Ulips see aggressive redemption

With the equity market at an all-time high, private insurers’ unit-linked insurance plans (Ulips) have seen aggressive redemption, making the insurance industry net seller at a time when fund managers are advising investors to stay invested.

With markets soaring to a new high each day, Ulip policyholders are booking profits and surrendering their plans. The equity market has given a return of more than 30 per cent in the past one year. Ulip plans are policies where a portion of the premium is deducted as mortality charges towards a life cover and the remaining premium minus the charges is invested largely in equities.

The top five insurance companies have made surrender payouts of Rs 23666.8 crore of which a significant portion accounts for Ulip. Nirakar Pradhan, chief investment officer, Future Generali India Life Insurance, told FC, “A large number of policyholders that had bought Ulips prior to the Ulip regulations (of September 2010) have completed the three-year lock in and are getting 30-40 per cent returns in the last one year. As a result they are booking profits and exiting.”

“Portfolio managers are also expecting clarity on US rate hike, which may be negative for the equity market and expect the currency to depreciate and are therefore selling. Some other portfolio managers are rebalancing their portfolio as the year end strategy,” added Pradhan.

For the nine months ended December 2014, the surrender payouts made by the country’s largest private life insurer ICICI Prudential Life Insurance, stood at Rs 8,344.5 crore.

Of the total surrender payouts, Rs 3,511.2 crore was from Ulip plans and Rs 3,854.5 crore was from Ulip pension plans. Under Ulip group business, the surrender payout was Rs 766.12 crore. For the nine months ended December 2013, the surrender payouts by ICICI Prudential Life stood at Rs 8,304.36 crore, of which Ulip plans was Rs 3,658.51 crore, Ulip pension plans surrenders Rs 3,621.84 crore, while Ulip group business was pegged at Rs 664.70 crore.

For HDFC Life Insurance, where 58 per cent of the business is from Ulips the surrenders/lapsation doubled to Rs 4,548 crore for the nine months ended December 31, 2014 compared to Rs 2,429.1 crore in the nine months of last year. HDFC Life said “Surrenders and withdrawals grew by 78 per cent compared to previous year in value terms driven by well-performing equity market though the number of policies increased by 20 per cent.” For SBI Life Insurance, surrender payouts was Rs 3,536.76 crore during the nine months ended December 2014 compared to Rs 4,107.10 crore during the same period of last year.

For Max Life Insurance, surrenders stood at Rs 1,872 crore for the nine months ended December 31, 2014 of which Rs 1,556 crore was from Ulip plans, while Rs 161 crore came from Ulip pension plans. During the nine months ended December 31, 2013, the surrender payouts was Rs 1,546 crore, of which Rs 1,366.26 crore was from individual Ulip policies and Rs 97 crore was from Ulip pension plans.

“Whenever markets do well, surrenders of Ulip policies rise,” said a spokesperson of Max Life Insurance.

For Bajaj Allianz Life Insurance, surrenders stood at Rs 5,365.80 crore of which Ulip plans, Ulip pension plans and Ulip Group business constituted Rs 5,037 crore for the nine months ended December 2014.

Data on domestic institutional investors’ activities in the equity market, compiled by the exchanges, show that they are net sellers to the tune of Rs 28,861.94 crore at the end of calendar year 2014. Domestic institutions were also net sellers by Rs 6,848.70 crore during the year-to-date period in 2015, according to corporate data firm Capitaline. These institutions include mutual funds, insurance companies and banks. Mutual funds were net buyers in the equity market, according to Sebi data. Analysts say since mutual funds have been net buyers in the market, it’s insurance companies among domestic institutions who have been net sellers as banks form a small part of the combined volume of the domestic institutions’ buy/sell data provided by the stock exchanges.

Said Aneesh Srivastava, CIO, IDBI Federal Life Insurance, “We have seen, as lock in expires, life insurance subscribers go for redemption. It is also because there is volatility in the market, which causes discomfort to investors, as our market return tends to be lower for a long duration of 3-4 years and rises fast in last 9-10 months which also leads to redemption pressure.”

With regular premiums, life insurance companies have sustained inflows but profit-taking has made the insurance industry net seller. “Going forward, there could be further redemption pressure on insurance subscribers if foreign investors are not impressed with policy reforms or rupee turns volatile, which may turn out to be a difficult scenario where valuations may look expensive and selling by foreign investors may impact market due to liquidity issues,” Srivastava said.

While the market has seen consolidation before and after the Union budget, falling crude price has been a big anchor for domestic markets. “A big positive for India has been that crude prices have been falling, ensuring that inflation remains under control. So long as crude prices remain at current levels, India has that much time to put its house in order in terms of supply chain bottlenecks and other factors leading to high inflation,” Srivastava added.

Insurance firms are net sellers also because they are contrarian players and when market indices are at all-time highs, even companies offload shares to book profit. Aggressive Ulip redemptions at a time when long-term investors are deploying money in the equity market has made them look like short-term investments rather than insurance product subscribed for risk mitigation.

Anup Rau, CEO, Reliance Life Insurance said, “In the industry there are companies with high volumes where the churning is also high, leading to high redemptions, but this is not a industry-wide practice as we do not have unit linked products. By going for redemption a subscriber loses the risk cover also.

“Our philosophy along with that of our partner Nippon Life Insurance is to provide long-term life insurance to people who want to invest in the equity market. For them, there is mutual fund and direct equity,” Rau said.