A recent report by the rating agency Icra has said that India's insurance sector has significant room to raise debt capital but is facing obstacles in issuing subordinated debt, a crucial component of its capital structure. Despite the potential benefits of sub-debt, insurers are struggling to access this vital funding source.
"Despite relaxation on limits to raise sub-debt, its share in the overall capital deployed remains limited at 5.8 per cent of the total net worth, amid weak investor appetite," Icra added in its report. Given the capital intensiveness of the sector, low insurance penetration, expectations of strong business growth and modest accruals, capital requirements will remain high, it revealed.
While all the issuers may not have a strong financial position to raise sub-debt but based on the above insurers, who have issued sub-debt in the past, the companies can additionally raise Rs 154 billion, which will be over and above the Rs 108 billion outstanding as on 31 July 2024. However, some of them enjoy a strong solvency position and may not require sub-debt, it stated.
According to the report, investor appetite would be key to the increase in sub-debt in the overall capital profile of insurers.
The insurance sector has seen strong business growth in both life as well as general insurance spaces. This has resulted in a doubling of the capital deployed to almost Rs. 2.0 trillion by companies over the last six years. Within the overall capital deployed, the share of subordinated debt (sub-debt) in the capital structure has remained limited at 5.8 per cent of the net worth.
Icra notes that investor participation in sub-debt of the insurance sector has remained weak with almost two-thirds of the outstanding debt being subscribed by the promoter group or peer insurance companies. With the notification of December 6, 2022, insurance companies have incrementally refrained from investments in sub-debt of peers. The other large investor category, i.e., mutual funds, has also refrained from such investments, given the poor liquidity in the secondary markets, thereby limiting the investor base.
“This remains a key challenge for capital raise and growth of the sector,” according to the Icra.
Further, given features of the instrument whereby coupon payment is subject to meeting the regulatory solvency level, and risk to solvency arising from adverse claim experiences that are difficult to predict, investors seem to factor in the strong parentage of the issuer. As a result, part of the sub-debt rated in higher categories was also subscribed by the promoter group.
Given the capital intensiveness of the sector, low insurance penetration, expectations of strong business growth and modest internal accruals, capital requirements will remain high. “Though the regulator had increased the limit to raise sub-debt in December 2022, the weak investor appetite could pose challenges to growth. Lack of sufficient capital also constrains the ability of the life insurers to underwrite protection and annuity business and the ability of general insurers to retain granular risk,” Icra report added.
Further, with the equity listing for large insurers in the sector, investor awareness of the business risks has improved. Nonetheless, only eight of the total 52 insurance companies are equity-listed. Icra expects that as the companies gain longer track records and build stronger standalone credit profiles, the investor appetite and volume of issuances can improve.
