CRISIL has assigned its ‘CRISIL AAA/Stable’ rating to the proposed Rs. 4.85 billion subordinated debt issue (also called a hybrid instrument) of ICICI Lombard General Insurance Company Ltd.
This is expected to be the first subordinated debt instrument in the Indian market by an insurance company.
Recently, the Insurance Regulatory and Development Authority of India (IRDA) allowed Indian insurers to raise additional capital through subordinated debt of preference shares.These instruments qualify as capital. Says Mr Pawan Agrawal, Chief Analytical Officer, CRISIL Ratings.
This development will structurally strengthen the insurance sector in India by improving their capital base and enable them to access other forms of capital apart from equity.
Eventually, this will contribute towards increasing penetration of insurance in the country.
By rating India’s first hybrid issuance in the insurance sector, CRISIL underscores its continued commitment towards making markets function better and enabling innovation in the Indian debt market.
Such innovations promote increased diversity of issuers which is essential for the development of corporate bond markets in our country.
CRISIL also released its rating criteria for hybrid instruments issued by insurers, the first of its kind in India. CRISIL’s ratings on any debt instruments reflect the likelihood of timely interest and principal payments.
For conventional debt instruments, a default situation may arise due to factors such as issuer’s lack of liquidity, losses, etc.
In addition to these risks, hybrid instruments issued by insurers carry additional risks because of restriction on debt servicing if solvency ratio falls below the regulatory stipulation, and the need for regulatory approval for servicing these instruments in the event of loss or inadequate profit.
Says Mr Somasekhar Vemuri, Senior Director, CRISIL Ratings: “CRISIL has developed the rating criteria for hybrid instruments issued by insurers factoring in their unique characteristics.
Our rating methodology entails rigorous evaluation of the financial strength of the insurer along with its ability and commitment to maintain cushion in solvency ratio above the regulatory requirement.