Mumbai: Life Insurance Corp. of India (LIC) is expected to post a year-on-year decline of 40% in profit-booking on equity investments in 2015-16, as choppy markets take their toll on the country’s largest investor.
LIC is expected to book a profit of Rs.15,000 crore on equities in the year to 31 March, a five-year low, two persons directly familiar with LIC’s investment accounts said. They spoke on condition of anonymity as the figures are not yet in the public domain.
Lower profits from investments will hurt LIC’s valuation surplus—the excess amount available for distribution to shareholders and customers holding a with-profits policy, a contract that entitles them to a share in the profit of an insurance company.
After providing for present and future liabilities stemming from maturity and death claims, 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 lower profit will also mean a lower dividend for the government.
Since 1 April 2015, BSE’s 30-share bellwether Sensex has fallen by around 12% to 24,659.23 on Tuesday, pulled down by investor concerns over weak corporate earnings growth, the economic slowdown in China, the start of interest-rate hikes in the US and plunging commodity prices.
LIC, with at least 250 million policyholders, around 300 million policies in force and total assets worth at least Rs.20 trillion, is the largest among 24 life insurers in the country.
According to LIC’s disclosures at the end of December, the state-owned insurer’s net premium collections stood at Rs.1.73 trillion, compared with Rs.1.56 trillion a year earlier. The insurer’s profit from sale and redemption of investments (including equities) was down to Rs.11,880 crore as of the end of December, compared withRs.16,700 crore a year earlier.
Losses from investments in equities, fixed income papers and other assets widened 27% to Rs.957.16 crore at the end of December from Rs.751.71 crore a year prior.
“LIC is a long-term investor in the market. Every investment decision at LIC is taken as per the investment department’s approval,” said one of the two persons cited in the first instance.
“Traditionally, LIC buys stocks at market lows and sells stocks at market highs if there is a possibility of making profits. The market has given more lows than highs over the past year, so the profit booking numbers are low but the gross purchase of stocks is one of the highest,” said the first person.
A LIC spokesperson did not respond to an e-mail seeking comment.
In equity markets, LIC typically acts as a contrarian investor. “Portfolio churning is a continuous process and depending on available opportunities, LIC books profits by churning its equity portfolio,” the first person said.
Still, LIC is better off than other investors and investment managers even after the estimated 40% profit decline from equity investments this fiscal year, said Sudip Bandyopadhyay, managing director and chief executive officer at Destimoney Securities Pvt. Ltd.
“Even with these numbers, LIC is most likely to have done better than other investors in the market. LIC is structurally positioned better than other investors since it is capable of investing in stocks for a much longer term than others and is able to redeem investments at any time from its old long-term investments, without making any loss, unlike any other conventional investor or investment manager,” Bandyopadhyay said.
According to Bandyopadhyay, the market is in such a situation that investors should bet on the fundamentals of the stock rather than an index or a sector while investing.
“This condition is likely to last for at least a year more. And this may be the right time for individuals to buy stocks, market-linked or participating insurance policies, since the returns are definitely going to be very decent over a horizon of 5-10 years,” Bandyopadhyay added.
During the ongoing financial year, Indian equities have logged more losing sessions than upswings.
According to BSE, the market has recorded 121 losing sessions and 111 gaining days during the current financial year so far.
From its highest level of 29,044.44 on 13 April 2015, the Sensex is currently trading 15.24% lower. On 11 February, the market closed at its lowest level in the current fiscal year, with the Sensex at 22,951.83 points.
The market dips allowed LIC to invest at least Rs.60,000 crore on a gross basis during the financial year. This is one of the highest investments by LIC in equities in the past 10 years.
According to research by Mint, LIC held stakes in at least 260 listed companies at the end of December. Between April and December, LIC has sold the most in the stock of Oil and Natural Gas Corp. Ltd and bought the most in Infosys Ltd in terms of the absolute value of transactions.
The insurer’s total value of transactions in the equities of these 260 firms could be estimated at Rs.11,847 crore on a net basis, as per the closing prices of the stocks on Tuesday. LIC sold 561.59 million ONGC shares between April and December and as per Tuesday’s market closing price of ONGC, this transaction is valued at Rs.11,338.7 crore.
The insurer bought 73.23 million Infosys shares in the first nine months of the financial year. As per Tuesday’s market closing, this transaction could be valued atRs.8,520.72 crore. However, all these transactions may have taken place at different days and at varying tranches between April and December.
“Most classes of investors, including mutual funds, redeem investments when markets start falling and put in money when markets start rising. But LIC has the muscle to buy stocks when markets start falling and sell when markets start rising. This places LIC in a very advantageous position as compared with any other conventional investment manager,” Bandyopadhyay of Destimoney said.
LIC’s market share in the insurance premium space has been sliding over the past few years.
Every insurer invests in the market from the money collected from premiums paid by policyholders. According to the Insurance Regulatory and Development Authority of India, during the nine months ended December, LIC collected total first-year premium of Rs.66,335.70 crore, compared with the combined collection ofRs.29,535.92 crore by private insurers. This has brought down LIC’s market share to about 69% from 69.5% in the year-ago period.