Non-life insurers raise capital worth ~2,181 cr via hybrid bonds

Non-life insurers, that relied heavily on equities to raise capital earlier, have found a new alternative in “subordinated debts or hybrid bonds”. As many as seven of the 31 non-life insurance companies have raised ~2,181 crore in financial year 2017 through hybrid bonds, according to rating agency CRISIL.

These hybrid bonds have come as a great relief to the non-life insurers as it is providing them with a higher solvency ratio cushion.

Insurance Regulatory and Development Authority of India (Irdai), in 2015, allowed insurance companies to raise capital in non-equity form, thereby providing a higher solvency cushion.

Most insurance companies are promoted by large establishments yet growth capital needs to be funded by external sources to maintain the solvency ratio as internal funding may fall short given modest underwriting performance.

However, investing in hybrid bonds of insurers comes with additional risks on account of restriction on debt servicing if the solvency ratio falls below the regulatory stipulation. Further, in case of insufficient profit or loss, approval from the regulator would be required to service these bonds.

Gurpreet Chhatwal, president, CRISIL Ratings, said, “Subordinated debt issuances have emerged as a very good alternative to equity as they enable insurers to raise capital at an optimal cost. Hybrid issuances will gain impetus, given buoyant growth prospects for non-life insurers.”