Why It's Best to Stay Away from Buying LIC Policies - Vivek Kaul's Diary
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Why It's Best to Stay Away from Buying LIC Policies

Apr 21, 2016

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The Life Insurance Corporation (LIC) of India is India's biggest insurance company. It is also India's biggest investment firm.

It is so big that it keeps coming to the rescue of the government now and then, when the government cannot find enough buyers for the financial securities that it wants to sell.

Nevertheless, the question is, how good is LIC when it comes to generating returns on the investments it makes?

Before we figure that out, it is good to point out that LIC is basically an investment firm which also sells insurance. A major portion of the money that it collects as premium from Indians, against the so called insurance policies that it sells, is invested in stocks and bonds (both private as well as government).

The insurance policies that LIC sells are basically investment plans with a dash of insurance. And given that the premium that it collects and in turn invests, should be generating decent returns for the policyholders (actually investors). Of course, the tragedy is that most of these policy holders don't even know that they are actually investors.

So how do things look? The accompanying table gives us the investment track record of LIC between 2005-2006 and 2014-2015. As is clear from the table the investment record of LIC has been dismal to say the least.

In 2014-2015, the investment firm earned a return of 7% on its investments. The average return on the 10-year government bond during the course of the year was 8.3%. The investment return of LIC was 130 basis points lower than the average return on a 10-year government bond. One basis point is one hundredth of a percentage.

Year Income from investments (In Rs crore) Investments (In Rs Crore) Return (%) Average returns on 10 year govt bond Difference
2014-2015 1,35,483 19,462,49 7.00% 8.30% 130 basis points
2013-2014 1,18,097 16.846,90 7.00% 8.40% 140 basis points
2012-2013 1,03,882 14,864,57 7.00% 8.20% 120 basis points
2011-2012 90,267 13,495,32 6.70% 8.50% 180 basis points
2010-2011 77,667 12,665,39 6.10% 7.90% 180 basis points
2009-2010 67,198 10,958,41 6.10% 7.30% 120 basis points
2008-2009 56,583 8,15,484 6.90% 7.60% 70 basis points
2007-2008 47,999 7,56,891 6.30% 7.90% 160 basis points
2006-2007 40,572 6,13,267 6.60% 7.80% 120 basis points
2005-2006 35,479 5,24,017 6.80% 7.20% 40 basis points
Source: Annual reports of LIC

[These numbers may not reflect mark-to-market on certain investments and hence the investment income may be higher, though it cannot meaningfully alter the returns.]

In fact, the difference between the average returns on a 10-year government bond during the course of a year and the investment returns of LIC vary between 40 basis points and 180 basis points. This is a huge difference.

The average return on investment for LIC over a period of ten years between 2005-2006 and 2014-2015 has been 6.7%. The average return on a ten-year bond has been 7.9%. The difference between the two returns is 120 basis points.

In fact, the average rate of inflation between 2005-2006 and 2014-2015 was 8.85%. Hence, the average return on investment of LIC was lower than the rate of inflation as well.

What does this tell us about a professional investment firm like LIC? It tells us that LIC is doing a terrible job of managing public money. Any investment firm should be able to generate average returns greater than the returns on government bonds, at least. It should also be able to beat the inflation. In fact, that is what it is paid a fee for. But that doesn't seem to be happening in case of LIC.

The investment returns of LIC have been consistently lower than the 10-year government bond returns. First and foremost, this tells us that the investment management capabilities of LIC are very bad, given that its investment returns have been 120 basis points lower than returns on a 10-year government bond, over a period of ten years.

Further, LIC would be simply better off by buying government bonds and then holding on to them till maturity, instead of actively trying to manage money. It would probably end up earning higher returns than it currently does.

Second, what this also tells us is that the government is interfering too much in the functioning of the firm and getting it to make investments, which it shouldn't be making in the normal scheme of things. The government regularly gets LIC to invest in shares of public sector enterprises which other investors are not willing to pick up.


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In the recent past LIC has picked up stakes in public-sector banks to help them meet their capital requirements. As a March 29, 2016, news-report in The Indian Express points out: "Since the beginning of 2016, LIC has brought into preferential allotment of as many as six banks, supporting the fund-raising requirement of these banks in turn. Share prices of PSBs on an average have declined close to 11.7% so far this year."

The public-sector banks are sitting on a huge corporate-debt time bomb. Many corporates they have lent to over the years are currently no longer in a position to repay their loans or have simply siphoned off this money. The question is why is LIC money being invested in these banks? This is because the government wants to continue owning these banks, instead of selling them out.

Also, LIC now owns 21.22% of Corporation Bank, 14.37% of IDBI Bank and 14.99% of Dena Bank. Again, the question, why should an investment firm managing public money be taking on such concentrated risk? In fact, the Securities and Exchange Board of India(Sebi) regulations do not allow a mutual fund to own more than 10% of a company.

Why doesn't the same rule apply to LIC as well? Like mutual funds LIC is also in the business of managing hard-earned public money.

Unnamed LIC officials in various news-reports justify this buying by saying that they are buying value. Maybe they are, but buying value does not mean betting the house on one stock. When an institution is managing as much money as LIC is, some basic investing principles need to be followed.

Third, it tells us that individuals are better off putting their money somewhere else rather buying LIC policies. What is the point in investing money in order to earn a return of 6-7% on an average? Yes, investing in LIC policies helps people save on tax, but there are better ways of saving tax like the Public Provident Fund (PPF).

Between 2009 and now the returns on PPF have never gone below 8%. In fact, currently the rate of interest on PPF is at 8.1%. As far as an insurance cover is concerned, individuals can look at buying a pure term insurance policy, which just offers insurance against the premium paid.

Fourth, the government needs LIC to finance its fiscal deficit and to keep rescuing the public sector enterprises which aren't a viable business anymore. Fiscal deficit is the difference between what a government earns and what it spends. LIC helps the government finance its fiscal deficit by buying government bonds and at the same time it also helps the government meet its disinvestment target by buying shares of public sector enterprises which other investors are not interested in. This money helps narrow the fiscal deficit.

In the process, the returns that LIC is able to generate on its investment portfolio get compromised on.

Fifth, when was the last time you saw an article analysing the returns on various LIC policies? Like is the case with other insurance companies, it is not possible to figure out which LIC plan has given what kind of return, over the years. Hence, it is best to stay away from investing in them.

Vivek Kaul is the Editor of the Diary and The Vivek Kaul Letter. Vivek is a writer who has worked at senior positions with the Daily News and Analysis (DNA) and The Economic Times, in the past. He is the author of the Easy Money trilogy. The latest book in the trilogy Easy Money: The Greatest Ponzi Scheme Ever and How It Is Set to Destroy the Global Financial System was published in March 2015. The books were bestsellers on Amazon. His writing has also appeared in The Times of India, The Hindu, The Hindu Business Line, Business World, Business Today, India Today, Business Standard, Forbes India, Deccan Chronicle, The Asian Age, Mutual Fund Insight, Wealth Insight, Swarajya, Bangalore Mirror among others.

Disclaimer: The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

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22 Responses to "Why It's Best to Stay Away from Buying LIC Policies"

sanjeev khandelwal

Jun 1, 2016

HI

nice written, but i would like to highlight two more points

1) Valuation of investments done by LIC. It is not transparent. Banks took lot of hit when prudential norms was introduced. Since, LIC accounting policy and Balance Sheet is not transparent , there may be some hidden pockets

2) Real Estate valuation. One big plus point of LIC is investment in Real estate in form of office. Its valuation in books may be very low but may have huge value..

Like 

skv

May 4, 2016

Nicely written with data , tearing in to the poor returns LIC has generated.

Like (1)

Deepak

Apr 26, 2016

Hi Vivek,

Nice Article indeed. I will appreciate this discussion as an eye opener. It would be wise to share similar comparison with Private sector Life insurers' investment pattern in similar if not same period that could be an apple to apple comparison. As investment done by Life insurers is governed by Insurance Act 1938 and amended time to time.

Like (1)

B Ganga Raju

Apr 24, 2016

LIC took its birth with the very idea of providing funds for implementation of the 5 year plans in 1956 while providing security to the policyholders. Though planning is given a go bye, the habit of providing investible funds to government continues. Let the government of the day which swears by liberalisation, give complete autonomy to LIC. Successive governments are liberal with public money. What debate was there in parliament about this? You name a scheme and pat comes the suggestion let LIC finance it. Can it be otherwise with a government which wants to tax even the provident funds? Everybody speaks of LIC and LIC top brass are not accustomed to defend themselves with political talks. Better spend more space and energy highlighting the damage done by the likes of Vijay Mallya and the political clout they enjoy. Why not run a campaign to make public the names of big defaulters of Bank Loans? Is it axiomatic that the industrialists are entitled not to repay huge loans they take from the Banks? Return on investments may be low ( in LIC) but the institution has not failed the Indian People. In articles of this type, the intention to throw mud on LIC is very much visible. Inspite of such attacks LIC continues to enjoy the confidence of insuring public. Better attack the government for all its wrong economic policies and decisions instead of trying to paint LIC in black.

Like (2)

Harshad Ashar

Apr 23, 2016

Dear Mr. Vivek,

I must congratulate U for a nice try based on some facts and figures. I am LIC agent since 1994 and trying to justify my clients based on their needs, nature and circumstances. I am known for my term insurance sells in my branch.

1- U have probably ignored the nature part of the Indian People. Though we all know that term insurance is the real insurance, People are ready to pay 50,000/- Rs annual premium on their branded car but are not willing to purchase the term life cover of 1-2 crore in the same annual premium. Instead they want something where they can get maturity amount back.

2-How ever good the bond and/or equity returns just try to find out at least 5-10 out of 100 investors who could with all discipline continue their investment for more than 10 years which if not all but many LIC Policy holders does.

3- Better if U can come out with details of last 10 big Stock purchases of LIC with date and cost with the current valuation. This may turn the side of the picture. Waiting for your response on this.

Like (3)

kamal

Apr 22, 2016

namsatay vivekji
i would like you to highlight me on more about lic investments in the share market ,why does it want to buy govt bonds ,also can you really admit that lic investment plans do not offer more than 6 to 7% returns on investments .
also i have a question and query to you vivekji,if lic has 95 percent shareholders as investors then why can not they do ask questions on the investment patter followed by lic .
also in this article you mentioned if lic just invests in govt bonds only then why are they not doing it ,and also why lic is not coming up with an ipo ,as hdfc is coming up,would lic if its comes out with ipo would be more transparent and good for the investors.

please do share your views on more about lic as an investment and are now all lic policies coming under the EEE OR ITS EET SECHUDLE

I MIGHT ASK MORE QUERIES IN FUTURE TO YOU

THANKX
KAMAL

Like (3)

Glenn Rego

Apr 22, 2016

I believe that LIC buying stakes in PSUs and this being hailed as bringing down the country's fiscal deficit is a complete sham - It is just transferring the government's debt from one pocket to another - Who is the major stakeholer in LIC anyways?? and who knows - What happened to UTI earlier may one day happen to LIC with the brunt having to be borne by the general public!

Like (2)

Ameet parekh

Apr 21, 2016

Very rightly put Vivek,lic policies are useless investments.I have reliazed it after 20 yrs that my premiums invested in a good stock or a diversified equity mutual fund would have given me tremendous returns. In life risks are to be taken not shied away from.

Like (1)

Parin

Apr 21, 2016

Not sure if this analysis is misleading since what about capital appreciation thru investments which will be known only if MTM is done. Please recheck n confirm

Like (1)

parimal shah

Apr 21, 2016

Hello Vivek,
First of all, I am not a fan or do not hold brief for LIC.
But please note you are ignoring the risk cover offered by LIC.
-Parimal

Like (1)
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