The Hindu Business Line : Insurers seek more long-dated papers

PRIVATE sector life insurers faced with asset-liability mismatches have sought greater government investments in infrastructure through long-term borrowings.

One of the major factors contributing to the asset-liability mismatch was the absence of long-term securities, sources said. The longest dated paper available for private sector life insurers was 10 years. The bulk of the long-term papers were with the public sector Life Insurance Corporation and the public sector banks. Absence of these papers had made their investment management difficult, they said.

Mr Venkatesh Mysore, Managing Director, of Metlife Insurance Company Ltd, said, "If there are no long-term debt securities available, there will be asset- liability mismatches."

Insurers traditionally match their long-term liabilities, particularly on saving-linked covers with long-term investments. Consequently, where they have liabilities in excess of 10 years, they have no investments available. This has left them with few options other than resorting to replenishing the investment at the end of the 10-year period.

Though many of the banks have sold their long-term holdings in the markets as part of de-risking their respective investment books, the quantities liquidated were fairly small, the sources said. Only some of the private banks were unlocking their investment books and shrinking the maturities of their portfolios to less than 2 years.

Public sector banks continue to hold long-term securities in their respective held-to-maturity categories. These include securities such as the 10.18 per cent 2026 and 7.50 per cent 2034. Bnkers said, with yields still soft, not many of them were too keen on jettisoning these papers. This was because it would impact their investment incomes. Already treasury income for most banks, which comprised almost 60 per cent of their profits till the first half of the last financial year, is down to a trickle.

Moreover, sources said that LIC was prepared to lift long- term papers from the banks at a premium for large volumes. The premiums were high for long-term and high coupon papers, the sources said, far higher than what the private sector insurers were willing to offer. Further, private sector insurers have much smaller investible funds than LIC and this constrained them from purchasing large volumes, the sources said.

One of the major reasons for LIC to offer such high prices was the possible impact of the high current yields in the form of coupon flows. In the last two years, LIC has faced a drop in the yields on investments as a result of shrinking yields on securities, particularly in primary issues. The mean yield for the LIC is currently only about 8 per cent.

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