Covid-hit insurers selective in risk-free instruments

As InVIT and ReIT line up for launch, insurers are gearing up to invest in them. The only thing is that they will be cautious as they have already faced with huge Covid-19 claims. Hence, they want to invest in safe papers only that are risk-free.

Earlier, the insurers were not allowed to buy the debt issuance of InVITs or ReIT. They were allowed to invest in the equity instrument of these issuers only. Since the insurance regulator IRDAI has permitted to invest in debt instrument of these issues too in April, a host of insurers has come forward to put their money into it.

"Life insurers are currently struggling with huge Covid claims and are cautious, while investing in risky instruments in the light of the problems taking place in entities like YES Bank, DHFL, Essel and IL&FS. So, the investment climate is very different now. Nobody wants to take any chance or risk. If there is a safe avenue, they will invest only in risk-free papers," said a source from the industry on the request of anonymity.

Insurance companies were happy to invest into these new instruments. Because, these are AAA rated and they are not permitted to borrow unlimited amount and there is a leverage cap on the issuers. On the day of one of the launch in April, as the insurers were given a go-ahead by IRDAI, they put a significant sum of money in the debt instrument of the InVITs, which were floated by a private sector infrastructure firm, IndiGrid in April.

The issue, which was sized at Rs 1,000 crore got oversubscribed and mopped up a total sum of s Rs 2500 crore on day one itself. This was the first public issue by any InVIT trust. The company offered 3,5,7 and 10 year tenor papers. Mostly, life insurers had invested in it. Still, there were a few general insurers too, who had put in their money. The insurers had invested Rs 600-700 crore into the issue as they had been permitted by IRDAI for the same merely a few days ago. The reason was that the IndiGrid was offering an attractive interest rate at 7.95 (for institutional investors) and 8.20 (for individuals). The interest rate being offered was about 100 basis points higher than the PSU companies of 10-year paper then.

Tata AIA, Reliance from life insurance sector and Star Health from general insurance sectors mainly had invested in this issue. After that, the insurers had picked up from the secondary market too. Earlier, the issuers were not getting to borrow beyond five years. However, with retail and insurance sector opening up by regulation has now got them to borrow money for a duration of even 10 years. There was a private placement as well done IndiGrid for 10 year which got well subscribed post a successful public issue.

This class of investment is being preferred by the insurers to put their money into as it was offering them attractive interest rate or 50 bps more than what was usually is offered by the PSU of similar tenors. But, the interest rate on these instruments has fallen now with yield ranging between 7.60 per cent and 7.70 per cent.

"Insurance companies will definitely join the party once the appetite improves. In fact, they are waiting and watching for the forthcoming ReITs like Mindspace and Brookfield and Embassy. But, they are still in the pipeline and are likely to be launched once the interest rates fall a bit in case of 10-yr maturity. Moreover, there should be appetite from insurance companies as well HNI and corporate for the same," Ajay Manglunia, MD, head of institutional fixed income at JM Financial, Mumbaì told Bizz Buzz.

People in the insurance industry are very much interested for investing their long-term money into these instruments. As there is no volatility in the revenue stream as it's tied up for completed long term revenue generating infra space. Moreover, an attractive dividend is being distributed by them on a quarterly basis, he said.

In the last month, in its board meeting, SEBI has also allowed that these funds can be traded within one unit. Earlier, it was allowed to be traded in Rs 2.00 lac lot which are meant for HNI class only, so the market lot was Rs 2 lakh per trade. Now it has been reduced as low as even one unit or Rs 100 per unit. Now retail investors, can also participate and use the stable tax efficient yields on its investments in these.

In private placement, he said, issuers end up getting short-term papers or those papers mainly upto 3-5 year tenors from most institutions but they need to borrow for the longer term as most of infra assets are of longer lasting with higher and stable interest rates.Covid-hit