Strong year for insurance par funds, but bonuses stay the same for most

INSURANCE participating (par) funds delivered robust returns in 2025 – some in double digits – thanks to a strong showing by both bonds and equities.

However, most policyholders are likely to find no change in bonus distribution rates, despite the strong performance. Income, Tokio Marine, Singlife and Prudential (its largest par fund) are maintaining their bonus rates.

Great Eastern said it has maintained bonuses for most policyholders, “while a small group of customers will see revisions (upwards and downwards)”. The difference reflects each plan’s cumulative performance over time, it said.

AIA said it is raising the bonus and dividend rates for some policies, “while maintaining last year’s rates for the majority of policies”.

Equities and bonds’ strength

Last year, the MSCI World index returned about 21 per cent in US dollar terms; the MSCI Emerging Markets index did even better – at 34 per cent. Fixed income, as represented by the Bloomberg Global Aggregate Index, which reflects global investment-grade bonds, returned more than 8 per cent.

Singapore equities based on the Straits Times Index returned about 28.8 per cent, including reinvested dividends. Excluding dividends, the return was over 22 per cent.

This year, global investment returns have remained strong, buoyed by strong US corporate profits. This is despite the ongoing geopolitical tensions, higher oil prices and a more hawkish tone from the US Federal Reserve.

The S&P 500 has returned about 8.7 per cent and the MSCI World Index, about 9 per cent as at Jun 29. The MSCI EM index has chalked up a 22.8 per cent gain.

Global bonds, however, were flat, as higher inflation spurred a “reset”. JP Morgan Asset Management wrote in a Q2 update: “Yields have established new trading ranges at higher levels, with 10-year government bond yields recently trading close to levels not seen since at least 2011. The role of bonds in a balanced portfolio has been restored.”

For par funds invested mostly in bonds, higher yields are a boon as proceeds can be locked in at higher rates.

Par funds are managed collectively by the insurer, and returns are smoothed. In a good year, not all surpluses are distributed. Some surpluses are typically retained for years when returns are poor.

Par policies such as whole life and endowment plans are illustrated with guaranteed and non-guaranteed returns. Bonuses, once declared, become part of the guaranteed portion of returns.

Taking a long view

Of the nine par funds for which 2025 updates are available, five achieved double-digit gains. But rather than a single year’s returns, the more important focus should be on the longer-term track record. Most insurers furnish the average returns for three, five and 10 years.

Par policies are illustrated based on two theoretical rates of return – 3 and 4.25 per cent. Based on 10-year average returns, all the par funds exceeded the lower illustration rate. Four funds exceeded the higher illustration rate of 4.25 per cent.

Manulife came in with the highest average 10-year returns at 5.8 per cent, followed by AIA with 4.97 per cent and Prudential with 4.86 per cent.

Focusing on 10-year returns may help policyholders understand why bonus rates remain the same. In 2022, for instance, all par funds were in the red. It was a relatively poor year in 2018; only one fund – Income’s – was in the black, but just barely.

In 2025, the highest rate of return of 13.63 per cent was achieved by the Tokio Marine Life Insurance (TMLI). Its fund’s equity exposure was 26 per cent, lower than most others. Its equity sleeve was 21 per cent invested in iShares Core MSCI Asia ex-Japan exchange-traded fund (ETF), and 18 per cent in the State Street SPDR S&P 500 ETF.

A TMLI spokesperson said: “While equities had a good year in 2025, the contributions from the fixed income portfolio were also meaningful, with the latter benefiting from a decrease in the interest rate environment generally.”

Insurers sanguine on a rate hike

Insurers are sanguine at the prospect of a US rate hike this year. US inflation in May came in at a three-year high of 4.2 per cent. Higher inflation expectations and uncertainty about the Fed’s next move had caused 10-year US Treasury yields to spike to nearly 4.7 per cent in May.

The market is now pricing in a 25 basis point increase by year-end, although some asset managers expect the Fed to remain on hold.

Singlife chief investment officer Allen Kuo said that while Kevin Warsh may have sounded hawkish in his first meeting as Fed chair, a broader view of the US balance sheet paints a different picture.

“With roughly half the annual US budget deficit going towards interest expenses, there are limits on how much interest rates can be raised. Moreover, with US tax receipts closely tied to US stock market performance, I doubt rates could be raised to the point where stock performance is materially affected.

“In my view, the probability that the Fed raises rates is lower than markets are currently pricing.”

Said David Chua, Income Insurance chief investment officer (CIO): “From an investment standpoint, (a rate hike) does not materially change the par fund’s long-term asset allocation.

“The fund is managed with a long-term perspective and is designed to remain resilient across various market regimes, including periods of heightened inflation and volatile interest rates. Portfolio resilience comes from maintaining diversification across fixed income, equities and private markets, including real assets.”

Great Eastern said: “While higher interest rates may support future investment returns, given that new assets can be invested at higher yield, participating funds are managed over very long horizons. Interest rate movements are one of several factors affecting participating fund performance.”

Prudential head of investment Andrew Chen said returns for both Sing and US dollar products rose in 2025 relative to 2024, thanks to strong returns from global equities and fixed income.

“Our insurance funds are managed with a long-term view, with a priority to cover long-term liabilities,” he said.

Hedging of US dollar exposures has helped. Singlife said that as the USD lost more than 9 per cent, hedging protected the fund from most of the movement.

AIA said foreign exchange hedging is “applied systematically and in a measured manner to support long-term stability, rather than through short-term or opportunistic positioning”.

“In 2025, this disciplined positioning allowed the AIA Singapore Par Fund to benefit from strong USD-denominated asset performance while containing currency volatility...”

Par plans remain a staple in Singapore despite the rise in investment-linked policies’ (ILPs) share of new business. At end-2025, S$2.88 billion worth of ILPs gave them a 44 per cent share of total weighted premiums. Par plans’ share was 24 per cent, with S$1.56 billion in new business.

Singaporeans like par plans because they provide a stable savings and protection vehicle with returns that are partially guaranteed. But there are some tradeoffs. One is that there is little visibility in how bonuses are distributed.

Secondly, it is a challenge to figure out the eventual net rate of return of a policy which may suffer several bonus cuts along the way.

Thirdly, par policies are a long-term commitment. It may take more than a decade to just break even on premiums.

Fourthly, whole life par policies may put savers in a no man’s land in terms of savings and protection. This is because for the premium charged, the protection value is generally insufficient, and the returns are modest in the long run.

Savers are generally better off buying term protection and investing excess savings in a low-cost portfolio of ETFs.