Why LIC was preferred for disinvestment now?


Finance Minister Nirmala Seetharaman to everyone’s utter surprise has declared that the Disinvestment target for the FY 2020-21 was Rs.2.10 lakh Crore including LIC of India.

Why LIC was preferred for Disinvestment? is the question now making rounds in the industry. It is the only Corporation giving entire surplus as dividend to Govt. Probably in her review she might have received that All is Not Well with LIC also just like PSBs. So it better to sell some part of shares to private parties to get additional revenue if all is well that goes well. Govt might have observed that though premiums are increasing every year with a good track record, the Surplus (profit) is not increasing due to several reasons.

Following is the balance sheet for the Financial Year 2019-20 based on which presenting this analysis on LIC:

Before going through, let us know some technical words.

A) The premium amount collected is the revenue for an insurance company.

B) The commission will be paid for agents for premiums collected and policies canvassed.

C) Bonus will be paid to all active policies at a prefixed rate say 7% of sum insured or 6% of sum insured etc.

D) For some specific policies, the interim bonus will also be paid.

E) Linked policies mean the premium amount can be invested in the stock market also.

F) Non linked policies are generally invested in debt instruments only for a fixed rate of interest.

G) The main ratios analysts see are Commission paid ratio, operating expenses to the premium collected, the yield on the investment made.

H) In non-linked policies there are Life policy, Pension policy and Group policy also.

I) The most vital term in the balance sheet is Fair Value Change, it means Unrealised gain or loss arising due to changes in Fair Value listed shares and derivatives instruments as at balance sheet date. Shown under Fair Value Change in the balance sheet under Liabilities.

Some facts about LIC of India are:

1) The surplus arrived in profit and balance sheet account ( profit )was fully paid to the Government as Final Dividend for the last 3 decades.

2. Govt holds 100% equity in LIC with an initial capital of Rs.10.00 crore. Reserves are hardly Rs.622.00 crore on 31&3-2020.

3) Loans in balance sheet mean loans given by LIC to policyholders against pledging of a regular policy.

4) LIC is the biggest investor in India ahead of SBI also. Total investment made as at 31-3-2020 were Rs.28,48,266.78 crore (27,53,549.46 crore on 31-3-2019).

Analysis of balance sheet

LIC of India has declared its audited balance sheet for FY 2020 the details of which are as follows:

There are only two sources of revenue for insurance company one is Premiums collected and another is Interest, dividend received on the investment.

  1. The premiums collected in FY 2020 was Rs.379,062.55 crore compare to Rs.337,185.39 crore in FY 2019. That means 12.4% growth in FY 2020 is a very good performance. For very big companies 5% growth is also considered excellent.
  2. Interest/dividend received on investment was Rs.236,820.38 crore in FY 2020 compared to Rs.223,598.99 crore in FY2019.
  3. Gross revenue was Rs.615,882.93 crore in FY2020 compared to Rs.560,784.39 crore. The growth was Rs.55,098.54 crore in FY 2020. But the end result is not satisfactory.
  4. Commission paid to agents was Rs.21,027.13 crore at 5.5% of total premium in FY 2020, compared to Rs.19,996.26 crore at 5.91% of FY 2019. In a high tech age on line policies to be canvassed more with some incentive of 1% or 2% to policyholders.
  5. The major expenditure was bonus declared for regular policies at Rs.2,52,548.89 crore in FY 2020, compared to Rs.2,49,284.86 crore declared bonus in FY 2019.
  6. Another account which reduced profitability was Change in Value of liabilities at Rs.295,286.22 crore on 31-3-2020 compared to Rs.253,147.37 crore on 31-3-2019.
  7. Operating expenses increased marginally to Rs.34,568.03 crore @ 9.1% of premium collection in FY 2020, compared to Rs.28,496.94 crore @ 8.44% of premium collection in FY 2019.
  8. The Surplus (profit in other companies) was Rs.2697.74 crore in FY 2020 compared to Rs.2660.59 crore in FY 2019.
  9. Though premium collection increased, interest in income also increased but it has not resulted in posting Better Surplus in FY 2020.
  10. The entire surplus of Rs.2697.74 crore in FY 2020 was declared as dividend to Central Government as done in last 30 years.
  11. The net worth of LIC was very low with Rs.739.52 crore as at 31-3-2020. It consists of paid-up initial capital of Rs.10.00 crore, Reserves Rs.622 crore only, and Fair Value change Rs.17.52 crore.

The capital base of the LIC is very small and entire surplus given to Central Government as dividend from decades, valuation of the Corporation is becoming difficult to go to public share. Fair value change of investment instruments deterioration was very huge at minus Rs.4340.53 crore on 31-3-2020 compared to the positive value of Rs.216,778.45 crore on 31-3-2019. This might have made Central Government to disinvestment in LIC when Surplus was posted.

Total policy liabilities including bonus was Rs.30,81,998.18 crore on 31-3-2020 compared to Rs.27,86,711.95 crore on 31-3-2019.

Assets side

  • Money invested from policies amount was Rs.28,48,266.78 crore on 31-3-2020 compared to Rs.27,53,549.46 crore on 31-3-2019.
  • That means investment opportunities were less having already invested huge sums in almost all banks, shares, debentures etc.
  • Loans on policies were Rs.107,822.67 crore on 31&3-2020 marginally above previous year Rs.104,322.55 crore. This year it may increase enormously due to pandemic.

So overall performance was satisfactory only, though premiums increased. Interest/dividend on investment was 8.31% only. This needs to be improved. Now LIC may enter the stock market with a valuation of Rs. 60,000 crore to Rs.70,000 crore.

Let us wait and see how the future of LIC is going to be.