Irdai approval to United India for bonds could set a precedent

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

Insurance Regulatory and Development Authority (Irdai) standards require insurers to maintain a minimum solvency ratio of 1.5. The ratio measures the company’s cash flows against its future obligations and shows an insurer’s ability to meet its obligations.

“This decision to allow United India to use its call option demonstrates that the Irdai is likely to allow future redemptions by other public sector insurers. This may be due to the fact that state-backed companies are backed by the government and therefore have little risk,” said the first of the two analysts mentioned above.

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

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

Data from credit rating agency Crisil shows the company had a gross direct premium in 2021-2022 €15,721 crore, a decrease of 5.9% from the previous year, compared to an industrial growth of 11% for the same period.

Another analyst said that while there are minimum solvency standards, the government has intervened in the past to ensure that state insurers don’t lose potential customers as a result.

The Treasury Department has even asked central public sector companies to soften minimum solvency standards in several tenders as an eligibility criterion for state insurers, The Bharat Express News reported July 5.

The second analyst said this decision would affect Oriental Insurance Co. Ltd, whose bonds are worth €750 crore have a call option, exercisable in March next year. The solvency ratio as at 30 September was 0.76.

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

“Investors in bonds issued by these insurers tend to be other public sector insurance companies and therefore expect early redemption after five years,” said the analyst mentioned above.

Last May, Crisil Ratings downgraded its corporate credit rating and National Insurance Co.’s subordinated debt issuance rating. It had said that the rating action is mainly caused by the lack of improvement in the company’s underwriting performance, which still leaves its earnings profile limited. and put pressure on its capital position and solvency.