With a 71% market share at the end of FY12, Life Insurance Corp of India (LIC) is the ubiquitous protector of life in the country. However, with the government increasingly looking towards the insurer to bail out its offerings and recapitalize banks, the institution's ability to make prudent investments may be compromised.
Global rating company Moody's downgraded recently downgraded LIC's foreign currency insurance financial strength rating. The rating was lowered from Baa2 to Baa3 with a stable outlook. The company's growing exposure to the government securities was a cause of concern. Reportedly, under the government behest, LIC picked over 90% of the 5% auction of a stake in Oil and Natural Gas Corporation (ONGC) for a premium. This investment is currently under water. Plus during 4QFY12, LIC was again forced to increase stakes in state run banks such as Syndicate Bank, Bank of Maharashtra, Bank of Baroda, IDBI Bank etc, as the cash strapped government could not spare a penny. Post these moves, LIC's stake in many banks is above the Insurance Regulatory and Development Authority (IRDA) mandated 10%. It now stands closer to 15%. These investments are also in the red currently.
A senior LIC executive however defended these moves saying that the insurer invests in PSUs because it believes that these stocks will do well over the long term. But, since the insurer hasn't had a permanent chief for a full year now, it is not surprising that instructions may be coming from the Center. LIC manages assets worth Rs 13 trillion, equal to 15% of India's GDP of Rs 85 trillion. Its investment in government-owned companies as on May 18, 2012, is Rs 1.1 trillion. Policyholders are now becoming increasingly concerned as to whether their hard earned money is safe. The memory of the failed US-64 scheme is still fresh in the minds of investors.
A valid question that the Economic Times recently put out there is whether this age old institution is 'too big to fail (TBTF)' akin to General Motors, AIG or Citigroup in the United States. When TBTF entities reached the brink of collapse, the US government had to step in to bail them out. LIC is 100% owned by the Indian government. But, with finances in a dismal state, depending on the Center for a bailout may be foolhardy. One major positive on LIC's side is that the institution invests in plain vanilla products such as debt and equity. It is not allowed to invest in structured products which spelled doom for many financial institutions in 2008. And with Indian equity markets usually dancing to the tune of foreign institutional investors (FIIs), LIC may actually be the only big long term player in the markets. LIC provides necessary domestic support to Indian equities, but, the government should not abuse its majority ownership of the insurer.