India bends sub-debt rules ahead of health insurance expansion

State-owned insurance companies are getting a pass from regulators to raise subordinated debt as the Government prepares to enlist them in a bid to extend health coverage to half a billion poor people.

Whereas the Indian banking regulator has repeatedly relaxed requirements to make it easier for all banks to make payments on their Tier 1 capital securities, the insurance regulator has been granting exemptions on a case-by-case basis to specific state-owned general insurers.

United India Insurance raised Rs 900 crore ($141 million) from a maiden offering of subordinated bonds, pricing the 10-year non-call five notes at 8.25 per cent. Crisil, which assigned a AAA (stable) rating to the deal, said this took into account forbearance from the Insurance Regulatory and Development Authority of India, which allowed UIIC to service interest throughout the life of the instrument, irrespective of its solvency ratio. Brickwork Ratings assigned an identical rating to the instruments.

Normal IRDA rules do not allow insurers to make interest payments on such securities if their solvency ratio is below 1.5.

UIIC was able to issue subordinated bonds even though its reported solvency ratio was 1.08 as of last September, below the minimum regulatory requirement, because of a deterioration of its underwriting performance, according to Crisil. The ratio is expected to rise above 1.5 after the fundraising, according to ICRA.

IRDA has also allowed UIIC to issue subordinated debt equivalent to 50 per cent of its net worth, above the 25 per cent limit for other insurers.

Last March, National Insurance raised Rs 895 crore from 10-year subordinated bonds at 8.35 per cent after similar regulatory forbearance was granted to the company.

“The rules are rewritten by the regulator for insurance companies, which are facing losses, because these relaxations are not given to private sector companies,” said a source away from the UIIC deal.

UIIC reported a net loss of Rs 1,913 crore in FY17 compared to a profit of Rs 221 crore in FY16. “It is a practical solution for a government, which is under fiscal deficit stress,” the same source said.

Since July 2016, 11 insurance companies have raised Rs 2,800 crore from subordinated bonds, according to Prime Database, after the regulator issued guidelines allowing them to tap the Tier 2 market.

“State-owned insurance companies will find subordinated bonds an efficient avenue to shore up solvency ratio at a relatively cheaper cost, as compared to raising equity capital," said Krishnan Sitaraman, senior director at Crisil Ratings.

“While reported solvency ratios of some state-owned insurance companies are low, they have equity investments that have substantial unbooked appreciation. If required, they can sell some of their equity investments and realise the gains on their books, which can help enhance their reported solvency ratios,” he said.

The adjusted solvency ratio for UIIC was 2.13 as of last September, according to Crisil.

UIIC's issue found tepid demand, however, and was kept open for two days. Life Insurance Corporation of India is rumoured to have bought half of the subordinated bonds, while public-sector insurance companies picked up the remainder.

Analysts say such cross-holdings of subordinated debt among insurance companies does not necessarily increase systemic risk.

“This is because the size of the investment in such securities is quite small in proportion to their overall investment portfolio,” said Sitaraman of Crisil.

“Subordinated bonds are of longer tenor. In the Indian context, investors in longer-tenor bonds typically include insurance companies and pension funds.”

FUNDING HEALTHCARE

In the budget for 2018/19, the government widened its fiscal deficit target to finance a sharp rise in spending on rural areas and healthcare. It also suggested the possibility of a mega IPO from the state-owned insurance sector after unveiling plans to merge state-owned general insurers Oriental Insurance, National Insurance and United India Insurance for a listing as one entity, without indicating the timeframe.

The government also announced a plan to provide health insurance to 500 million poor people, which would require an estimated Rs 11,000 crore in federal and state funding each year. Government health insurance companies have agreed to fund this programme, according to a Reuters report.

Many bankers believe that raising subordinated debt will eventually pave the way for state-owned insurance companies to merge, list and fund the massive healthcare programme.

Among other public-sector insurance companies, Oriental Insurance has been in talks with bankers to issue subordinated bonds. It has yet to make an official announcement on the plan.

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