New Delhi: Domestic life insurance companies probably helped stem a bigger decline in the stock market by investing almost as much in Indian equities as foreign investors pulled out in the first nine months of the current fiscal year, according to an industry body.
Life insurers invested around Rs47,900 crore between April and December in the stock market, according to data from the Life Insurance Council.
In the same period, foreign institutional investors (FIIs) sold Rs50,000 crore more in equities than they purchased.
The Sensex, the benchmark index of the Bombay Stock Exchange, fell 38.3% from 15,626 points on 1 April to 9,647 points on 31 December.
On Tuesday, the Sensex fell 2.3% to the lowest in three years to 8427.29 points.
“Private insurers have stepped up their investment from Rs11,700 crore in April to Rs18,925 crore in December. This is an indication that whatever was sold by FIIs was bought by the insurance companies,” said S. B. Mathur, secretary general of the council.
In 2007-08, life insurers had invested Rs55,000 crore compared with Rs53,400 crore invested by FIIs.
In December, T. S. Vijayan, chairman of state-owned Life Insurance Corp. of India, had said the insurer hopes to enhance its investment across various portfolios to Rs1.6 trillion in 2008-09 compared with Rs97,000 crore a year earlier.
LIC invested around Rs29,000 crore in the April-December period in equities alone.
For traditional policies, Insurance Regulatory and Development Authority, or Irda, guidelines mandate life insurers to put 50% of their investible funds in government securities and 15% in infrastructure, leaving 35% to be invested in equities, corporate loans, mutual funds, fixed deposits and commercial paper.
In unit-linked insurance plans, or Ulips, where returns are market-linked, investments are done according to investors’ choice.
In private insurance companies, Ulips account for 80-90% of the product portfolio.
“In rupee terms it (investment in equities by private insurers) is higher compared with last year. But in percentage terms it has reduced,” said Sunil Kakkar, chief financial officer of Max New York Life Insurance Co. Ltd.
According to data put out on the Irda website, fresh business, or first-year premiums of the insurance industry, shrank by 2% to Rs52,298 crore between April and December on account of a 14% contraction in LIC’s business.
Stock valuations fall
Private players have, however, expanded by 18% to Rs22,841 crore during the period. Fresh business grew by 23.31% to Rs92,989 crore in 2007-08 compared with a year earlier.
In the two preceding fiscal years, business had grown even faster at 94.96% and 47.94%, respectively.
Meanwhile, the data released by the Life Insurance Council this month show that the share of fixed-income instruments has risen to 70% of total investible funds available with insurance companies as of December 2008, at Rs6 trillion; as of December 2007, it was 36% at Rs31,201 crore.
By contrast, the equity portion (on market value) contracted to 27% in December 2008, at Rs2.35 trillion; it was 59% as of December 2007 at Rs51,144 crore.
Such a change is largely due to the decline in stock valuations, Mathur said.
Besides, because of the decline in interest rates, investment in government securities and corporate bonds has become more attractive, he added.
Falling interest rates prop up bond prices.
Since October, the Reserve Bank of India has cut the rate indicative of the short-term lending rate, known as the repurchase or repo rate (this is the rate at which RBI lends to banks), by 350 basis points to 5.5% and the cash reserve ratio, which defines the proportion of deposits banks need to keep with RBI, by 400 basis points to 5%.
One basis point is one-hundredth of a percentage point.