Irdai approval to United India on  bonds  may set a precedent

MUMBAI : The insurance regulator’s approval to state-run United India Insurance Co. to exercise the call option on its bonds despite not meeting the minimum solvency ratio will set a precedent for similar redemptions by peers, experts said.

The insurer raised 900 crore in February 2018 through a private placement bond sale with a call option after five years. The call option allows the issuer to buy back the bonds before the maturity date.

According to the Insurance Regulatory and Development Authority (Irdai) norms, insurers must maintain a minimum solvency ratio of 1.5. The ratio measures the company’s cashflows against its future liabilities and shows the ability of an insurer to meet its obligations.

“This decision to allow United India to use its call option shows that the Irdai is likely to allow future redemptions by other public sector insurers. This could stem from the fact state-backed companies have sovereign backing and, therefore, are low-risk in nature,” said the first of the two analysts cited above.

United India’s solvency ratio was at 0.35 as of 30 September.

The country’s third-largest insurer in terms of gross premiums underwritten during FY22, has a market share of 7.1%.

Data from rating agency Crisil show that the company’s gross direct premium in 2021-22 was 15,721 crore, a decrease of 5.9% from the previous year, compared to industry growth of 11% for the same period.

Another analyst said that while there are minimum solvency norms, the government has, in the past, stepped in to ensure state-owned insurers do not lose potential business because of it.

In fact, the finance ministry asked central public sector companies to tone down the minimum solvency norms as an eligibility criterion for state-owned insurers in various tenders, The Indian Express reported on 5 July.

The second analyst said that this decision would impact Oriental Insurance Co. Ltd, whose bonds worth 750 crore have a call option, exercisable in March next year. Its solvency ratio stood at 0.76 as on 30 September.

He said the decision to allow early redemption of the United India Insurance bonds could be a result of the investor ire last year when the National Insurance Co. decided against using the call option on its 895 crore bonds. According to a report in The Economic Times on 17 February 2022, the state-owned insurer decided not to exercise the call option on its 10-year bonds.

“Investors in bonds of these insurers are typically other public sector insurance companies and therefore expect early redemption after five years,” said the analyst cited above.

In May last year, Crisil Ratings downgraded its corporate credit rating and rating on subordinated debt issue of National Insurance Co. It had said that the rating action is primarily driven by the lack of improvement in the company’s underwriting performance, continuing to constrain its earnings profile and imposing pressure on its capital position and solvency.

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