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Rs14,000cr hole; loss at LIC MF; govt scrutiny
LIC’s problems echo those at Unit Trust of India a decadeago when its assured return scheme ran into trouble

Tamal Bandyopadhyay, Baiju Kalesh& Anirudh Laskar
Mumbai: Life Insurance Corp. of India (LIC),the country’s largest financial institution with an asset base of Rs12trillion, is running a valuation deficit of around Rs14,000 crore in threeplans of its guaranteed-return annuity policies—Jeevan Dhara, Jeevan Suraksha and Jeevan Akshay. Not all plans under these three brands are affected.
There are at least 1.3 millioncustomers of these three plans, but none will be affected.
In a parallel development, allinvestments made by LIC during fiscals 2007-08 and 2008-09 are under thegovernment’s scanner, following complaints made about its investments in a fewcompanies.
The finance ministry is alsoclosely looking at the exposure of its subsidiary, LIC Mutual Fund AssetManagement Co. Ltd (LIC MF), to liquid and money market schemes that led to aloss of Rs120 crore. “The unitholders have nothing to worry. We’ll fix theresponsibility and take stern action (against those responsible),” said aministry official familiar with the development, who asked not to beidentified.
Another person, who also did notwant to be identified, said “heads will roll” in LIC MF.
While LIC MF has disclosed its lossin its half-yearly earnings and reported this to the capital market regulator,the notional loss or valuation deficit of LIC’s three guaranteed return pensionschemes is not mentioned in its balance sheet as the insurer does not discloseits profits or losses across segments.
These plans were launched in the1980s and the 1990s with assured returns of 11-12%, but with the drop ininterest rates the actual yield on investments is much less than what investorshave been earning. They were launched under the Jeevan Dhara, Jeevan Surakshaand Jeevan Akshay brands. Subsequent schemes launched under the same brands arenot suffering from any notional losses.
These three loss-making old schemesare annuity plans, offering periodic payments after the retirement of apolicyholder. They address the longevity risk and in some cases, inflation riskin a limited manner.
As the payout phase is usually longand uncertain, such schemes require the matching of assets and liabilities overa fairly long period.
“The valuation gap varies accordingto the movement of interest rates. In future, it can widen or even shrink. Atthe current interest rate scenario, the net present value of the deficit forthese schemes, which will expire after a few decades, is around Rs14,000crore,” said an LIC official, who asked not to be named.
Apart from the interest rate trend,the mortality rate will also have a bearing on the actual loss that LIC willsuffer eventually. Mortality rates have been progressively coming down and thismeans longer payouts to the investors. The LIC official said that there is noplan to discontinue these schemes and added that LIC has a solvency margin ofRs46,000 crore and this is being used to take care of the valuation gap. “We’reusing surpluses to make good this gap and not using other policyholders’money,” he said.
A senior Insurance Regulatory andDevelopment Authority (Irda) official said the regulator would not haveapproved these LIC schemes had it been in existence when they were launched.“There is indeed a deficit… This is not a good practice. We’d not have clearedsuch products if they were to come to us for approval,” the Irda official said,asking not to be identified.
“It would be unwise for LIC tobuild up such losses in their accounts. Pension funds are required to behandled very carefully,” he added.
If interest rates keep falling andthe people covered under these LIC policies do not claim their incomes, thelosses could build up further. “If it calls for a corrective action, we’dcertainly act,” said Irda chairman J. Hari Narayan.
Irda came into being in 1999.
The schemes
LIC introduced two personal pensionplans, a deferred pension plan by name Jeevan Dhara and an immediate pensionplan by name Jeevan Akshay in 1987-88, offering 1% assured return per month.The government had allowed premium on these two plans up to Rs40,000.
Both plans had managed to attractmillions of customers due to tax incentives offered. Investments in suchschemes were exempted from one’s income while computing tax. Demand for theschemes continued till 1992, when the government withdrew the tax incentive.
In 1996, once again, LIC introduceda deferred pension plan, Jeevan Suraksha. The government allowed premium of upto Rs10,000 for the policy.
The latest data available for theseschemes shows that till March 2003, LIC had nearly 1.3 million customerscovered under them.
The arithmetic
The premium money collected underannuity and pension plans is predominantly invested in government securitiesand highly-secured corporate bonds; some portion is also invested in equity.
Interest rates in India wereregulated until 1997–98, when the medium and long-term rates were approximately12-13%. Since then they started falling and simultaneously, the mortality ratestoo fell as life expectancy increased. Currently, the yield on the government’sbenchmark 10-year bond is about 8.1%.
When an insurer launches aguaranteed annuity product, it assumes that the securities where the premiummoney is invested are fairly long-term in nature and will mature roughly duringthe payout phase (the period when the annuitants start claiming their income).
If investments mature before thepeople covered die or start claiming their income, the insurer needs toreinvest the money in other securities. If the reinvestments fetch interestrates lower than the returns guaranteed by the insurer, it starts incurringhuge losses. The losses keep multiplying year-on-year and if the interest rateskeep falling, the company may be badly hit.
“The interest rates fell moresteeply than we had expected and the life expectancy has increased to 90 yearsfor the policyholders,” the LIC official said.
Solvency issues
In order to ensure that the lifeinsurers in Indiaare capable of honouring claims against any of their policies any time, Irdastipulates that firms must maintain a solvency margin. The solvency margin issimply the excess of the value of assets over the value of life insuranceliabilities and other liabilities of policyholders’ and shareholders’ funds.
Irda also specifies that forpension schemes, an insurer is required to recognize the risk of decline infuture interest rates.
LIC has an overall solvency marginof Rs46,000 crore currently. A member of the Instituteof Actuaries of India, who hadearlier worked with LIC, said solvency margins are prudential measures and maynot be sufficient to handle an insurer’s overall liabilities. An insurer needsto ensure it has the right kind of reserves, reinsurance or derivatives to backits guarantees credibly as far as annuities are concerned, he added, asking notto be identified.
The valuation deficit at LIC issomewhat reminiscent of the infamous US-64, the assured return scheme of theerstwhile Unit Trust of India (UTI), the nation’s oldest MF that crumbled underthe burden of assured payouts to the millions of investors in US-64. Thegovernment had bailed out UTI and bifurcated it into two separateentities—Special Undertaking of UTI for managing all the tax-free assuredreturn schemes, and UTI Asset Management Co. Ltd for managing the assets underother MF schemes.
The LIC official said that “it’s notfair to compare (LIC’s schemes) with US-64” as investments made by the pensionschemes are all held to maturity and LIC does not need to value them inaccordance with their market price or follow the so-called mark-to-market (MTM)accounting practice.
Losses in MF
LIC MF has posted a Rs120 croreloss following a new norm of capital market regulator Securities and ExchangeBoard of India (Sebi) that directs all MFs to value their investment in allsecurities maturing 91 days and above on an MTM basis.
In its effort to enhancetransparency in valuation of debt schemes, Sebi in February had ordered all MFsto value all money market and debt securities, including floating ratesecurities, with residual maturity of up to 91 days on the basis of theirmarket value.
Nearly 60% of the MF industry’sassets are in debt securities. The Rs7.13 trillion industry invests money underincome schemes, liquid and money market schemes in such securities. At the endof September, LIC MF’s average assets were Rs19,726.97 crore and Rs16,911.18crore of this was in debt funds, says Value Research, a Delhi-based MF tracker.
“We’ve a substantial holding inlong-dated securities under our mutual fund business. We’re now strengtheningour mutual fund team. Actions are being taken,” the LIC official said.
Sushobhan Sarkar, who used to headLIC’s MF business, has recently been made the head the insurer’s internationaloperations, and Mohan Raj, an executive director, is now heading the MFbusiness.
Govt investigation
A three-member panel constituted bythe finance ministry is closely looking into all investments made by LIC in2008 and 2009. Tarun Bajaj, joint secretary (insurance and banking), departmentof financial services; Sanjeev Kumar Jindal, director, department of financialservices, and Ravneet Kaur, joint secretary (banking and insurance) are themembers of the panel.
R. Gopalan, financial servicessecretary, said: “This is a routine investigation. Millions of policyholders’money is involved and we should act responsibly.”
“Whenever there’s any complaint,the government examines if there is any merit in it. If there are verifiablefacts, the government questions and checks the investment books. One of therecent complaints regarding LIC’s investments involved four to five firms. Theinvestigations are going on and we’re cooperating fully,” the LIC officialsaid.
A series of discussionsbetweenMintand anumber of LIC officials disclosed that LIC’s equity investment portfolioincludes investments in 475 unlisted firms of which 14 are strategicinvestments, including those in the National Stock Exchange and the BombayStock Exchange.
The book value of such investmentis around Rs1,521 crore.
Currently, LIC holds equities of atleast 1,000 companies and the market value of these investments stood at Rs3.75trillion as on 30 September.
“Our holdings are fairly long termin nature. Naturally, there is always a possibility of companies gettingdelisted, turning the stock illiquid,” a second LIC official said last week,asking not to be identified.
He also said, “There is noloss-making investment and if required LIC can liquidate its stake (in suchcompanies) at substantial profit.”
However, another person familiarwith LIC’s investments in illiquid stocks said the insurer is trying to“dispose of such investment fast at best possible way”. This person, whodoesn’t work for LIC and asked not to be named, said no new investment is madeby the insurer in any firm unless it is listed and has a track record of payingdividends for three consecutive years.
The insurer has an investmentcommittee that meets roughly once in six weeks. Gopalan is one of the membersof the committee.
According to Irda rules, a lifeinsurer is permitted to invest at least 50% in government securities, 15% insecurities of infrastructure-related companies and projects, and the remaining35% in equities, non-convertible debentures, commercial papers, certificate ofdeposits and MFs.
The insurer plans to invest nearlyRs2 trillion this fiscal, including equity and other instruments. LIC’s netprofit went up by 11% to Rs23,478 crore during 2009-10 against Rs21,152 crorein the previous fiscal.

Source:http://www.livemint.com/2010/11/16085127/LIC8217s-triple-blow-Rs14.html?h=A1

Bribe scam unearthed; top LIC, bank officials held
Vinaya Deshpande
MUMBAI: The Economic Offences Wing of the Central Bureau of Investigation has unearthed a multimillion-rupee bribery scam and arrested top officials of public sector banks and financial institutions, including the Chief Executive Officer of the Life Insurance Corporation Housing Finance Limited.
On Tuesday, the CBI conducted raids in Mumbai, Delhi, Chennai, Jaipur, Kolkata and Jalandhar and seized some documents. “Five separate cases have been registered,” Joint Director P. Kandaswamy told a press conference here on Wednesday.
The arrested include Naresh K Chopra, Secretary (Investment), LIC, Mumbai; Ramchandran Nair, Director and Chief Executive Officer, LIC Housing Finance Limited, Mumbai; R.N. Tayal, General Manager, Bank of India, Mumbai; Manindersingh Johar, Director (Chartered Accountant), Central Bank of India, New Delhi; Venkoba Gujjal, Deputy General Manager, Punjab National Bank, New Delhi; Rajesh Sharma, chairperson and managing director of Money Matters, Mumbai; and Suresh Gattani and Sanjay Sharma, also of the private financial services company.
Mr. Kandaswamy said Money Matters used to bribe officials of these public sector banks and financial institutions to facilitate large-scale corporate loans and other facilities.

courtesy:The Hindu