Like other insurance companies in Asia, Edelweiss Tokio Life Insurance Company is increasingly looking to invest in non-traditional assets.
And for its Mumbai-based chief investment officer, Bismillah Chowdhary, infrastructure and commercial real estate assets are a particularly attractive proposition.
“We view alternatives as a very viable investment class,” Mumbai-based Bismillah Chowdhary told AsianInvestor in an interview last week, noting the higher yields to be had due to the long-term and illiquid nature of these assets.
These allocations typically account for 2%-3% of the overall portfolio of insurers and offer a good way to diversify, he added.
For him, infrastructure and real estate are also ideally suited to the particular needs of life insurers by enabling them to better match their liabilities to policyholders, echoing similar comments made recently to AsianInvestor by HSBC Insurance’s chief investment officer, William Chan.
As a result, Chowdhary said, Edelweiss Tokio Life Insurance has made a small allocation to infrastructure investment trusts (InvITs) and property, whilst declining to provide a breakdown of these investments.
Formed in 2011 by India's Edelweiss Financial Services Limited and Tokio Marine Holdings, one of Japan's biggest and older insurance firms, fast-growing Edelweiss Tokio Life Insurance received an additional capital injection of Rs6.7 billion ($100 million) to support its expansion.
In India, insurance companies can invest in private equity and private debt funds, infrastructure funds, small-and-medium enterprise funds, venture capital funds and social venture funds as part of their alternatives exposure. They cannot, however, invest in fund of funds or leveraged funds.
Chowdhary is especially keen on InvITs, a young asset class that pools money from several investors to invest in assets that provide a cash flow over a period of time. In the case of operational power transmission assets, they can offer yields of anywhere between 8% and 12% per annum on an almost perpetual basis, he said.
“There is hardly any construction or operational risk and the revenue stream is highly visible,” he said.
InvITs are listed on stock exchanges and must invest in assets related to transport, energy, water and sanitation, communication, social and commercial infrastructure, including educational institutes, hospitals, and agricultural storage facilities. At least 80% of their funds must be invested in established revenue-generating assets, while the rest may be used for infrastructure assets under construction.
From a long-term, asset-liability management perspective as well as from a yield perspective, invITs tick all the boxes, Chowdhary said.
They also dovetail with a legal requirement for Indian insurers to have a minimum 15% of their total investment assets in infrastructure and housing assets, as part of their social obligations. These investments can include the shares or bonds of infrastructure companies, such as telecoms firms.
For all this, InvITs remain an embryonic asset class in India with a mixed track record to date.
Only two InvITs have been listed in India so far, both of them last year – IRB InvIT Fund and India Grid Trust. Both have seen a relatively glum share price performance: the IRB InvIT fund is trading at Rs80 ($1.19), around 20% below its issue price of Rs102, while India Grid Trust InvIT fund is trading at Rs95.8, compared with its issue price of Rs100.
Chowdhary believes that doesn't reflect the full picture and said he prefers to compare the India Grid invIT, which owns interstate power transmission assets, with long-term corporate bonds or government bonds as these assets are quasi-debt assets.
"Since inception, the internal rate of return for India Grid is around 6% while for 10-year Indian government bonds it stands at around 0.16%," he said.
Still, with an IRR of -9%, the relatively higher-risk IRB invIT has done less well since listing, he added.
TASTE FOR REAL ESTATE
Another alt asset that Chowdhary likes is commercial real estate, which in India can generate annual yields of about 9.5% for well-located prime assets.
“These are real estate investments that already have a lock-in, marquee tenant for five or 10 years. Occasionally, a rent escalation clause can even lift yields up to 10%," he said.
Investors seeking even higher returns also have the option of investing in non-triple A, second-standard commercial real estate, Chowdhary said.
Chowdhary believes these investment opportunities represent low hanging fruit for insurance companies. So it's no wonder, perhaps, that the allure of Indian property -- and high yields -- has been attracting investors from overseas: institutional investors such as insurance firms and pension funds have been bulking up their exposure to Indian real estate, AsianInvestor reported recently.
Other Indian insurers are more tentative but also moving cautiously into this space.
Canara HSBC Oriental Bank of Commerce Life Insurance’s chief executive, Anurag Jain, said like other insurers, the firm is in the process of exploring alternatives.
“We believe that alternatives as an investment asset class, though nascent in India, is emerging and developing at a fast pace,” he told AsianInvestor. “On the one hand it is a highly illiquid asset and most of the sponsors lack a long-term track record; but at the same time, it provides avenues to deploy long-term money and generate superior risk-adjusted returns for the investors.”
*This article has been corrected to reflect that alts allocations account for a small portion of the overall portfolio of insurers in India.