In May when Franklin Templeton shut six of its debt schemes, it only reiterated the risk for investors in debt products. With increasing credit and liquidity risks that debt schemes face, how are insurance companies that are also vulnerable to bond defaults in their ULIPs, handling it? We spoke to Manish Kumar, Chief Investment Officer, ICICI Prudential Life Insurance Limited, to understand how the fund managed to sail through the last 20 years without a single NPA in its debt scheme. Edited excerpts:

We have been seeing issues with debt mutual funds starting from the IL&FS crisis in 2018. How are your debt funds doing? Can you give us a picture of their performance vis-à-vis benchmarks?

While the stress in the credit markets has been a cause for concern, our investment policy and selective approach have ensured a good quality portfolio. There have been no defaults in our bond portfolio. Our fixed-income funds have delivered competitive returns against their respective benchmarks across time periods.

Have there been any NPAs in your debt fund?

There have been no defaults in our bond portfolio till date. Since September 2018, credit markets, especially in the NBFC space, have witnessed high levels of stress and defaults/payment delays. However, we do not hold any non-performing assets (NPAs) in our debt portfolio and have had a record of zero NPAs since inception, i.e, over a 20-year period.

How did you manage zero NPAs? How do you go about the selection of companies to invest?

Our approach is to deliver superior risk-adjusted returns as policyholders depend on us to achieve their long-term financial goals. We ensure building a good quality portfolio. 94.3 per cent of our total holdings in the fixed income portfolio (including money market instruments) are invested in the highest credit-rated securities, as on June 30, 2020. These are all sovereign, AAA/A1+ rated securities or equivalent. Our credit decisions are based on extensive research – detailed research reports obtained from credit rating agencies form the primary basis for investment decisions. In addition, the team’s assessment of economic cycle, industry health, its perception of management quality and demand/supply of a particular entity’s debt influences the investment decision. We have also established credit triggers like credit rating downgrade, significant drop in revenue/profit on yearly basis, sharp fall in the equity price relative to the sector, changes in leverage, etc. which are monitored regularly. Based on the triggers, the companies are re-evaluated in light of the developments and action taken, if required.

Is there an option for side-pocketing in debt funds in insurance?

The IRDAI does not permit insurance companies to undertake side-pocketing in their linked funds.

When there are bond defaults in ULIPs, do insurance companies also write down the value of such papers?

While we have not faced any bond default in our company, we understand that insurance companies write down the value of such securities in their portfolios over a period of time based on an assessment of the expected recovery. Based on that assessment, they could also sell the bond in the market at a significant discount.

What are the disclosures required in ULIPs, especially in case of debt funds?

As per IRDAI’s Master Circular on Investments, life insurance companies need to make portfolio disclosure for ULIP funds on a monthly basis. The disclosures cover various aspects including fund composition, rating profile, modified duration, the performance of the fund against the benchmark over different time periods, top 10 industrial sectors and holdings under each asset category (government security and corporate bond). Regulations ensure complete transparency of the portfolio holdings.

What are the restrictions imposed by IRDAI with regard to debt funds in ULIPs? How much of the portfolio can be in a single company?

The IRDAI has laid down exposure norms for investments in an individual company, group and industry. At the fund level, exposure limit for a single investee company is set at 10 per cent, for a group it is set at 15 per cent and for each industry it is set at 15 per cent. For BFSI, it is set at 25 per cent. Similarly, at the company level, the exposure limit is set at 12 per cent of the net worth and outstanding bonds of the investee company. A rating limit is also set which requires each fund to have at least 75 per cent of the investments in debt instruments in sovereign debt, AAA or equivalent rating for long-term instruments and A1+ or equivalent rating for short-term instruments. We would like to highlight that we have maintained superior portfolio quality by having 94.3 per cent of our fixed-income portfolio in the highest credit-rated securities, against the regulatory requirement of 75 per cent.

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