Detailed Rationale

CRISIL Ratings has reaffirmed its ‘CRISIL AA/Stable’ rating on the subordinated debt issue (also known as hybrid instrument) of Cholamandalam MS General Insurance Company Ltd (Chola MS).

 

CRISIL Ratings has also withdrawn its rating on the Rs 100 crore of Subordinated debt (See Annexure 'Details of Rating Withdrawn' for details) on receipt of independent confirmation that the instrument has been redeemed. The Withdrawal is in line with CRISIL Ratings' withdrawal policy.

 

The rating continues to factor in the strong support from the parents: the Murugappa group (60% stake through Cholamandalam Financial Holdings Ltd) and Mitsui Sumitomo Insurance Co Ltd (MSIG; rated 'A+/Stable/A-1' by S&P Global Ratings). The company also benefits from its association with Cholamandalam Investment and Finance Co Ltd (Chola Finance; 'CRISIL AA+/Stable/CRISIL A1+') and has a strong presence in the motor segment.

 

The rating also factors in Chola MS’s adequate capital position, sound risk management practices, and sound investment policies. However, these strengths are partially offset by limited product diversity as the motor segment contributes to majority of gross premium.

 

Chola MS is the ninth largest private player in the general insurance sector of India with a market share of 2.34% (based on sectoral gross direct premium written in India during nine months ended December 31, 2022). Against an industrial growth of 16% over the first nine months of fiscal 2023, the company’s gross direct premium grew at 28%.

 

During the nine months of fiscal 2023, the company reported total claims of 4,22,342 amounting to Rs 2593.07 crore against which the company settled 3,55,317 claims amounting to Rs 1887.01 crore

Analytical Approach

CRISIL Ratings has first assessed the financial strength of Chola MS, which indicates ability to meet policyholder obligations. For arriving at the financial strength rating, CRISIL Ratings has factored in the strong support from the Murugappa group, and the business, financial, and management risk profiles of Chola MS. The subordinated debt instrument is then tested for additional risk factors to determine whether the rating should be the same as, or lower than, the financial strength rating. The extent of cushion that the company intends to maintain in the solvency ratio over and above the regulatory stipulation on a steady-state basis is taken into consideration to arrive at the rating on the subordinated debt instrument. The stance of the Murugappa group on the level of cushion the company would maintain in the solvency ratio on a steady-state basis has also been factored in.

Key Rating Drivers & Detailed Description

Strengths:

* Strong support from the Murugappa group and MSIG

The company receives significant funding, branding, managerial and technical support from the Murugappa group and MSIG. The Murugappa group, that includes Cholamandalam Financial Holdings Ltd, have two common members on board of Chola MS. Both the parents are expected to continue to support the company’s growth plan and contribute to any incremental capital requirement. The Murugappa group is also likely to provide timely capital support in case of distress. Reduction in ownership by the group below a majority holding, or any change in CRISIL Ratings’ view on the group or opinion on Chola MS's strategic importance to the group, will be rating sensitivity factors.

 

* Established presence in the motor segment and growth in other segments expected to remain stable

The company is a sizeable player in the motor segment with a market share of 5.2%, based on motor gross premium written during nine months ended December 2022. Motor segment premium registered a growth of 24% as compared to corresponding period of previous fiscal and amounted to Rs 3,040 crore during nine months ended December 2022 as compared to industry growth of 16%. The company benefits from its association with Chola Finance and is the preferred insurer for nearly 30% of commercial vehicles funded by the latter. Chola MS also benefits from its association with MSIG and has made robust inroads in garnering business from Japanese and Korean automobile companies established in India. Within the motor segment, it focuses on commercial vehicles, which account for nearly 40% of gross premium.

 

The fire segment premium grew by 37% to Rs 494 crore during nine months ended December 31, 2022 as compared to 361 crore in corresponding period of previous fiscal whereas the health segment witnessed growth of 38% on account of continued traction in demand for health insurance products since the pandemic outbreak. The company has also witnessed growth in other niche segments like marine and personal accident. The company has tie ups with large private and public sector banks to expand its presence in the health and personal accident segments as well as commercial lines of business. The company is expected to continue its growth in health segment going forward however it is expected to remain largely focused towards retail segment.

 

* Sound risk management practices, however, moderation in underwriting performance remains monitorable

The company has a comprehensive risk management policy. Its risk management committee discusses and reviews the risks on a quarterly basis and periodically reviews changes in risk categorization both in terms of risk improvement and risk deterioration, as well as emerging risks. During fiscal 2022, the combined ratio for the company increased and stood at 111% driven primarily by increase in commission expenses and operating expenses of the company on account of digitization initiatives taken by the company. During nine months ended December 31, 2022, the combined ratio stood at similar levels at 111%. Resultantly, underwriting deficit for fiscal 2022 increased to Rs 433 crore from Rs 287 crore for the prior fiscal. For nine months ended December 2022, underwriting deficit stood at Rs 475 crore as against a deficit of Rs 315 crore for the corresponding period of previous fiscal. Though, the robust risk management practices will enable the company to maintain operating performance and solvency margin, the ability to improve its underwriting performance will be key monitorable.

 

* Sound investment quality supported by stringent investment policy

The company follows stringent investment strategies and invests in sovereign securities or corporate debt instruments typically rated 'AA' or higher. Investments in equities are kept below 5% of the total investments on book. Liquidity is also comfortable. Government securities accounted for around 67% of the investment portfolio based on book value as on December 31, 2022.

* Adequate capital position

Chola MS reported networth of Rs 2,115 crore as on December 31, 2022 (Rs 1,991 crore as on March 31, 2022). The solvency margin has witnessed improvement over the last 4 quarters and stood at 2.06 times as compared to 1.95 times as on March 31, 2022. The current level of solvency margin is well above stipulated regulatory levels and CRISIL ratings believes that the capital position in the long run will be supported by sound risk management practices and timely, need-based capital infusion by the parent. The management has articulated that it will maintain a high level of cushion in the solvency ratio on a steady-state basis, and the Murugappa group is supportive of this. The ability to maintain solvency ratio at a similar level on a sustained basis remains a key rating sensitivity factor.

 

Weakness:

* Limited diversity in product segments

The motor segment accounts for nearly 69% of gross premium, against an average of ~50% for private insurers. Moreover, the motor third-party segment contributes to 43% of the premium, making the company susceptible to the associated underwriting risks, given the long tail and unlimited exposure. However, it has maintained underwriting performance so far by being selective about asset segments and geographies. Moreover, it clears 80% of claims pertaining to motor third-party through out-of-court settlements, thereby reducing uncertainty of long tail claims exposure. However, the management is focusing on improving product diversity in the retail segment as well as commercial lines of business through associations with large private and public sector banks. The company is gradually expanding its presence in retail health, personal accident, and small and medium enterprise segments through the bancassurance channel. It continues to face intense competition from the public sector and other large private insurers, which have strong distribution networks due to their association with large banks, non-banking financial companies, and dealers of large auto manufacturers. The ability to strengthen its distribution network and increase scale in other retail segments, while keeping cost under control and report underwriting profits, remains a monitorable.

Liquidity: Strong

Liquidity position of Chola MS remains comfortable supported by adequate investments in government securities and liquid mutual funds. Around 97% of the debt investments (including government securities) were in securities rated 'AA' or higher as on December 31, 2022. Liquid investments were Rs 9,309 crore as on December 31, 2022. Government securities accounted for 67% of the debt investment portfolio, based on market value as on December 31, 2022.

Outlook: Stable

CRISIL Ratings believes Chola MS will continue to derive strong financial, branding, and technical support from the parents, both on an ongoing basis and during distress, and maintain high level of cushion in its solvency margin over and above the regulatory minimum. The company will also benefit from its established presence in the motor segment and maintain sound risk management practices and investment quality

Rating Sensitivity factors

Upward factors

• Ability to maintain adequate cushion in solvency ratio above regulatory minimum on sustained basis
• Improvement in product diversity and earnings with return on equity maintained at 15-17%

 

Downward factors

• Decline in solvency margin to below 1.55 times on a sustained basis
• Continued moderation in underwriting performance, leading to an adverse impact on profitability
• Sizeable reduction in ownership by, or strategic importance to, the Murugappa group

About the Company

Chola MS is a joint venture of the Murugappa group and MSIG. The company has a large presence in the motor segment with overall market share 5.3% based on gross premium written during nine months ended December 2022.

 

Chola MS had a profit after tax of Rs 77 crore on gross written premiums of Rs 4,824 crore in fiscal 2022, against profit after tax of Rs 282 crore on gross written premiums of Rs 4,388 crore in the previous fiscal. For nine months ended December 2022, the company reported profit after tax of Rs 116 crore on gross written premium of Rs 4,389 crore.

Any other information: Not applicable