Aarati Krishnan

The real state of LIC’s investment portfolio

Aarati Krishnan | Updated on February 21, 2020

Piecing together LIC’s investment book shows that fears of large NPAs or equity losses lurking in the portfolio are overdone

A little information can be a dangerous thing. Of late, this has played out to the detriment of the Life Insurance Corporation of India — the country’s largest life insurer and institutional kingpin in the equity and bond markets. With no granular details of its portfolio in the public domain, LIC’s individual investment missteps have been widely reported, fanning fears about the safety of policyholders’ funds lying with the insurance behemoth.

So, is LIC’s equity portfolio really ‘deep in red’ owing to its rescues of PSU disinvestment offers? Has its debt portfolio run up ‘high NPAs’ rivalling ailing banks? As LIC readies itself for a listing, we pieced together data from LIC’s public disclosures and shareholding patterns disseminated by stock exchanges, to run a check on its investment book.

Safety in size

When you’re a money manager, size can be useful in muting the impact of investment calls that misfire. LIC is quite fortunate on this count, dwarfing every other Indian money manager on the sheer size of assets managed.

By end December 2019-end, according to its public disclosures, LIC managed total investments of ₹30.55 lakh crore. Of this, a miniscule ₹648 crore belonged to the Corporation’s shareholder (the Government of India) and the rest to policyholders.

Of the ₹30.55 lakh crore, ₹29.85 lakh crore were attributable to LIC’s non-linked schemes (life, pension, endowment etc) which pay out fixed returns and insurance claims to policyholders. The remaining ₹70,000 crore was attributable to market-linked schemes, where losses or gains are immediately passed on to investors.

As of December 31, 2019, 67 per cent (₹20.6 lakh crore) of LIC’s policyholder assets were invested in government securities, about 7 per cent were parked in other approved bonds (₹2 lakh crore), 15 per cent in equity shares (₹4.7 lakh crore) and 3 per cent in investment properties (₹1 lakh crore), with the rest deployed in mutual funds, subsidiaries and other debt securities.

Therefore, hits to LIC’s portfolio from misplaced equity or bond bets can effectively hurt only about a third of its portfolio: the part that is not invested in cast-iron government securities.

Last year, LIC infused over ₹21,000 crore into the teetering IDBI Bank in a bid to raise its stake to 51 per cent. Since then, over half of the value of that investment has eroded, on the bank’s continuing losses. Sinking sums of this magnitude into a single entity would cost other money managers dear; but in LIC’s case, thanks to its size, it has affected less than 1 per cent of assets.

The NPA picture

Dewan Housing Finance, Reliance Capital, Yes Bank, Reliance Home Finance, IL&FS, Jaypee Infratech — all of these big-name firms have hogged the headlines for debt defaults and downgrades in recent times. All of them figure LIC’s debt portfolio, either as bond or loan exposures.

But what is the dent to LIC’s total investments on behalf of policyholders from such downgrades and defaults? The schedule of investments (L-13/14), tucked away in LIC’s disclosures offers some clues. According to IRDA regulations, insurers are required to invest the bulk of their policyholder money in ‘approved’ securities: Central and State government bonds and highly rated corporate bonds. Should any of these bonds slip in their ratings and fail to make the cut, they are swept into the ‘Other than approved investments’ category. LIC’s December 2019 disclosures show that, of the ₹30.5 lakh crore investments it held under its linked and non-linked plans, unapproved bonds amounted to about ₹1.2 lakh crore. Besides these, there were also ‘non-standard’ loans of about ₹13,500 crore.

These downgraded bonds and loans amounted to about 4.4 per cent of total policyholders’ assets. Adjusting for provisions, the number was 3.4 per cent.

But how much of this downgraded debt actually turned NPA? About ₹32,200 crore or 1 per cent by end-December 2019, is what the disclosures indicate. In a recent interview with BusinessLine , the LIC Chairman had stated that if its NPAs are looked at in the context of its total debt investments and not just its loans, they would amount to about 1 per cent. The above numbers verify that claim.

In fact, given the composition of LIC’s debt portfolio, it is not investments in corporate bonds or loan exposures that policyholders may need to worry about. Its extensive lending to State governments, which have stretched finances, appear more worrisome. By December 2019, 95.5 per cent of its debt portfolio sat in either sovereign bonds or AAA-rated bonds, but 37 per cent of the sovereign bonds were State government bonds.

Propensity for PSUs

Unlike LIC’s debt exposures, details of its equity portfolio are not available from any of the insurer’s disclosures, whether it’s the annual report or quarterly statements. Yet, it is LIC’s equity investments in PSUs and financial entities such as IDBI Bank and IL&FS that have generated the most speculation.

Given that there’s no direct way to get at LIC’s equity portfolio, we turned to the December shareholding patterns in the Capitaline database, to assess LIC’s holdings in the listed stock universe. Tallying up stocks where LIC held more than a 1 per cent stake threw up two interesting findings.

One, LIC held a 1 per cent-plus stake in a long list of 353 companies, with the market value of its portfolio at ₹5.3 lakh crore on February 19, 2020 (the difference from the ₹4.7 lakh crore mentioned in its public disclosures could be due to stock price moves or subsidiaries/associates). In its equity bets, LIC showed a strong a partiality for PSUs. Its 68 PSU holdings featured not just well-known names such as ONGC, IOC and HPCL, but also unlikely down-and-out ones such as IFCI, MTNL and National Fertilisers. With 21 per cent of its equity portfolio (₹1.15 lakh crore) invested in PSUs, LIC was overweight in PSUs relative to the market and this is likely to have hurt its returns during the long spell of PSU under-performance in recent years.

Two, much like the portfolios of retail investors, the Pareto Principle seems to operate on LIC’s equity holdings, with just 20 per cent of its stocks chipping in with most of the value. Of the 353 stocks, 69 large-cap stocks (by SEBI definition) made up ₹4.8 lakh crore or 90 per cent of LIC’s aggregate portfolio value of ₹5.3 lakh crore. The next 54 mid-caps chipped in with another ₹40,000 crore in value (7.5 per cent). Effectively, the remaining 230 stocks, a really long tail, contributed just 2.5 per cent of the portfolio value and could easily have been dispensed with.

The silver lining in this, though, is that the deep value erosion in stocks such as Vakarangee, Suzlon Energy, JP Associates and Reliance Communications which feature in LIC’s tail can do limited damage to policyholders today. Fears that LIC’s equity portfolio is deep in the red due to its PSU holdings seem overblown given that the bulk of its investment performance now relies on large-cap stocks which have been soaring lately. In March 2019, the fair value of LIC’s equity portfolio hovered 17 per cent above its historical cost.

Overall, this bird’s eye view of LIC’s investment portfolio suggests there’s no reason for policyholders to press the panic button on their investments in the Corporation. But the significant value of downgraded bonds and the long tail of under-performing stocks do suggest there’s plenty of room for improvement in insurers’ investment management. This is where more informed public scrutiny of its portfolio moves, after its IPO, can work wonders.

Published on February 20, 2020

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