Redemptions leave insurers with less money for stocks

They have invested Rs 25,000-30,000 cr in this financial year.

A rise in redemptions might leave insurance companies with less money to invest in the stock market. It is estimated that the industry will invest a net Rs 13,500 crore during January-March, as compared to Rs 30,000 crore in the corresponding period last year.

Although the industry is likely to pump in $10-12 billion, or Rs 45,000-54,000 crore, during January-March on a gross basis, insurance executives say the net investment will decline to $ two-three billion due to redemption of old policies.

The benchmark Sensex has surged 15 per cent, or 2,609 points, since April 1, 2010. The index closed at 20,301 today.

During the first half of the financial year, insurance companies saw a large number of redemptions. Industry sources said insurers had invested Rs 25,000-30,000 crore in this financial year so far.

“Most companies have been facing redemption pressure on old policies. The changes in guidelines on unit-linked insurance plans (Ulips) and the subsequent fall in sales is going to impact investments in the equity markets. We will invest less than last year,” said Max New York Life’s Chief Investment Officer, Prashant Sharma. As against an investment of Rs 7,000 crore in the corresponding period last year, Max New York Life is likely to put in Rs 2,000-3,000 crore this quarter.

Subsequent to the change in Ulip guidelines, companies launched a slew of traditional products. The regulations say insurers can invest up to 35 per cent from conventional plans in equity under the other approved securities category. The product mix for most insurers has changed from 85 per cent Ulips and 15 per cent traditional to 60 per cent Ulips and 40 per cent traditional.

“We expect the insurance industry to invest $10-12 bn in the stock market this quarter,” said a senior Life Insurance Corporation (LIC) executive.

With some good new issues this year, the companies also shifted their focus to the primary market. LIC is believed to have invested a large chunk of money there. ICICI Prudential Life’s Senior Vice-President & head, investments, Manish Kumar, said 90 per cent of their investments on a net basis went into the primary market this year.

Around 40 per cent of all sales take place during the fourth quarter of the financial year. The Life Insurance Council has projected total premium collection, including renewal and new sales, at Rs 2.7 lakh crore in 2010-11.