Bailouts of govt assets, social schemes hurt LIC. Value migration & improved governance possible themes.
For years, the government has been pushing away all the household dirt under a carpet. Well, the household is running into issues now, and the carpet will soon be out for sale. The question now is how much will this carpet fetch, and where does the dirt go now?
In today's post, we discuss what disinvestment is and how aggressive the NDA government has been with it. see where LIC currently stands due to its bailouts of weaker firms and policy support to the government, and explore value migration and governance improvement themes post listing.
What is disinvestment?
Disinvestment is when the promoter decides to part away with a certain share in the company. The Indian government has been falling back on this mode to provide fiscal support as other revenue streams come under pressure in a weak economy. With higher infra-spend, corporate tax cuts, capital infusion is banks and weaker GST collections, putting extreme pressure on finances, the government plans to increase its disinvestments threefold from 65K cr to 2.1 lakh cr.
What is the history of disinvestments and who oversees disinvestments in India? Disinvestment strategy by the government started in the post-liberalization era in 1991. Governments since then have raised more than 4.32 Lakh Cr by disinvesting in various Central Public Sector enterprises. In India, the Department of Investment and Public Asset Management oversees the disinvestment. 2.79 of the 4.32 lakh cr have been in the NDA/Modi government regime (~65%). Of the 2 lakh cr that it plans to make in this year, 50% is expected to come from LIC.
LIC - Market share, investment history, NPAs, policy support, and financials
LIC was set up by the government of India in 1956 by merging 245 private insurance players. It manages a whopping 31 Lakh Cr assets and gained the trust of the public due to the sovereign guarantee it offers on its policies. Till the early 2000s, it enjoyed a monopoly in the Life Insurance sector in India. Even today it has a 76% share in the life insurance market. In FY 2019, LIC generated profits to the tune of 30k Cr. while giving a dividend of close to 3k Cr to GoI.
Before getting into the impact of disinvestment of government in LIC it helps to answer one important question.
What are the investments LIC has made in the recent past? In 2014 LIC invested in Bharat Heavy Electricals Ltd (BHEL) an amount of Rs 2,685 crore, increasing its stake to 14.99%. In 2015, it purchased shares of Coal India worth Rs 7,000 crore, which is one-third of the public offer. In 2017, it had put in over Rs 15000 crore to buy stakes, after the government initiated the disinvestment of General Insurance Corporation of India and New India Assurance Company. In 2018, LIC was made to acquire 51% stake in the debt-ridden IDBI bank.
All these investments were made either to bail out firms or to achieve disinvestment targets of Government and were largely accepted as being detrimental to LIC’s best interests.
Apart from investments, LIC is also struggling with a massive NPA problem. The gross NPAs as of September 2019 stand at 30,000 Cr. This has increased significantly over the past 5 years. Some of these include DHFL, Reliance Communications, ABG shipyard etc. in which it had to make a 100% provision.
LIC is also forced to be the flagbearer for the social security scheme, Pradhan Mantri Jeevan Jyoti Bima Yojana, which has a claims ratio of 170% as of FY 2019. This essentially means that the outflows of claims surpass the premium inflows by 70% hurting its financial health.
The combination of these factors has taken a toll on the firm's solvency ratio, which indicates the health of an insurance firm, stood at 1.6 for LIC, which is the lowest among other life insurers. IRDAI mandates a solvency ratio of 1.5, which means that LIC is barely managing to cross the threshold. For comparison, Bajaj Allianz tops the table with a solvency of 5.92, followed by Kotak life, Max, ICICI, SBI, HDFC at 3.05, 2.75, 2.52, 2.06 and 1.92 respectively.
Could there be a silver lining for LIC?
Considering the above arguments, LIC’s financial stability might be in question if the current state of affairs continues, which is something we should actively try to avoid given the millions of Indians depending on the insurer. While the amount of stake the government is currently disinvesting is small, it could lead to two broad trends emerging.
One, as government shareholding reduces, migration to private insurance should pick up pace, as the government protection guarantee begins to fade. The counter-thesis here is that LIC still remains too big to fail, and the government will have to bail out if it comes to that, irrespective of stake.