Life Insurance Corporation of India, which has been in the eye of a storm over the past few days, received solid backing from the insurance regulator on Friday.
Insurance Regulatory & Development Authority Chairman Hari Narayan, who earlier talked about launching an investigation into the books of LIC for 2009-10, backtracked on Friday. He agreed with LIC's view that the Rs 14,000-crore deficit in three plans of its guaranteed-return annuity polices is "not a real cash shortage, but an actuarial shortage".
The three schemes -- Jeevan Dhara, Jeevan Suraksha and Jeevan Akshay -- were launched in the 1980s and 1990s with assured returns of 11-12 per cent. The actual yields are, however, much less than what investors have been earning due to a drop in interest rates.
"There is no problem. They will project the gap between liabilities and assets, assuming a certain pattern of liability and assuming a certain generation of income from the investments made," Hari Narayan said. He added that LIC generates a lot of surplus, which technically belongs to shareholders.
"LIC is used to meeting shortfalls with this cash flow. It is entirely possible in the years to come that this imbalance will be rectified. So, at the moment it is not a cause for concern," Hari Narayan said.
The regulator also said these figures were disclosed in LIC's annual accounts and that they were part of the public sector insurer's non-performing assets, which were 0.72 per cent of its total assets. LIC officials also said the valuation deficit has been provided for on a year-on-year basis at the time of actuarial valuations, and that LIC has an overall solvency margin currently at Rs 46,000 crore.
Hari Narayan said LIC "certainly would not transfer money from one account to another" in violation of existing guidelines. However, he added that the regulator would issue guidelines on cash transfer between accounts.
Meanwhile, LIC officials said the "deficit" is only a notional actuarially estimated figure pertaining to a period of over 20 years, which has been reported to IRDA in routine regulatory statements, as different from a financial deficit or an investment loss. In any case, the 1.3 million customers of these three plans will not be affected.
The officials also said there has been a regular increase in LIC's surplus over the years, which for the current year stood at Rs 23,478 crore, showing an increase of 11 per cent over the last year.
On the Rs 120-crore half-yearly loss incurred by LIC Mutual Fund, LIC officials said this was due to a sudden change in regulatory norms and not internal issues. The company decided to absorb these losses in the interests of unit-holders and has reported this to the Securities & Exchange Board of India and published in the half-yearly results.
But independents observers said the mutual fund's performance has been far below par, partly because of questionable investments in liquid and money-market schemes -- something that is being probed by a three-member finance ministry panel. LIC, however, terms the enquiry "routine", as the government reviews LIC's working on a regular basis.
But there is no denying that LIC MF's schemes figure at the bottom of the performance charts across all categories. For example, as many as five schemes figure among the 20 worst-performing equity funds over the last five years.
Despite its public posturing, the sustained losses recently forced LIC to shift the head of its mutual fund business to international operations.
LIC's net profit went up by 11 per cent to Rs 23,478 crore in 2009-10, against Rs 21,152 crore in the previous fiscal. The corporation holds shares valued at over Rs 3.75 lakh crore in over 1,000 companies.
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