How Troubles At DHFL, Yes Bank, IL&FS, Anil Ambani Firms May Hurt Indian Insurers

Bajaj Group’s insurance subsidiary provided for its investments in debt downgraded by ratings agencies, hurting its profit in the quarter ended June 30. But the insurer isn’t alone in having such exposure.As many as 49 insurers disclosed a total investment of about Rs 11,000 crore in debt of companies that were downgraded in the second half of 2018-19. Of this, Rs 8,514 crore is invested in the paper of just four—Anil Ambani group companies, Dewan Housing Finance Corporation Ltd., Infrastructure Leasing and Financial Services Ltd. and Yes Bank Ltd.The downgrades stem from the credit crunch that non-bank lenders faced after a series of defaults by the IL&FS Group. Several mutual funds had to either write down investments or agree to a standstill with controlling shareholders who had pledged shares as a collateral.To be sure, according to data from Insurance Regulatory and Development Authority, the investments that have been downgraded comprise only a fraction of the insurance sector’s assets under management worth Rs 34.58 lakh crore as of March 2018.Among insurers, life companies have a greater exposure to such entities compared with general insurers. Bajaj Allianz General Insurance Co. Ltd., Max Life Insurance Co. Ltd. and DHFL Pramerica Life Insurance Ltd. were among the 24 life insurance firms that had the maximum exposure to these stressed firms, according to an analysis by BloombergQuint. Among the 25 general insurers analysed, Bharti AXA General Insurance Company Ltd., Cholamandalam MS General Insurance Company Ltd. and IFFCO Tokio General Insurance Company Ltd. had the maximum exposure..Investments by insurers amounting to nearly Rs 1,450 crore was downgraded to default in the second half of the previous fiscal, according to company disclosures..Bajaj Allianz General Insurance Co. Ltd. made a provision of Rs 76 crore—representing 60 percent of the outstanding amount in fixed income investments of DHFL—in the quarter ended June 30, dragging its profit 28 percent to Rs 210 crore.The general insurance and life insurance arms of Bajaj Finserv Ltd.—Bajaj Allianz General Insurance Co. Ltd. and Bajaj Allianz Life Insurance Co. Ltd.—raised their provisioning on their exposure to IL&FS, according to Edelweiss Securities and Deutsche Bank. The general insurance arm, the brokerages said, made provisionof Rs 49 crore, while the life insurance arm provided Rs 126 crore.Bajaj Finserv, in a post-earnings call with investors, admitted that it shouldn’t have invested in debt papers of DHFL and IL&FS. The investments, the company said, were made when papers of the two companies were highly rated, adding it will be careful with its investments in the future. Bajaj Finserv also said it has some exposure to Yes Bank, which it doesn’t consider to be “exceptionally risky”.Do Insurers Need To Write Down Investments?The IRDA (Investment) Regulations, 2016, allow insurers to invest only in bonds or debentures issued by companies, rated not less than AA or its equivalent and A1 or equivalent ratings for short-term bonds, debentures, certificate of deposits and commercial papers by a credit rating agency, registered under SEBI (Credit Rating Agencies) Regulations, 1999.There are no prescribed guidelines for the extent of haircuts in the case of ratings downgrades, unlike the mutual fund industry which needs to act according to regulations specified by the Association of Mutual Funds of India, BloombergQuint found in conversations with senior executives of insurance companies.Under the regulations, approved investments that are downgraded below the minimum rating prescribed for not continuing to satisfy dividend criteria should be automatically re-classified under “other investments” and specifically identified under a category which shall be valued at mark-to-market on a quarterly basis. However, there are no set guidelines for the extent of haircuts in the case of rating downgrades, unlike AMFI’s norms for the mutual fund industry, insurance executives BloombergQuint spoke with said.Vibha Padalkar, managing director and chief executive officer of HDFC Standard Life Insurance Co. Ltd., said they would have to make provisions immediately in case a company in which they have exposure to is downgraded to default. “If there are stages of default, we would start making provisioning of 25 percent and then progressively take a haircut thereafter.”Still, insurance is a very cautious sector and IRDAI ensures there’s a lot of oversight—something that has held the companies in good stead, said Padalkar. Moreover, the company’s exposure to such stressed names is very minimal compared with our Rs 1.3 lakh crore of assets under management, Padalkar told BloombergQuint.“But some of the distress is sentiment, there is nervousness and people will hold on to cash,” according to Padalkar. “[But] when the rest of the market is skittish, insurance tends to do well, especially those companies with lesser exposure to unit-linked products.”According to V Viswanand, deputy managing director at Max Life Insurance, “Our assets under management touched the Rs 63,000-crore mark last year. The exposure to names like IL&FS and ADAG is miniscule. We don’t see any of these investments pulling down investor returns or bonuses.”.(Corrects an earlier version that misstated Bharti AXA and Royal Sundaram’s downgraded debt)

How Troubles At DHFL, Yes Bank, IL&FS, Anil Ambani Firms May Hurt Indian Insurers

Insurers had a total investment of Rs 9,320 crore in debt of these four firms, whose ratings were downgraded in H2FY19.

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