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Issue 39, July 16th
General Insurance Company Subordinate Bonds - Should you Invest?
Royal Sundaram General Insurance Subordinate bond is available at attractive yield.
Royal Sundaram General Insurance Subordinate bond is available for Investment at attractive levels. The issuer is rated AA+ stable by CRISIL and it's 10.5% March 2027 maturity subordinate bond is offered at a yield of 9.86%. This bond has a call option where the issuer can call the bond i.e exercise the right to repurchase the bond at face value, in March 2022. Assuming the bond is called, the yield to call is 6.44%. The offer is available on INRBonds Orderbook.
The yield on the bond, whether to maturity in 2027 or call in 2022 is much higher than yields offered on similar rated bonds of similar maturities.
Now, why is this bond yield above normal market levels, does it make it more risky to invest?
Subordinate bonds - Why do they quote above market yields?
Subordinate bonds come in the lowest pecking order if an issuer defaults and settles debt claims of bond investors through a liquidation process or any other process, Also called junior bonds, subordinate bonds are unsecured and have clauses where they are prohibited by regulators to pay interest on the bonds or the principal on maturity if their financial position deteriorates. They can even be written off in extreme circumstances.
Many investors do not invest in subordinate bonds due to its status and this makes the bonds not very liquid. Hence the higher yields on these bonds.
For insurance Companies like Royal Sundaram General Insurance, the key financial ratio is the solvency ratio, and if this falls below 1.5X, the company may not pay interest or principle back if the regulator doest not permit them. The solvency ratio stood at 1.87X as of March 2021 for this insurance company but that's not the only criteria that should go into buying the bond.
Bond investment considerations
While higher solvency ratio is a positive factor for Royal Sundaram General Insurance, the nature of general insurance business is that the loss on claims is more than premium collected. Hence the return on the investment portfolios matters a lot as it makes up for losses. However investments are risky as markets normally move up and down.
The access of capital is more important, as when in a bad year with heavy losses, solvency ratio falls, the management will have to infuse equity. Here the background and stability of promoters are very important.
Look at the details of promoters and financials of Royal Sundaram General Insurance and if it looks strong, then take advantage of the higher yields offered on the bond.
INRBonds Research has a report on Royal Sundaram General Insurance. Click here to access the report.
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