How LIC compares with private insurers

Life Insurance Corporation (LIC) is often known as the 'lender of the last resort' and a proxy for the government to bail out state-owned companies. Oil and Natural Gas Corporation's follow-on offering almost three years ago is a well-known example where the grossly under-subscribed issue (almost 95 per cent) was lapped up by the insurance giant at the last minute.

Of late, LIC, which enjoyed a monopoly in life insurance till 2000, has been bailing out public sector banks facing severe pressure on their profitability. Undoubtedly, LIC has emerged as a proxy to government post the Lehman Brothers' crash when the government's finances (fiscal deficit) also worsened, leaving little scope to provide capital to these companies. The argument often put forward by experts is that LIC being a public institution shouldn't be used to park money in dud assets. In the past, institutions like UTI decayed because of political pressure. IDBI, which was a developmental financial institution (DFI) and is now a bank, lost out to market savvy ICICI Bank, which also converted from a DFI to a bank.

What many experts haven't attempted so far is LIC's comparison with private sector life insurers in terms of various performance parameters. LIC today operates in a much competitive environment than a decade and a half years ago when it was the only player insuring the lives of people.

Today, private players have cornered a market share of 25 per cent. This could have been 30-40 per cent had the private players got the much needed doses of capital after the 2008 global financial meltdown. The FDI limit of 26 per cent acted as a big stumbling block for growth of private insurers because Indian players with a majority stake of 74 per cent had limitation of capital. Now, with the FDI limit being relaxed to 49 per cent through an ordinance by the government, the road is all clear for the private sector to step on the gas. I think LIC will now have to face bigger competition than it faced since 2000.

LIC is also operating on a very high commission structure because of dependence on a large agent network. The commission ratio (gross commission paid to gross premium) at 7.06 per cent is also high as compared to HDFC Life and ICICI Prudential Life. The two large private sector companies have a commission ratio in the range of four to five per cent. Over the last four to five years, the private players have carefully built a strong low-cost bancassurance channel, which is contributing more than 50 per cent to the new premium.

Similarly, many private players are experimenting with digital channels through online sale of policies by way of tablets. In fact, the entire sales platform is now on the online platform. That is one area where LIC should work to reduce its expenses. Surprisingly, LIC's ratio of expenses of management to gross direct premium at 15.63 per cent is comparable to the private sector.

The private sector, which is known for paying high salaries, is also in the 15-16 per cent range. But this high management expenses didn't show up in terms of innovation of products or channels etc. The profit after tax to total income of LIC stood at .004 per cent. HDFC has 4.22 per cent and ICICI Prudential has 7.1 per cent.

The growth in the shareholders' funds, which represents capital invested by shareholders, is also muted. LIC has seen growth of 4.49 per cent in shareholders' fund whereas HDFC Life has 45.36 per cent and ICICI Prudential Life is at 10.08 per cent. The yield on advances of LIC is at 8.08 per cent. HDFC and ICICI Prudential Life do slightly better than LIC with yield on advances at 8.72 per cent and 8.5 per cent, respectively.

Lastly, LIC runs a large book of non-performing assets. LIC's gross NPAs are at 2.44 per cent, which are comparable to not so well run public sector banks. Net NPAs are at 0.89 per cent. Fourteen years is actually a long-enough period to create NPAs if you operate a company recklessly. But despite going through two big economic cycles of early 2000 and late 2008, the private players have come out unscathed.

ICICI Prudential Life has absolutely nil NPAs, while HDFC Life has net NPAs of 0.9 per cent. There are some who argue that LIC with a life fund of Rs 16 lakh crore has a larger size, which makes the ratio incomparable to private players. But what is the use of size when you fare poorly on some performance ratios?

LIC is surviving on a large fund and also a book renewal premium book that it has built over the decades. At some stage in future, these advantages will go away and the private players will catch up. The good example is of UTI, which had near monopoly in the mutual fund business.

Today, after 33 years of privatization of the mutual fund industry, UTI has been pushed to the fifth slot in terms of assets under management. Private players like HDFC, ICICI or new ones like Reliance Anil Ambani Group and Birla have taken a big lead in terms of AUM. Hope good sense will prevail in government corridors to save one of the biggest financial institutions in the country!