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C. Shivkumar

Fear volatile situation will result in further asset depreciation

Bangalore May 10 Faced with large depreciation losses, life insurance companies have stopped picking up mortgage-backed securitised (MBS) papers of housing finance companies.

Insurers said that with the continuous hikes in interest rates over the last two years, some of the existing MBS papers have depreciated in value. The outstanding MBS papers currently are close to about Rs 1,000 crore. But some private sector insurers have as a matter of policy steered clear of MBS papers. These include entities such as OM Kotak Life Insurance Company and Aviva Life Insurance Company Ltd.

The Kotak's Executive Director, Mr Pankaj Desai, said: "We are not investing in these papers". The Aviva's Managing Director, Mr Bert Patterson, preferred to be circumspect. "We will wait for some time before investing in MBS papers," he said

But some life insurers, in a bid to offer higher bonuses or higher returns on their unit-linked funds, had picked up MBS papers, in 2004 and 2005, when yields were on the descent. MBS papers were then placed at discounts as low as 6.5 per cent by some of the housing finance companies with insurance companies and mutual funds. However, with the situation reversing since 2005, the entire market for MBS has dried up. In fact there were few takers for such papers in the markets, the sources said.

IRDA notification

The Insurance Regulatory and Development Authority's (IRDA) recent February notification also dampened the enthusiasm for these instruments, the sources said. The notification had directed all the life insurers in the country to start adopting solvency (solvency is the excess of capital and assets over insured liabilities) guidelines on a quarterly basis.

This was in line with guidelines prescribed by the International Association of Insurance Supervisors that has prescribed migration to Solvency II regime. The guidelines prescribe that investments be valued on a value-at-risk basis.

As a result, insurers fear that having a large portfolio of MBS papers would have direct impact on solvency margins, especially in a situation when the realty sector was in ferment. Under the current regulatory regime, insurers are expected to maintain a solvency of 150 per cent. Insurers fear the volatile situation would result in further asset depreciation that would have to be offset with more capital.

Capitalisation issue

Besides, with the Government yet to relent on relaxing the foreign direct investment in the insurance sector, capitalisation was a major issue, the sources said. The end result was that life insurers preferred to hang on to unit-linked insurance plans, where the capital requirements were low and asset depreciation losses were passed directly on to policyholders.

Moreover, the sources said that another major issue that was preventing investments in MBS papers was the reluctance of the housing finance companies and banks to pass on the benefits of the floating rate interest rates on to MBS securities. In fact, almost the entire outstanding of MBS papers was on a floating rate basis.

Insurers, the sources said, have not benefited from the hardening of yields. The sources said: " If it was passed on to us, we would have benefited through higher cash flows and picked up more."

Currently, housing loans are priced at upwards of 10 per cent, though the coupon flows for MBS with life insurers were still under 7 per cent.

More Stories on : Housing Finance | Non-Performing Assets | Life Insurance

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