago period.
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