The insurance regulator’s approval to 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 Rs. 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 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.
