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Trichy, Tamil Nadu, India
Working as an Assistant in LIC of India, Rockfort BO, Trichy, TN. Having a strong belief that LIC's welfare is our welfare and always trying to work towards that. Also functioning as an office bearer of AIIEA Thanjavur Division.

Friday, December 3, 2010

Nothing amiss in investments: TS Vijayan, LIC Chairman

In a season of scams, LIC has come under harsh media glare. The CEO of LICHF has been arrested on bribery charges, and whispers of operators palming off securities to LIC and its AMC continue to float. In an exclusive interview with ET, chairman TS Vijayan explains what it means for him and the country’s largest investor. Excerpts:

There’s a spate of bad news pertaining to LIC. Losses in the mutual fund, the arrests of LIC secretary (investment) and LIC Housing CEO, and shortfall in guaranteed return products. Are these connected in any way?

No, they are not related in any way. They are isolated incidents. Whereas in the case of mutual fund, changes in regulatory practices have resulted into some losses , the other two incidents mentioned are matters related to individuals. As far as the shortfall in old guaranteed return policies is concerned, it is also not unusual for some plans to be in a deficit. Even in banks, there will be some loans that are below the cost of deposits, but that does not hurt institutions as long as they have an overall margin. A corporation that sees inflows of hundreds of crore every working day does not have any scope of timing the market.

The news reports stating that the finance ministry was looking into LIC’s investments and the fact that there was a reshuffle in the investment department some time ago seem to suggest that LIC knew something was amiss. This is really not the case. There is nothing amiss with the working of the investment department of LIC. The reshuffling in the investment department some time ago was done as a part of our ongoing restructuring process to cope up with the increasing volume of activities and prudent risk management strategy. The Insurance Regulatory and Development Authority (Irda) was kept informed about this.

Going forward, will there be further changes in portfolio of officials?

Restructuring and changes in the portfolio of officials working in the investment department are an ongoing process. Such a reshuffling becomes necessary as a risk management strategy, and sometimes also to give better exposure to officials working with various sections of the investment department.

To what extent are policyholder funds in LIC or investor funds in LICHFL impacted?

The policyholder funds in LIC will not be impacted due to the recent happenings. Our exposure in LICHFL comprises 36.54% equity, Rs 5,753 crore of NCDs and Rs 1,247 crore of NCBs. The servicing of portfolios has been regular and there is no default. There might have been a marginal impact in the market value of equity shares, but this is purely due to fluctuations in the market price of the company; fluctuations and corrections in the price of scrips traded are regular happenings in the stock market.
In no way the quality of our investments was compromised. Moreover , the market price of LICHFL share had gone up from Rs 707 on January 29, 2010, to Rs 1,496 on September 29, 2010, and the present correction in the market price does not impact LIC policyholders in any significant way. There has also not been any impairment in the equity of our investments with LICHFL. Our average book value per share is Rs 50.43.
Are the investment department’s risk management strategies adequate? Will you be revisiting them?

LIC has appropriate risk management strategies and practices in place. The risk management policy of the corporation is continuously being reviewed. The corporation has also constituted two separate board level committees—risk management committee and asset liability management committee.

These committees meet at regular intervals and review the risk management practices of the corporation. We have been regularly reviewing and mitigating risks, which is a continuous process. The investment policy of the corporation is also being reviewed at half-yearly intervals as a prudent risk management practice.

Foryears,LICandIrdahavefailedtoarriveatanagreementon the manner in which investment limits apply to the corporation . Going forward, how do you plan to deal with this so that you do not come out as being on the wrong side of regulation?

There has been no contradiction or conflict with the regulator except that there are a few issues where our views in the matter of interpretation of insurance laws and regulations were different . As an insurance company belonging to the public sector, we have been strictly complying with all regulations, statutory norms and satisfying the regulator by complying with all their requirements .

Is there a need to review the manner in which the investment department deals with intermediaries?

This is an ongoing process. We have adequate systems and controls in dealing with intermediaries. Apart from internal systems and controls, our investment department is subject to concurrent audit of 100% of the transactions of corporations. The systems and controls are also subject to system audit once in every three years. Irda has also been conducting periodical inspection to review our systems and procedures. Our systems are effective. Nevertheless, we have been reviewing the systems and procedures regularly to cope up with the volume of activities, market demand and regulatory requirements.
LIC Housing Finance had shown rapid growth in recent times and had increased its share of business. Do you see business slowing down as a result of the recent incidents?

The growth of business in LICHFL is related to the development of the realty sector and is also related to the demand and supply in the housing loan market. Till date, we have not come across any situation where we have found a compromise on the quality of the underlying and asset cover. As such we do not visualise any slowdown in the business of the company.

There has been a slowdown in renewal premium under unitlinkedinsuranceplans (Ulips). Also,the new regulations have been a dampener for the life industry. How do you see business growth in the coming months of the fiscal?

The recent changes in Irda regulations with regard to Ulip plans will take some time to be absorbed by both the customers and the agency force that sells the policies. We have, therefore, seen more sales of single premium policies in comparison with non-single premium policies that may in turn affect renewal growth. Another issue that has affected renewal growth is the rise in Sensex that has motivated some Ulip customers to go for profit booking.

To what extent has LIC succeeded in islanding its liabilities under its guaranteed return policies. When will these liabilities where there is a gap between the promised return and market rates be extinguished and what will be its impact on the balance sheet?

The annuity policies are repriced periodically. We have been islanding and valuing the liabilities under guaranteed annuity plans, and liabilities in such plans are detailed in the actuarial report and abstract submitted to Irda. As most of these polices are life annuities, with return of corpus, the liabilities shall remain till the survival of the last annuitant.

It may be mentioned that if the gap between the promised return and market rates is closed, then any such guarantee may become irrelevant. Section 24 of the LIC Act states that the corporation shall have its own funds and all receipts of the corporation shall be credited to there to and all payments of the corporation there from.

The “valuation surplus” at the end of each year is determined as a difference between the value of assets representing the policyholders fund and the total liability under all the policies with guarantee or without guarantee, participating or non-participating , linked or non-linked as determined by the actuary and is distributed as per Section 28 of the LIC Act. The balance sheet will, therefore, not be impacted with the movement of liability over time. 

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