 "Insurers raise exposure to gilts on rate cut hopes")
Insurers usually have 35-40 per cent exposure to gilts and have now increased their exposure by 10-15 per cent in the past few weeks. Other than rate cut hopes, the absence of quality investible debt securities in other sectors has led them to increase exposure.
According to the Insurance Regulatory and Development Authority (Irda) regulations, life insurers are required to invest a minimum of 25 per cent in central government securities, meaning an insurer can also invest up to 100 per cent in these securities. General insurers are required to invest a minimum of 20 per cent in these securities.
The head of fixed income of a securities firm said, “The trend of investing more in government bonds picked up as these insurance companies have to ensure they meet their investment limits before the end of the fiscal. They also preferred government bonds because these are secure, and as RBI will cut rates further, the prices of these bonds will rise.”
Irda’s investment regulations also increased the sectoral exposure limit to 15 per cent, from the earlier limit of 10 per cent. It had said the exposure limit for the financial and banking sector would stand at 25 per cent of the investment assets of all insurers. The rest could be utilised for investment in other sectors.
According to the chief investment officer of a private life insurer, investments in gilts have increased due to the absence of quality debt securities in the corporate bond market. “Since securities with good ratings were not available in other sectors, we concentrated on gilts,” said the official.
Nirakar Pradhan, chief investment officer at Future Generali India Life Insurance, said the market was expecting repo rate cuts of 50-75 basis points over the next few quarters. This, he said, would push down bond yields and increase prices. Hence, companies were purchasing gilts and holding on to these.
There is an inverse relationship between interest rates and bond prices. If the rate is cut, then yields fall, boosting prices.
The Street is expecting a cut of 25 basis points in the repo rate in RBI’s mid-quarter review of monetary policy, to be announced on Tuesday.
Says the head of fixed income of a brokerage firm, “If there are rate cuts, then government bonds may perform better than corporate bonds of the same tenure. Due to this, insurance companies are investing more in government bonds.”
General insurers are also pinning hopes on a rate cut.
N Sampath Kumar, chief financial officer of Bharti AXA General Insurance, said the reason behind higher exposure to gilts is the fact that if rates are cut, then they could book profits.
Insurers said the proposed risk charge had also prompted them to shift back to government securities. A senior investment official of a general insurance firm said since Irda hasn’t put any risk-charge, this was an incentive to invest in such debt.
As part of the proposed risk-based solvency model , Irda is contemplating a total capital charge ranging from 0.9 per cent to 7.5 per cent, based on the rating of the instrument, with lower rated ones having a higher risk charge. Government securities will have no risk charge.
According to the head of fixed income of a fund house, insurers are going for long-term government bonds for their endowment plans, as they have to match their liabilities there. The official added for unit-linked plans, they mostly go for liquid government bonds like the 10-year benchmark 8.15 per cent 2022.