Insurers add more assets into equity and unit trusts in search of higher yields

• Assets held in unit trusts increase 114%  to Rs.14.1 bn from Rs.6.6 bn a year ago
• investment allocation in equities up 56% to Rs.35.1 bn from a year ago

Insurance companies added significant amount of assets into equities and unit trusts in a bid to beat lower yields from the government securities but the uptrend in the yields of the latter will largely enhance their profits predominantly via higher investment incomes and potentially lower transfers to insurance contract liabilities. 
According to the latest data available through the end of March quarter this year, life insurers have more than doubled the assets they held in the unit trusts to Rs.14.1 billion from Rs.6.6 billion a year ago, logging 114 percent increase. 

Meanwhile the unit trust assets holdings by general insurers rose to Rs.6.8 billion from Rs.1.4 billion during the same period, reflecting that insurers who typically hold bulk of their assets in low yielding government securities have reallocated their assets looking to make higher yields while keeping retaining the liquidity they need. 

This performance also mimicked the performance in the assets under management (AUM) in the broader unit trusts industry about the same period in the year which saw more growing assets as their exposure into a portfolio of investments provided them the ability to generate higher returns than for government securities and bank deposits. 

Government securities account for the lion’s share of the insurance industry investments with nearly 45 percent of the life insurance investments held in them, both as a compliance requirements and an access to liquidity while keeping their market risks to the minimum. 

In general insurance, this share was 37 percent end of the March quarter. 

All insurers are mandated to maintain a minimum of 30 percent of their investments in government securities. 
While the insurers earned only a nominal return from holding bulk of their assets in government securities so far, the upward trend in the yields of government securities could now bode well for the insurers’ bottom line due to rising investment income that will result in. 

Further, the rising interest rates are also expected to result in lower surplus transfers to life insurance fund further supporting the bottomline of the insurers who hold larger insurance funds as there has been a negative correlation between the change in insurance contract liabilities and the 5-year treasury bond rates, as observed by First Capital Research in a recent report on the sector. 

Investments in government securities, corporate debt and bank deposits account for 86 percent of total investments of life insurance industry, the data showed. This share is 68 percent by general insurers.  Meanwhile, similar to shift in investments into unit trusts, insurers have also reallocated a substantial amount of their assets into equities to make the most from the rising equities market and thereby their yields.  For instance, investment allocation in equities by life insurers surged by 56 percent to Rs.35.1 billion to March 2021 from a year ago, while the same in the general insurance industry soared by 61 percent to Rs.11.6 billion between the two periods. 

Corresponding to the investment portfolio reallocation into high yielding assets, the investment incomes of the life insurers rose by a robust 34 percent to Rs.11.9 billion in the quarter ended in March 2021 from the same period a year ago while the same income in the general insurance industry remained virtually unchanged at Rs.1.8 billion as the pandemic weighed on general insurance premiums and thereby its asset growth. 

Conversely, the life insurance sector emerged a winner from the pandemic-induced conditions as more people started subscribing for life and health covers to guard themselves against the growing uncertainties and the escalating healthcare and medicinal costs.