September 28, 2010
Financial Strength Rating AAA/Stable (Reaffirmed)

CRISIL’s financial strength rating on National Insurance Company Ltd (National Insurance) continues to reflect the support National Insurance is likely to receive from its parent, the Government of India’s (GoI). The rating also continues to reflect the company’s established market position, healthy capitalisation, sound asset quality, and comfortable liquidity. These rating strengths are partially offset by pressure on the company’s underwriting profitability, and its modest systems and processes.

CRISIL believes that public sector general insurance companies, including National Insurance, are systemically important and will therefore receive support from GoI. Furthermore, CRISIL believes GoI’s complete ownership puts a moral obligation to support these companies at all times. Also, public sector insurance companies have a dominant aggregate market position in the insurance sector. These companies together had around 61 per cent share in the gross premiums originated in India in 2009-10 (refers to financial year, April 1 to March 31). While competition has intensified in the sector with the entry of new players and de-tariffing in key products, National Insurance, with 13 per cent market share (based on gross premiums originated in India), continued to be among the top four players in the general insurance industry in 2009-10. The company’s extensive track record, wide market reach, automobile and bancassurance tie-ups, and its status as a GoI entity will continue to support its competitive position.

National Insurance has healthy capitalisation, as reflected in its large net worth (adjusted for preliminary expenses) of Rs.15.3 billion as on March 31, 2010. The company’s capital surges up to Rs.95.8 billion if the mark-to-market gains from its investment portfolio (reflected in the fair value change account) are factored in. Its large investment (including loans) portfolio of Rs.145.4 billion (including fair value change account), and its comfortable reserves (more than 300 per cent of the net worth, excluding fair value change over the past six years), as on March 31, 2010, support its capital position. National Insurance’s solvency margin of 1.6 times as on March 31, 2010 remains above the regulatory requirement of 1.5 times. The company’s investments are highly liquid, with ‘AAA’ rated instruments (including 35 per cent in government securities and related instruments) comprising a large part of its debt securities as on March 31, 2010. National Insurance’s equity investments (29 per cent of portfolio on book-value basis) had a market value of 5 times the book value (Rs.99.1 billion) as on March 31, 2010, due to historical holdings and effective churning of large market capitalisation securities.

However, National Insurance’s underwriting performance remains under pressure; underwriting losses of Rs.9.7 billion in 2009-10 remained high despite a reduction from Rs.12.1 billion in 2008-09. Consistent losses in the motor (especially third-party motor pool) and health segments, high operating expense ratios, and inadequate pricing in the fire and engineering segments, as a result of de-tariffing, are the primary factors responsible for these underwriting losses. In line with public sector insurance companies, National Insurance’s combined ratio [net incurred claims ratio (net incurred claims ratio is calculated as a percentage of net premiums earned) plus expense ratio] of 124 per cent in 2009-10, was higher than the industry average of 120 per cent. Nonetheless the company’s combined ratio has improved from 133 per cent in 2008-09. CRISIL believes that the general insurance industry in India will continue to face challenges in sustaining a profitable growth over the medium term, given the increasing market competition after detariffing by the Government of India. In line with other public sector insurance companies, National Insurance’s healthy investment income aided by profit on sale of equity investments, has enabled the company to offset its underwriting losses.

National Insurance continues to be modest in terms of technologically advanced systems and processes. While the company has initiated a project for implementing a centralised information technology platform integrating its systems and procedures, the project is currently running behind schedule, given the complexities involved both in terms of operations and human resources.

Outlook: Stable
CRISIL believes that National Insurance will receive support from GoI, and that the company will maintain its competitive position and healthy capitalisation levels on the back of stable returns from its investment portfolio, over the medium term. However, like all public sector insurance companies, National Insurance is yet to demonstrate its ability to generate underwriting profits. Any significant deterioration in the company’s market position, or a continuation of large underwriting losses, could result in the outlook being revised to ‘Negative’.

About the Company
National Insurance is one of India’s largest non-life insurance company; wholly owned by GoI, it has a track record of more than 100 years. The company has an extensive branch network and operated from 24 regional offices and 1196 branches as of March 31, 2010. It recorded a net profit of Rs.2.3 billion and wrote gross premiums of Rs.46.5 billion in 2009-10 compared to a net loss of Rs.1.5 billion and gross premiums of Rs.43 billion in 2008-09. The company’s gross premiums grew at 8 per cent year-on-year in 2009-10, compared with the industry average of 14 per cent. CRISIL expects National Insurance’s gross premiums to grow at the industry average in 2010-11, mainly driven by growth in its motor and health insurance segments.

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September 28, 2010