| HDFC ERGO General Insurance Company Limited | ||||||||
| 'CRISIL AAA/Stable' assigned to Subordinated Debt | ||||||||
| Rating Action | ||||||||
| ||||||||
| Note: None of the Directors on CRISIL Ratings Limited’s Board are members of rating committee and thus do not participate in discussion or assignment of any ratings. The Board of Directors also does not discuss any ratings at its meetings. | ||||||||
| 1 crore = 10 million | ||||||||
| Refer to Annexure for Details of Instruments & Bank Facilities |
Detailed Rationale CRISIL Ratings has assigned its ‘CRISIL AAA/Stable’ rating to Rs 300 crore proposed subordinated debt issuance of HDFC ERGO General Insurance Company Limited (HDFC ERGO) and, has reaffirmed its ‘CRISIL AAA/Stable’ rating on existing debt instruments of the company.
CRISIL Ratings has also withdrawn its rating on Rs 80 crore (please refer Annexure - Detail of Rating withdrawn table) subordinated debt instrument of the company which has been fully redeemed by the company consequent to exercise of call option. This withdrawal is in line with CRISIL Ratings’ withdrawal policy.
The rating continues to centrally factor in the strategic importance to, and continued strong support that HDFC ERGO receives from its majority owner, Housing Development Finance Corporation Ltd (HDFC, rated ‘CRISIL AAA/Stable/CRISIL A1+’), both on an ongoing basis and in the event of distress.
On April 4th, 2022, the Board of Directors of HDFC and HDFC Bank respectively approved a composite scheme of amalgamation (“Scheme”) inter alia involving merger of HDFC with and into HDFC Bank subject to receipt of requisite approvals/ no objections including from Reserve Bank of India (RBI) and other statutory and regulatory authorities. Post the merger amalgamation becoming effective, HDFC Bank will hold the shares held by HDFC in the Company. The developments pertaining to this amalgamation and, the ultimate shareholding of HDFC Bank in HDFC ERGO subsequent to the scheme coming into effect, will remain a key monitorable.
The rating also reflects CRISIL Ratings’ expectation and HDFC ERGO’s intent and track record of maintaining a comfortable level of cushion in solvency ratio above regulatory minimum and in available solvency margin over economic capital requirement (capital requirement as per Pillar I of Solvency II global framework, as required to be computed by Indian insurers based on guidelines provided by the Insurance Regulatory Development Authority of India). This stance remains unchanged. The extent of surplus in solvency is a critical determinant of the insurer’s ability to service subordinated debt and thus remains a key rating sensitivity factor. This is because these instruments carry additional risks owing to restrictions on their servicing if solvency ratio falls below the regulator-specified minimum, and the need to obtain the regulator’s approval for servicing them in the event of loss or inadequate profit. The solvency ratio of HDFC ERGO has exhibited less volatility than that of its peers due to its policy of raising capital ahead of anticipated growth and a higher percentage of reinsurance.
The rating of ‘CRISIL AAA/Stable’ on the subordinated debt issue of HDFC ERGO also factors in HDFC ERGO's established market position with diversified distribution network, robust risk management practices, sound investment quality and modest underwriting performance with overall earnings profile remaining driven by investment income. In fiscal 2022, the company underwrote Rs 13,498 crore as gross direct premiums, marking an annual growth of 10% over the past year as against a growth of 11% in industry gross direct premium over the same period. For the first half of fiscal 2023, the company underwrote Rs 8002 crore, registering a year-on-year growth of 22.6% (non-annualised).
In terms of underwriting performance, the company incurred a claims ratio of 84.0% during fiscal 2022 as against a claims ratio of 75.7% for the previous fiscal. The elevation of loss ratio for the fiscal was attributed to heightened Covid-19 claims following the second pandemic wave. Correspondingly, the expense ratio corrected to 23.4% for fiscal 2022 from 27.5% for the previous fiscal when the company incurred one-time amalgamation related expenses. Overall combined ratio for fiscal 2022 was 107.5% (103.2% for fiscal 2021) which corresponded to an underwriting deficit of Rs 568 crore (Rs 235 crore for fiscal 2021). With reduction in Covid-19 instances, claims ratio has corrected over the first half of fiscal 2023 – and this metric stood at 79.2% whereas the combined ratio for the half year was 103.5% |
Analytical Approach For arriving at the rating on the subordinated debt issue of HDFC ERGO, CRISIL Ratings has first assessed the corporate credit rating of the company. CRISIL Ratings has factored in HDFC ERGO's business, financial, and management risk profile and the company's strategic importance to, and expectation of strong support from, Housing Development Finance Corporation Ltd (HDFC; rated 'CRISIL AAA/Stable/CRISIL A1+’) - for arriving at the corporate credit rating. The extent of cushion that HDFC ERGO intends to maintain in the solvency ratio over and above the regulatory stipulation on a steady state basis is taken into consideration for arriving at the rating on the subordinated debt instrument. The stance of the HDFC on the level of cushion HDFC ERGO would maintain in the solvency ratio on a steady state basis, has also been factored in. |
Key Rating Drivers & Detailed Description Strengths:
HDFC ERGO is strategically important to its parents, HDFC and ERGO International AG (the primary insurance entity of Munich Reinsurance group) and derives significant managerial and funding support from them. Strong managerial support from HDFC is reflected in its sizeable representation on HDFC ERGO’s board, commonality of chairman and its strong involvement in HDFC ERGO’s functioning. ERGO International AG also has two non-executive directors on HDFC ERGO’s board and provides technical support, if needed. Both the parents have also demonstrated timely financial support, whenever needed. HDFC ERGO also benefits from common branding with HDFC, which is the largest housing finance company in India with a strong retail presence, solid brand image, established franchise, and large customer base. CRISIL Ratings believes that both parent companies will continue to support HDFC ERGO’s growth plans and will contribute to any incremental capital requirement whenever needed.
HDFC ERGO’s strategic importance to HDFC is underpinned by the former’s strong market position and expectation of gradual improvement in its underwriting profitability over the medium term. Furthermore, HDFC ERGO being the general insurance arm of HDFC group makes it a key element of the latter’s suit of financial service offerings. The strategic importance of HDFC ERGO to HDFC is also reflective in the support extended by the latter in the inorganic expansion of the subsidiary through acquisition of HDFC ERGO Health Insurance Company Ltd (HEHI; erstwhile Apollo Munich Health Insurance Company Ltd).
On April 4th, 2022, the Board of Directors of HDFC and HDFC Bank respectively approved a composite scheme of amalgamation (“Scheme”) inter alia involving merger of HDFC with and into HDFC Bank subject to receipt of requisite approvals/ no objections including from Reserve Bank of India (RBI) and other statutory and regulatory authorities. Post the merger amalgamation becoming effective, HDFC Bank will hold the shares held by HDFC Ltd in the Company. The developments pertaining to this amalgamation and, the ultimate shareholding of HDFC Bank in HDFC ERGO subsequent to the scheme coming into effect, will remain a key monitorable.
HDFC ERGO, having been in operations for close to two decades now, has a strong market position with a market share of 6.1% % based on the gross direct premium written during fiscal 2022 – which makes it the third largest private general insurer and, seventh largest at an overall level. The company’s gross direct premium for fiscal 2022 was Rs 13,498 crore which marks a rise of 10% over gross premiums written in the preceding fiscal. For H1 2023, the year-on-year growth in gross premiums was 22.6%.
In the last 3-5 years, the company has expanded inorganically which has strengthened its market position within key insurance segments like motor and health. After its reverse merger with HDFC General (erstwhile L&T General Insurance Company Ltd), HDFC ERGO’s position in the motor segment was bolstered by the established distribution network of the former. And subsequently, post amalgamation of HEHI with HDFC ERGO, HDFC ERGO’s agency channel has widened which would benefit its market position in the health insurance segment in the long run. In terms of portfolio mix, health, motor, fire and crop have remained the key focus areas. Based on the gross direct premiums for H1 2023, the share of health insurance stood at 27.5% as against its share of below 20% prior to amalgamation with HEHI. This increase in share of health portfolio is in line with CRISIL Ratings’ earlier expectations. Motor, as the second largest segment, formed 25.5% % of the total premiums followed by fire, which accounted for 12.5% and has emerged as one of the key segments after a favourable revision in rates w.e.f January 2020 which has catalysed growth in this segment across the sector. The share of crop segment was 21.5% in the total premiums written during H1 2023. Since premium inflow within this segment happens in the latter half of the fiscal, its share is expected to remain at similar levels for rest of the fiscal.
HDFC ERGO also has a strong distribution network supported by its association with HDFC group, and channel relations acquired through inorganic routes. For H1 2023 nearly 14% % of business is sourced by corporate agents as against 10% for most other large players in the industry. This reduces dependency on brokers and direct mode of origination.
CRISIL Ratings believes that HDFC ERGO shall sustain its market position in due course supported by its diversified portfolio and distribution network. However, its ability to sustain the momentum in growth, apart from the inorganic expansion that it undertakes, amid intense competition will remain a key rating sensitivity factor.
HDFC ERGO has institutionalized a comprehensive risk management framework to identify, assess and monitor risks. Apart from insurance risk, the risk management framework also addresses strategic risks, operational risks, investment risks and information and cyber security risks. The company undertakes only those businesses where risks can be measured quantitatively. Moreover, a large proportion of the exposure is reinsured, thereby limiting the risks on books. The company also has a diversified panel of reinsurers, all rated ‘BBB+’ or above on international rating scale. The company, on average, retains 50-55% of its business, which is significantly lower than peers.
These practices have enabled the company to maintain adequate level of cushion in available solvency margin over and above the economic capital requirement and, have also ensured lesser volatility in the solvency margin of the company over the years, as compared to that exhibited by its peers. Over the medium term, the company’s robust risk management practices are expected support the sustenance in its operating performance.
HDFC ERGO also has a sound investment portfolio quality supported by its prudent investment policy and stringent regulations. As on September 30, 2022, 99.7% of its debt investments are in securities rated ‘AA’ or higher or are sovereign securities. In addition, liquidity is comfortable, with a large proportion of liquid investments. Government securities (G-secs) accounted for 46% (central and state) of its investment portfolio based on market value on September 30, 2022. The company’s conservative investment philosophy is also depicted by its low exposure of less than 6% to equity investments and, the steady state stance of maintaining equity exposure within 10%.
Capitalisation, in relation to the nature and scale of the company’s operations, remains comfortable. On September 30, 2022, the company had a reported networth of Rs 3,533 crore (excluding amalgamation reserves) and a solvency ratio of 1.78 times. Apart from its reported metrics, capital position of HDFC ERGO is backed by expectation of timely capital infusion from its parents, if needed, as demonstrated in the past.
CRISIL Ratings believes HDFC ERGO’s capital position will remain adequate, supported by opportune financial support from its parents and steady internal accruals. The company is also expected to sustain the cushion over and above regulatory solvency requirement at current levels, on an on-going basis.
Weakness:
HDFC ERGO’s underwriting performance, despite gradual improvement over the years, remains modest. For fiscal 2022, the company reported a combined ratio of 107.5% as compared to 103.2% for the previous fiscal. Over this period, where the claims ratio increased to 84.0% from 75.7% due to surge in Covid-19 claims, expense ratio restored to 23.4% from 27.5% as last year the company incurred amalgamation related expenses which led to a rise in expenses. Underwriting deficit for fiscal 2022 was Rs 568 crore as compared to Rs 235 crore for the previous fiscal. For fiscal 2021 and 2022, Covid-19 claims were on the higher side which resulted in an elevated claims ratio especially after the second wave in fiscal 2022. However, as the Covid instances have tailed out – claims ratio is expected to correct in the near term. As prudence, the company is still carrying provisions to the tune of 3-5% of the indemnity portfolio which is expected to take care of any incremental Covid related claims that may be incurred. For H1 2023, claims ratio stood at 79.2% as against 88.8% for the corresponding half of the previous fiscal. The correction was driven by decline in Covid-19 claims which drove the delta in the last period. Correspondingly, expense ratio increased from 24.2% % to 24.4%.
Overall profitability remains supported by income from investments. For fiscal 2022, the impact of modest underwriting performance was offset by a gross investment income of Rs 1,239 crore, resulting in a net profit of Rs 500 crore. For H1 2023 as well, a stable investment income of Rs 692 crore and a reduced underwriting deficit of Rs 227 crore, resulted in a net profit of Rs 321 crore for the period.
The adequacy of reserving done by the company against potential Covid-19 claims which are incurred but not reported or are partially reported, will remain a monitorable. |
Liquidity: Superior The company’s liquidity position is comfortable, with a base of highly liquid investments in the form of - G-Secs (46%; both Central and State government securities) based on carrying value and liquid mutual funds (0.2%). Apart from these, the company has various other routes to avail short term funding if needed. Additionally, the company maintains adequate reserving for claims outstanding at all points in time. In terms of reserving against Covid claims liability, the company has maintained an estimated buffer (surplus) of ~3-4% over claims incurred in lieu of underlying Covid liability. |
Outlook: Stable CRISIL Ratings believes that HDFC ERGO will continue to derive strong financial and managerial support from its parents over the medium term, both on an ongoing basis and in the event of a financial distress, and that it will maintain comfortable level of cushion in its solvency ratio over and above regulatory minimum on a steady-state basis. HDFC ERGO will also remain a major player in the Indian general insurance industry and maintain its robust risk management practices, and sound investment quality. The company will also continue with its policy of raising capital ahead of anticipated growth through frequent infusions and, reinsuring a significant proportion of its business on an on-going basis, which should help maintain a comfortable cushion in its available solvency margin over economic capital requirement at all points in time. |
Rating Sensitivity factors Downward factors:
|
About the Company Incorporated in 2002, HDFC ERGO is one of India’s largest private sector general insurance companies (based on gross premiums written in fiscal 2022). It is a joint venture between HDFC (India’s premier housing finance institution) and ERGO International AG. It offers a complete range of general insurance products ranging from motor, health, travel, home and personal accident on the retail side and property, marine and liability insurance on the corporate side. The company has been expanding its presence across the country and is today present across 90+ cities with 207 branch offices, with an employee base of 9586 (full time employees) as of September 2022. |
Key Financial Indicators
^excluding amalgamation reserve
^excluding amalgamation reserve | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Any other information: Not applicable |
Note on complexity levels of the rated instrument: |
Annexure - Details of Instrument(s)
^Yet to be issued *HDFC ERGO has a call option exercisable 5 years after the date of allotment and every year thereafter
Annexure - Details of Rating Withdrawal
*HDFC ERGO has a call option exercisable 5 years after the date of allotment |
| Annexure - Rating History for last 3 Years | ||||||||||||||||||||||||||||||||||||||||||||||||||||
|
||||||||||||||||||||||||||||||||||||||||||||||||||||
| All amounts are in Rs.Cr. | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Criteria Details
|