Life insurance companies putting pressure, say bankers

C. Shivkumar

Some life insurance companies, including the Life Insurance Corporation of India, were pushing for higher yields as a precondition for investments, especially in the case of bonds falling in the rating scale below AA+.

Bangalore, July 31

Banks are being pushed to offer higher yields on their bond offerings for raising tier-II and upper tier-II capital.

Bankers said that the demand for higher yields was driven by pressure from life insurers. The last few issues of bank bonds have been priced between 9.25 and 9.5 per cent for tenors up to 10 years. But for maturities above 10 years, the yields are at least 50 basis points higher.

But bankers said some life insurance companies, including the Life Insurance Corporation of India, were pushing for higher yields as a precondition for investments. This was especially in the case of bonds falling in the rating scale below AA+. As a result, some of the bond offerings were made with front-end discounts to wholesale subscribers to increase the yields.

The front-end discounts are allowed for the pricing of bonds at less than face value.

This kind of pricing, however, would not impact the interest servicing flows or the profit and loss account immediately. The impact would be felt only at the time of maturity, when the bonds would have to be redeemed at par. Bankers said that life insurers were in a position to push for higher yields in view of competing demands for their funds. Besides, the AAA and AA+ category bonds, were picked up by the provident funds and mutual funds. It was in the lower category of bonds that insurers were in a position to push for higher yields. Bankers said that this allowed them to push for discriminatory pricing, implying higher pricing for lower rated issuers.

Bankers said that insurers were pushing for the high yields to ensure higher returns to policyholders. For almost three years, life insurers faced low mean yields on their investments. This was entirely on account of soft interest rate regime, leading to low yields across all their debt investment portfolios. In fact, yields on corporate bonds that included debt offerings by banks dropped to under 6 per cent in 2004.

Besides, many of the State Government undertakings and development agencies had also stopped borrowing from LIC switching to banks that were chasing assets during the period. The preference for bank funding was partly on account of the softer terms and lower interest rates. This, in turn, resulted in life insurers parking funds in low-interest bank term deposits and in mutual funds. Consequently, mean yields on investments of LIC and life insurance companies dropped to less than 7 per cent.

hike in mean yield

The higher yields on bank bonds were therefore intended to hike the mean yield on investments, the bankers said. Currently, life insurers are allowed to invest up to 20 per cent of their investible corpus in these categories of securities.

In fact, with yields on the ascent since the beginning of this financial year, the mean yields for the insurance companies have already risen. With the 10-year yield currently at 8.3 per cent, mean yields on life insurance companies' investments are currently are about 8.6 per cent, according to sources.

(This article was published in the Business Line print edition dated August 1, 2006)
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