The Hindu Business Line : As depreciation pressure mounts — Private insurers opt to derisk portfolios

IN a bid to mitigate pressures of depreciation on investments, private sector general insurers have taken the cue from the banking sector and begun derisking their investment portfolios.

Sources said some of the private sector insurers have already managed to bring down the average tenor of their investmentsto under five years.

the Bajaj Allianz General Insurance Company Ltd Chief Financial Officer, Mr S. Sreenivasan, told Business Line: "We have brought down the average tenor to three years."

Under the investment guidelines of the Insurance Regulatory and Development Authority, at least 55 per cent of the investments are expected to be parked in government securities, which include both Central and State government securities. The remaining are expected to be parked in designated securities, including high-rated debentures and equities.

Private sector general insurers during the initial years had kept their G-Sec investments at tenors of above 10 years. This was to ensure a high mean yieldas long tenors then offered higher yields. In addition, most of them also resorted to aggressive treasury operations to improve returns.

Still they remained at a considerable disadvantage vis-à-vis public sector players, sources said. This was because public sector insurers had high coupon securities in their investment baskets. In addition, their equity holdings were acquired at low values. As a result, sources said, the mean yield on investments of the private sector was around 6 per cent as opposed the public sector's returns of close to 9 per cent.

Besides, the sources said, the private sector had been hit hard by depreciation in the investment portfolios since this year. The depreciation has been most severe at the middle and long ends of the yield curve. That they had suffered substantial depreciation is evident from the factthat the 10-year paper, currently at 7.2 per cent, is at least 200 basis points above the level obtained at the beginning of the last financial year.

The dip in value of investments automatically exerted pressures on the solvency margins of the insurers. Under current guidelines, the value of investments is expected to be higher than the value of the liabilities. Liabilities include the gross value of the insurance cover provided, net of reinsurance support.

The only investments that have helped the private insurers are their equity portfolios that have appreciated substantially. Private sector insurers, the sources said, had resorted to selling their equity portfolios to partly offset claims losses from the floods in Gujarat, Maharastra, Karnataka and Tamil Nadu.

In addition, they have also used the profits to buttress their balance sheets through additions to the net worth. In fact, many of them are expected to continue their aggressive treasury operations.

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