Your Insurance Could Be at Grave Risk

Oct 22, 2016

In this issue:
» The world's top 5 richest Indians
» Is India's gold demand back?
» Global markets end week on a robust note
» ...and more!
Ankit Shah, Research analyst

Why do you buy insurance? To make sure you or your family or your business is protected from an unexpected disaster. When you buy insurance, you expect the insurer to compensate in case of an unfortunate event.

Insurance is nothing but a hedge against risk.

This means that the insurer assumes a very crucial role in your financial well-being. And so it goes without saying that the insurer itself must be of sound financial health.

The question I want to ask you today is - Can you trust your insurance company?

This question occurred to me when I came across some disturbing facts regarding India's largest insurance company - Life Insurance Corporation of India.

In the past, the government has often used the cash-rich company to bailout disinvesments.

But what I read recently is not just's plain scary.

On 20 October 2016, a news piece in The Times of India read:

  • Life Insurance Corporation (LIC) may come to the rescue of debt-laden Air India (AI) by converting a significant part of the airline's high-cost debt to a low-cost one.

What's wrong with this?

Air India is a virtually bankrupt airline...sustained purely by taxpayer bailouts.

Take a look at these numbers...

During the financial year 2015-16, Air India reported an operating profit of Rs 1.05 billion. This was the first time in a decade that the public-sector airline reported an operating profit (driven mainly by low fuel prices). But this is nothing to cheer about. At the bottomline level, the company reported a net loss of Rs 35.87 billion.

Here is the reason for the big mess: As of March 2016, the company had a total debt burden of about Rs 460 billion. It was reported that Rs 280 billion comprises short-term loans and the rest is long-term borrowings.

Now compare the operating profit of Rs 1.05 billion with a debt burden of Rs 460 billion.

Let's do a small thought experiment. Assuming that Air India does not have to pay any interest on its debt...and assuming that it maintains its current level of operating profits (the highest in the last decade), how many years will it take for the airline to repay all of its debt?

438 years.

This is mind-boggling. The other way to interpret this is that the airline is a dead horse. The business is unsustainable. The debt is unmanageable.

But it is a government company. And as you know, the government can do anything. It can make the impossible possible. It can make a dead horse look alive.

And now, it seems the government's cash cow LIC is going to convert a portion of Air India's high-cost working capital debt to low-cost debt.

While this whole idea sounds preposterous, there are reasons to believe that this may actually happen. Here's The Times of India again:

  • Last year, LIC had signed an MoU with the Indian Railways for providing financial assistance of Rs 1.5 lakh crore till 2020. Railways had got the first tranche of Rs 2,000-crore loan at around 7% and AI is said to be seeking a similar rate.

Do you think an insurance company should be offering such risky loans at subsidised interest rates?

In reality, the government appears to be simply transferring public money from a cash cow to a dead horse.

So be careful when you buy insurance. Your insurance agent is unlikely to inform you about these risks.

Moreover, it turns out that LIC is not the only black sheep in the Indian insurance industry.

Our big-picture editor, Vivek Kaul, recently penned a pertinent report on how the entire insurance industry is built on misselling.

I strongly recommend you go through the full report to understand what's really happening in the insurance industry in India...and how it affects you. If you have not accessed Vivek Kaul's Letter yet, sign up here.

By the way, we have also prepared a guide to help you understand the valuation of insurance businesses.

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03:00 Chart of the day

We live in an era where the income inequality divide has only been increasing. It's certainly been pronounced in West where post the subprime debacle, loose monetary policies by the Fed have only enriched the rich and impoverished the poor. But this is not a phenomenon seen only in the developed world. It's very much prevalent in India too. Indeed, the Forbes has an annual ritual of releasing the world's biggest billionaires and India has quite a few names on the list. Just to give a flavour, Mukesh Ambani has been named the richest Indian for a ninth year in a row. His networth stands at US$ 22.7 billion, which is equal to Estonia's GDP!

The World's Top 5 Richest Indians

That's one part of it. As you can see, the total wealth of India's top five billionaires stands at a mind-boggling US$ 83.7 billion. This is more than 18 times the cost of hosting the recently concluded 2016 Rio Olympics!

So there you go. The irony is that if one were to draw up a list of countries with the highest number of poor people, we would not be surprised if India featured on that list as well.

Clearly, wealth is concentrated in the hands of the very few. But there is a small silver lining in the cloud.

If one were to apply the 80-20 rule, it would mean that the top 20 billionaires in India would account for 80% of wealth. However, the share of the top 20 in overall wealth has steadily eroded from 70% in 2009 to 52% in 2016. This indicates that wealth has been trickling down to the lower order, which is an encouraging sign.


We Indians love gold. But demand was subdued for a few years due to a variety of reasons. The UPA government had imposed curbs on gold imports among other measures. There was also a crackdown on gold smugglers. The NDA government eventually eased the import norms, however the price of domestic gold did not give up its discount over the international gold price. The lacklustre demand was due to the weak economy and two consecutive deficient monsoons. The 10% import duty did not help matters.

However, things are changing now. Gold demand is back. As per an article on Reuters, India's overseas purchases of gold is likely to hit a nine-month high in October 2016. The domestic price has flipped to a premium. Banks and refiners have resumed imports ahead of the festival season. India's demand for gold usually firms up in the last quarter of the year due to the wedding season and festivals such as Diwali and Dussehra. A much needed correction in local gold futures market has also attracted buyers.

India's gold imports in the first nine months of 2016 were estimated to have slumped 59% from a year ago to 268.9 tonnes, according to consultancy GFMS. But the trend is clearly changing due to an 8% fall in prices from the highs seen in July 2016. It remains to be seen if this revival is sustainable and by how much it would affect India's current account. We will keep a close eye on this development going forward.


The global markets performed well this week. Bank of Japan (BoJ) indicated that it would adjust the monetary policy as needed to achieve its 2% inflation target with an eye on economic, price, and financial developments. To control the yield curve, it said that it would introduce a new policy tool called quantitative and qualitative monetary easing (QQE). The Nikkei 225 gained 1.9% in the week gone by.

European stocks ended the week in positive territory. The European Central Bank (ECB), in its meeting this week, kept the policy rates unchanged. On the inflation front, it said there is a threat of inflation in the coming month which would also mean the euro zone economy improving at a slower rate than expected. Stock markets in Germany and France were up by 1.2% and 1.5% for the week gone by.

The commerce ministry of China stated that trade environment will remain weak for the remainder of 2016. This comes as a concern for the Chinese economy which faced lower than expected trade data for the month of September. The release of data pointed to weaker Chinese demand both at home and abroad. It also revived concerns over the latest depreciation in China's yuan currency.

Earlier this month, China declared to cut red tape and ease rules for foreign investors in order to boost the economy and counter a decline in private investment. Not only that, the Chinese government also decided to block new projects in sectors that are plagued by overcapacity. The Shanghai Composite index gained 0.9% in the week gone by.

Back home, the BSE-Sensex ended the week on a robust note and was up 1.5%. Indian exports grew by 4.62% YoY in September to US$ 22.9 billion. The export sectors, which recorded positive growth, include engineering, gems and jewellery, handicrafts, textiles, and chemicals registered growth of 6.51%, 22.42%, 23%, 12.62%, and 6%, respectively. On the other hand, Indian imports contracted by 2.54% YoY to US$ 31.22 billion during the last month. The above mismatch left a trade deficit of US$ 8.33 billion in September 2016. The trade gap, however, was lower than US$ 10.16 billion recorded in September 2015.

Performance During the Week Ended 21st October, 2016

04:50 Investing mantra

"The net wealth creation in airlines since Orville Wright has been next to zero. If a capitalist had been at Kitty Hawk and shot him down, would have done us a huge favor." - Warren Buffett

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