Risk firms wary of investing in hybrids

Insurance companies seem to be giving a lukewarm response to the recent stipulation, which allows them to invest in hybrid instruments of banks.

The reasons range from wariness with regard to the quality of banks issuing such instruments to the limit of exposure notified for such investments.

The Insurance Regulatory and Development Authority of India recently said hybrid instruments issued by banks would now fall under the approved investments category for risk firms, as they would have a minimum maturity period of 10-15 years.

Since insurance companies also have long-term liabilities these would turn out to be appropriate investment opportunities, it said.

These instruments include perpetual debt instruments for inclusion as tier-I capital, debt capital instruments eligible for inclusion as tier-II capital, perpetual non-cumulative preference shares for inclusion as tier-I capital and redeemable cumulative preference shares eligible for inclusion as tier-II capital.

According to Vikram Kotak, head (investments), Birla Sun Life Insurance Company, while the company is looking forward to investing in these instruments, it is adopting a cautious approach. The reason is that hybrid instruments of all banks would not be potential investment opportunities.

Birla Sun Life has, therefore, started investing in such instruments but plans to restrict its portfolio to the instruments being issued by the top three banks.

One of the reasons for this is that investors of such instruments would be paid only after all the other creditors are paid. This could mean bad business for a risk firm when a bank goes bankrupt.

Keeping this in mind, the regulatory authority has also stated that debt instruments issued by banks in the private sector will need to have a minimum of AAA rating by an independent and recognised rating agency and those issued by banks in the public sector will need to have at least AA rating.

Meanwhile, ICICI Prudential has not yet started investing in such instruments. Puneet Nanda, its chief investment officer, said the yield would be too small for the company because of the exposure limits.

The regulator said in the case of a life insurer, investments in various hybrid instruments should not exceed 3.5 per cent of life fund and 5 per cent of other funds such as pension, general annuity and unit-linked funds. Similarly, in the case of non-life insurers, all investments in such hybrid instruments should not not be more than 5.5 per cent of investment assets.

"With such limits, investing in these instruments would not really make a dent in our portfolio. Ideally, there should be no limit on such exposure," Nanda said. Although ICICI Prudential has not yet started investing in such instruments, it is keeping all options open.

Bajaj Allianz General Insurance Company has started investing in hybrid instruments, but according to a spokesperson of the company, "it is at a small level".

The company declined to comment on the reasons for the limited exposure. Aviva Life Insurance said it would not invest in such instruments. The insurer, however, declined to divulge the reasons.