The Hindu Business Line : Pvt insurers shy away from State-guaranteed bonds

Industry sources said they preferred parking their investible funds in either Government securities, public sector bonds or top rated corporate bonds. This is despite the low yields in these securities in view of the lower risk profile.

In fact, for most of the private sector insurers, both life and non-life, the average yield on investments is less than 7 per cent.

The Chief Executive Officer of one of the largest private sector life insurers said, "Yields are good on State Government guaranteed bonds, but we would prefer to remain liquid."

In fact, some of the recent issues such as Sardar Sarovar Narmada Nigam Ltd and Himachal Pradesh Forest Development Corporation entered the markets with 10-year issues and 7-year early exit options. The coupons on these securities were about 8 per cent. Some of the issues also offered front-end discounts to push up yield to maturity (YTM) to about 8.5 per cent. Insurers' reluctance to invest in such securities stems from fears of depreciation in market values. Some of the State Government guaranteed securities were in fact available at YTMs close to 10 per cent, partly due to the high default risk and the consequent illiquidity attached to them.

The perception of default risks was partly due to the fact that some of the entities that have floated the securities were either loss making undertakings or special purpose vehicles which have so far not begun generating sufficient revenues to meet debt service obligations. In fact, several States have large over-dues in debt service obligations to investors on some of the bonds.

A large depreciation in the value of such securities, therefore, will adversely hit the solvency margins of insurers, the sources said implying that they would have to bring in additional capital. Life insurers are already faced with capitalisation pressures in view of the rising yields in Government securities.

Ten-year yields have moved up from about 5 per cent in April to 6.2 per cent. The rise in yields and the need to ensure business growth have prompted some life insurers such as ICICI Prudential Life and Aviva Life Insurance to bring in more capital. In fact, the capitalisation requirement was expected to be high for life insurers who have large portfolios of endowment policies, offering guaranteed returns. The sources said that, as a result, more insurers were moving to unit-linked policies.

However, even in unit-linked policies - either pure debt or balanced portfolios (60 per cent debt and 40 per cent equity) - life insurers were staying away from State Government guaranteed securities, due to the fear that depreciation will impact the net asset values of the funds, they said.

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