Major defaults in our corp bond holdings due to Covid unlikely: LIC chief

In a Q&A, chairman M R Kumar says the insurance behemoth isn't considering scaling down targets and hopes to reach its budgeted figures at the end of FY21

Despite the grim economic situation and in contrast with the sharp contraction most Indian companies are expected to witness, Life Insurance Corporation of India (LIC) expects to grow its business in 2020-21 (FY21). The insurer is not considering scaling down its targets. In a talk with Subrata Panda, LIC Chairman M R Kumar speaks of the life insurance sector, the company’s growth targets, gains from equity investment, and the implications of the pandemic for corporate India, in which LIC is heavily invested through bonds.

He says economic activities have been on the upswing since June, when lockdown started being relaxed. He also expects companies with strong fundamentals in every sector to do well. However, since people will be cautious about spending, insurance, a risk-mitigation tool, will have priority in their expenses.

Insurance, he says, is an agency-driven business and LIC is no exception to this. Despite the nationwide lockdown and subsequent unlock phases, LIC has done a net addition of 60,771 to its agency force as of August 31 and the number stands at 1.27 million. However, he is non-committal on LIC’s initial public offering while being open to having more banks as corporate agents. Edited excerpts:

The new business performance of the life insurance sector picked up in July and August, after contracting in Q1. How will the sector perform in FY21?

Life insurance has a direct correlation with economic activities. The lockdown and its related restrictions due to Covid-19 had affected the industry. Economic activities started looking up once the unlock process started in June. We expect the life insurance sector to perform well during FY21.

Given the pandemic, have you scaled down growth targets in FY21?

We have set a target of 22 million policies and Rs 51,300 crore of first-year premium from individual businesses.  

It is more than what it was in FY20. We are not considering scaling down our targets. We hope at the end of FY21 we will reach our budgeted figures.

In August, in composite premium, we had a growth rate of 15.19 per cent, which is better than the industry average of 14.79 per cent. In policies, in the same month, there was a decline of 24.08 per cent and in cumulative terms, up to August, we sold about 4.5 million policies with a 66.15 per cent market share and Rs 71,415.18 crore of composite premium with a 71.87 per cent market share. Our business activities are picking up and we will finish FY21 with much better numbers.

LIC has substantial exposure to companies through bonds. Given the situation, where the cash flow of firms has been affected, do you think they will default on their debt repayment, resulting in an NPA (non-performing asset) problem for LIC?

We received a moratorium request in respect of only about 2 per cent of the bond portfolio. Companies are fulfilling their obligations like repaying principal and interest. As a matter of strategy, LIC follows due diligence. We don’t expect major defaults in our corporate bond portfolio due to the pandemic. Our exposure to loans is very little and more than 90 per cent of our corporate debt exposure is through bonds.

What is your strategy for the equity markets in FY21? How much profit has LIC made from sales of shares till now and how much are you looking to invest?

LIC is a contrarian investor and we are buyers and sellers. We booked profits of more than Rs 11,500 crore as of August 31. We will invest in equities when there is an opportunity to do so. As of August 31, we invested Rs 40,769 crore in equities this year against Rs 25,516 crore last year up to August 31. We are sector-agnostic and believe in assessing and investing in fundamentally strong companies. Given the emerging situation due to the pandemic, we believe that companies with strong fundamentals in every sector will perform well.

What is the status of LIC’s IPO? Is there any clarity on how much the government is looking to divest?

The Department of Investment and Public Asset Management (DIPAM) is looking after the IPO aspects of LIC. It is, therefore, not appropriate on our part to comment on this.

Has there been a rise in demand for loans against policies from retail consumers due to the pandemic? Also, have surrenders gone up?

In this financial year, as of August 31, there has been a decline in the number of loans disbursed. LIC has disbursed 1.09 million loans worth Rs 7,887.42 crore as against 1.70 million worth Rs 11,125.52 crore in the same period last year. The number of surrenders has reduced by 31.8 per cent, indicating the awareness of continuing life risk cover.

LIC has been agency-driven, and with IDBI Bank in its fold now, bancassurance seems to be an important distribution network. Are you planning any new bank tie-ups and is there a plan to induct more agents this year?

IDBI Bank is one of our productive bancassurance partners and in 2019-20 it procured 66,751 policies with a premium of Rs 699.03 crore. We are open to bank tie-ups as corporate agents and look forward to such relationships. Life insurance in India is mainly agency-driven and will continue to be so even in the digital era. Agents contribute 62.26 per cent of individual new business premium in the industry and 95.81 per cent of LIC’s individual new business premium. With the life insurance business expected to grow by 12-15 per cent in the coming years, LIC will play a crucial role in creating employment in the agency channel. Despite the nationwide lockdown and subsequent unlock phases, LIC has a net addition of 60,771 agents to its agency force as of August 31 and the number of agents stand at 1.27 million.

Is LIC looking to pare its stake in IDBI bank anytime soon?

LIC has been providing support and working towards bringing IDBI Bank out of prompt corrective action (PCA). Though IDBI Bank has declared profits for two consecutive quarters — March 2020 and June 2020 — it has not emerged out of PCA. It is not possible at this stage for LIC to commit to a definite timeframe and at what point the market would be conducive for reducing stake.

How many death claims due to Covid-19 has LIC received?

As of September 10, we received death intimations due to Covid-19 for 678 persons. Of those, 408 have been settled.

India’s economic growth plummeted in Q1. How much of an effect will this have on the life insurance sector and the savings of individuals?

In the days ahead, the consumption behaviour of customers will change. With an impact on employment, people will be cautious about spending. Insurance, a risk mitigation tool, will have priority in their expenses.