| HDFC ERGO General Insurance Company Limited | ||||||
| 'CRISIL AAA/Stable' assigned to Subordinated Debt | ||||||
| Rating Action | ||||||
| ||||||
| 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 375 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.
The rating continues to centrally factor in the strategic importance to, and continued strong support that HDFC ERGO receives from its domestic parent, Housing Development Finance Corporation Ltd (HDFC, rated ‘CRISIL AAA/FAAA/Stable/CRISIL A1+’), both on an ongoing basis and in the event of distress; additionally bolstered by the flexibility available to HDFC as a non-bank to infuse capital in times of requirement at considerably short notice, if needed.
The rating also reflects CRISIL’s 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 and applies to the merged entity. 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 2021, the company underwrote Rs 12,295 crore as gross direct premiums, indicating annual growth of 28% over the past year which was driven by its acquisition of HDFC ERGO Health Insurance Company Ltd (HEHI, erstwhile Apollo Munich Health Insurance Company Ltd). At industry level, slowdown after the first wave of the Covid-19 pandemic was most evident in the motor segment, which constitutes over one-third of the overall sectoral premium. Industry’s gross premiums from the motor segment declined by 1.68% during fiscal 2021.However, a healthy traction was observed in the health and fire business. HDFC ERGO, owing to the acquisition of HEHI’s portfolio (100% health insurance), registered a 189% in the health insurance premiums in fiscal 2021. Fire and motor premiums also grew at 20.0% and 0.5%, respectively, during the year.
In fiscal 2021, the company incurred about Rs 583 crore of Covid-19 claims including IBNR. However, its impact was offset by lower claims for non-Covid illnesses and casualties and other accidents, due to restricted public activity and vehicular traffic. Therefore, claims ratio for the year stood at 75.7% as compared to 79.2% for the previous fiscal.
Subsequent to the second wave, which witnessed higher severity and frequency of casualties, and with penetration of health insurance having increased in the past year, total Covid-19 claims reported and honoured in the first quarter of fiscal 2022 were almost equivalent to the Covid-19 claims incurred in fiscal 2021. As against Rs 7,832 crore of Covid-19 claims settled by the non-life insurance industry in fiscal 2021, claims incurred in the first quarter of fiscal 2022 amounted to Rs 7,768 crore. The company had incurred Rs 624.2 crore worth of Covid-19 claims (including IBNR) in the first quarter of fiscal 2022, which accounted for 41.9% of the total claims incurred by the company during the quarter. This resulted in the overall claims ratio for Q1 2022 surging to 95.1% against 67.9% reported for the corresponding quarter of the previous fiscal. Accredited to this surge in Covid-19 claims, the company reported an underwriting deficit of Rs 324 crore for Q1 2022, as against an underwriting surplus of Rs 70.8 crore for Q1 2021. Resultantly, for the first quarter of fiscal 2022, the company reported a net loss of Rs 36 crore as against a profit of Rs 235 crore for Q1 2021. While the instances of Covid-19 claims have been declining since June 2021, 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.
Considering the elevated loss ratio with higher coverage of Covid-19 products, an upward revision in health policy prices may be in order so as to adequately factor in the increased risks. Alternatively, the prices for regular indemnity products in the health segment may also increase in the long term based on the trend in loss ratio for the segment.
In fiscal 2022, growth in industry’s new business premiums for larger segments such as motor insurance may remain subdued as revival in sales volumes in the automobile sector will be gradual once the lockdowns across states are lifted. Renewal premiums for the retail segment may decline on account of job losses and pay cuts. For the health segment, which is the second-largest after motor insurance, CRISIL Ratings believes growth prospects are strong on account of increased awareness and demand for multiple covers. In a scenario where pricing of Covid-19 policies is revised upwards, growth in this segment will be higher than that of the past fiscal. However, with the increasing ticket size of Covid-19 claims, the impact of actual losses borne by the insurers after the second wave on their underwriting performance and capital and solvency position remains to be seen |
Analytical Approach For arriving at the rating on the subordinated debt issue of HDFC ERGO, CRISIL has first assessed the corporate credit rating of the company. CRISIL 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/FAAA/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).
Sizable reduction in ownership by HDFC, or any change in CRISIL Ratings' view on HDFC or in its opinion on HDFC ERGO's strategic importance to HDFC, will remain rating sensitivity factors.
HDFC ERGO, having been in operations for close to two decades now, has a strong market position with a market share of 6.19% based on the gross direct premium written during fiscal 2021 – which makes it the third largest private general insurer and, seventh largest at an overall level. The company’s gross direct premium for fiscal 2021 was Rs 12,295 crore which includes the effect of amalgamation with HEHI and marks a rise of 28% over gross premiums written in the preceding fiscal. For Q1 2022, the year on year growth in gross premiums was 20%.
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 which was bolstered by the established distribution network of the former. And now, post amalgamation with HEHI, 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 Q1 2022, the share of health insurance stood at 36.2% as against its share of below 20% prior to amalgamation with HEHI. This increase in share of health portfolio in line with CRISIL Ratings’ earlier expectations. Motor, as the second largest segment, formed 26.4% of the total premiums followed by fire, which accounted for 18.9% and has emerged as one of the key segments after a favorable revision in rates w.e.f January 2020 which has catalyzed growth in this segment across the sector. The share of crop segment was 1.9% in the total premiums written during Q1 2022 however, since premium inflow within this segment happens in the latter half of the fiscal, its share is expected to remain at ~20% levels.
HDFC ERGO also has a strong distribution network supported by its association with HDFC group, and channel relations acquired through inorganic routes. Nearly one-third of business is sourced by corporate agents as against one tenth 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 June 30, 2021, 99.4% 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 44% (central and state) of its investment portfolio based on market value on June 30, 2021. The company’s conservative investment philosophy is also depicted by its low exposure of 3% to equity investments and, the steady state stance of maintaining equity exposure within 5%.
Capitalisation, in relation to the nature and scale of the company’s operations, remains comfortable. On June 30, 2021, the company had a reported networth of Rs 3,208 crore (networth excluding Amalgamation reserve stood at Rs 2,908 crore) and, a solvency ratio of 1.69 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 2021, the company reported a combined ratio of 103.2% as compared to 105.2% for the previous fiscal. Over this period, while the claims ratio improved to 75.7% from 79.2%, expense ratio increased marginally to 27.5% from 26.0% owing to amalgamation related expenses incurred during the year. Underwriting deficit for fiscal 2021 was Rs 235 crore as compared to Rs 342 crore for the previous fiscal. During fiscal 2021, the total Covid-19 claims (including IBNR) incurred by the company were Rs 583 crore. These Covid-19 claims incurred by the company were majorly against its traditional medi-claim policies. However, since claims for non-Covid illnesses and casualties and other accidents were lower because of restricted public activity and vehicular traffic, overall claims ratio remained within the regular range.
Subsequent to the second wave, which witnessed higher severity and frequency of casualties, and with penetration of health insurance having increased in the past year, total Covid-19 claims reported and honoured in the first quarter of fiscal 2022 were almost equivalent to the Covid-19 claims incurred in fiscal 2021. As against Rs 7,832 crore of Covid-19 claims settled by the non-life insurance industry in fiscal 2021, claims incurred in the first quarter of fiscal 2022 amounted to Rs 7,768 crore. HDFC ERGO has incurred Rs 624 crore worth of Covid-19 claims in the first quarter of fiscal 2022, which accounted for 41.9% of the total claims incurred by the company during the quarter. Of this, ~Rs 425 crore worth of claims have been indemnified whereas, balance are carried as IBNR. This surge in Covid claims during the quarter resulted in an elevated overall claims ratio of 95.1% for the quarter, against 67.9% for the corresponding quarter of last fiscal. Correspondingly, the underwriting deficit for Q1 2022 was higher Rs 323.7 crore.
Overall profitability remains supported by income from investments. For fiscal 2021, the impact of modest underwriting performance was offset by a gross investment income of Rs 1140 crore, resulting in a net profit of Rs 591.7 crore. However, for Q1 2022, despite a stable investment income of Rs 298.2 crore, the moderation in underwriting performance due to high Covid-19 claims resulted in a net loss of Rs 35.5 crore for the quarter.
While the instances of Covid-19 claims have been declining since June 2021, 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 substantial base of highly liquid investments in the form of ' G-Secs (44%; both Central and State government securities) based on carrying value and liquid mutual funds (5%). 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 claims liability, the company typically maintains a buffer (surplus) of ~3-4% over claims incurred in any accident and this philosophy is expected to continue. |
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 2020). 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 171 cities with 203 branch offices, with an employee base of 6524 (full time employees) as of June 2021professionals. |
Key Financial Indicators
^excluding amalgamation reserve | |||||||||||||||||||||||||||||||||||
Any other information: Not applicable |
| Note on complexity levels of the rated instrument: CRISIL Ratings' complexity levels are assigned to various types of financial instruments. The CRISIL Ratings' complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL Ratings' complexity levels for instruments that they consider for investment. Users may also call the Customer Service Helpdesk with queries on specific instruments. |
Annexure - Details of Instrument(s)
*HDFC ERGO has a call option exercisable 5 years after the date of allotment ^Yet to be issued |
| Annexure - Rating History for last 3 Years | ||||||||||||||||||||||||||||||||||||||||||||||||||||
|
||||||||||||||||||||||||||||||||||||||||||||||||||||
| All amounts are in Rs.Cr. | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Criteria Details
|