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US-64: Insurance cos keep head above water

C. Shivkumar

BANGALORE, Aug. 6

PUBLIC sector insurance companies have been insulated from the crisis which has effected the Unit Trust of India's flagship scheme, US-64.

Sources here said that four companies, Oriental insurance Company Ltd, National Insurance Company Ltd, New India Assurance Company Ltd and the United India Insurance Company, had completely liquidated the bulk of their holdings of US-64 long before the b eginning of the crisis.

Although UTI's fund units were approved securities for investments by the insurance companies, they said, no fresh investments had taken place since last year.

The sources said that insurance companies had been wary of making fresh investments in view of the low yields offered by the UTI on US-64. Insurance companies had found the scheme during the periods when US-64 had offered dividends of 26 per cent during the mid-90s. Besides, the sources said that the scheme was no longer as liquid as it used to be.

As a result, all the general insurance companies are now focussing only on Government securities and public sector bonds. The sources said that these securities currently offered the most attractive returns both by way of capital appreciation and as well as a regular cash flow by way of coupon payments.

Besides, insurance companies have also begun looking closely at liquidity as a criteria. In the past, insurance companies had focussed exclusively on returns to push up their income.

This is mainly in view of the potential to improve income through treasury operations. Consequently, most of the insurance companies have preferred to reshuffle their investment portfolios in favour of government securities.

In fact, during the last few months all the public sector insurance companies were large sellers of Government securities in the financial markets. As a result, all them have managed to book substantial profits, to offset the impact of a slowdown in prem ium incomes.

However, these companies have restricted their exposures in the State government and corporate sector, both in equities and in debentures. In the State government, insurance companies have remained within the mandated norms of the Insurance Regulatory an d Development Authority's investment guidelines.

The reason for this circumspection stems from the bitter experience of the financial institutions with state governments, where defaults in meeting debt service obligations have been recurrent with no form of recourse mechanisms.

But in the case of corporate debentures, the insurance companies have investments restricted to corporates with credit ratings of ``AA'' and above. Even here most of the corporate debt papers are mostly of short duration, the sources said.

In the case of equity investments, the sources said, the companies still preferred to remain with some of the blue-chip and public sector equities. And the stocks being preferred are mostly those with high dividend yields. But even here the companies hav e chosen to restrict investments in the technology sector in view of the tight IRDA guidelines on exposures.