BANK Negara will allow insurance companies to invest up to 50% of their total assets in secured and unsecured assets by January, from 40% now, in a move to relax the investment limit under insurers' prudential framework.
In a statement yesterday, Bank Negara said the relaxation would be implemented in two stages:
·With immediate effect, the limit on an insurer's aggregate investment in secured and unsecured credit facilities will be raised from 40% to 45% of the insurers' margin of solvency (MOS); the limit in unsecured credit facilities is increased from 30% to 35% of the MOS.
·Effective Jan 1 next year, these limits would be further raised to 50% and 40% respectively.
Credit facilities under the admitted asset framework refer to private debt securities such as bonds, notes, debentures and loan stocks and certain types of debt securities issued by Cagamas Bhd.
An unsecured facility under this framework must be of a minimum rating of BBB or P3 or its equivalent assigned by a rating agency established in Malaysia or by an internationally recognised one.
MOS refers to the company's total assets or the amount of assets to back the insurers' liabilities.
The industry, which had been waiting for a long time to see the changes, welcomed the move. It is expected to free up some RM7bil for investment in the bond market, based on total assets of about RM66.7bil in the industry as at Dec 31, 2002.
It gives us more avenue to invest in private debt securities and allows us to better match our investments with our products, said Prudential Assurance Malaysia Bhd chief executive officer Ng Keng Hooi.
Malaysia Assurance Alliance Bhd (MAA) chief executive officer Ramlan Abdul Rashid said this would give MAA and the industry a wider choice of investments.
It creates more flexibility for us to invest in these instruments, which are an important part of an insurance company's portfolio, Ramlan told StarBiz.
The move is also supported by Rating Agency Malaysia Bhd (RAM), which believes it could encourage issuers to offer products that suited the long-term investment horizon of insurance companies.
There are currently not many products with the sort of long-term investment horizon that is preferred by the insurance industry, said RAM executive director Wong Fook Wah.
Bank Negara said the increase in the investment limit was to give insurers greater flexibility in the management of insurance funds and allow more flexibility for the acquisition of assets that could offer stable income streams to match insurance liabilities, particularly long-term liabilities of life insurance companies.
Bank Negara's aim was also to promote the demand for private debt instruments and thus contribute to the development of the domestic capital market.
However, despite the positive move, the timing may not favourable, given the soft bond market and good run in the equities market, which had shifted attention from bonds.
I think the recent attention to the equity market may encourage companies to raise their funding requirements through equity papers such as right issues, said Wong of RAM.
However, he added that given the estimated inflow of about RM7bil, the total impact would augur well for the growth of the bond market in the future.
Prudential's Ng said the move by Bank Negara would support the industry's initiative to encourage companies to issue long-term bonds.
To match their products, insurance companies often require investment products with a long-term horizon,'' said Ng, who is also chairman of the investment committee at the Life Insurance Industry Association (Liam).
Although long-term bonds are subjected to higher interest rates and may be costly for issuers, they help to eliminate the risk of issuers having to redeem the bonds earlier.
In 1997, we saw a lot of companies faced with severe financial constraints because they did not have the funds or could not get alternative financing to redeem their bonds, he said.