Detailed Rationale

CRISIL Ratings has assigned its 'CRISIL AA/Stable' rating to the Rs.75 crore subordinated debt instrument of Magma HDI General Insurance Company Ltd (Magma HDI) and reaffirmed its rating on existing subordinated debt.

 

The rating centrally factors in the strategic importance of Magma HDI to, and expectation of strong support from, its majority shareholder, Sanoti Properties LLP (Sanoti Properties). Sanoti Properties is significantly held by Mr. Adar Poonawalla (90%) and Rising Sun Holdings Private Limited (RSHPL) (10%). Mr. Adar Poonawalla is CEO of Cyrus Poonawalla group of companies. Furthermore, during the previous years, the group, including Serum Institute of India Pvt Ltd (SIIPL; ‘CRISIL AAA/Stable/CRISIL A1+’), has invested substantial funds in RSHPL. This capital was used to infuse funds into financial services and various businesses of the group.

 

The rating also reflects the adequate capitalisation of Magma HDI and CRISIL Ratings' expectation that Magma HDI will maintain a comfortable level of cushion in its solvency ratio above the regulator-specified minimum on a steady-state basis. The extent of the solvency surplus is a critical determinant of the insurer's ability to service subordinated debt. This is because these instruments carry additional risks owing to restrictions on their servicing if the solvency ratio falls below the regulator-specified minimum, and regulatory approval is needed for their servicing in case of loss or inadequate profit. The parent company’s stance to support Magma HDI in maintaining the solvency ratio comfortably above the regulatory requirement has also been factored into the rating. The business risk profile is also supported by the company’s stable investment portfolio.

 

The rating strengths are partially offset by small scale of operations with limited, though increasing, diversity in the portfolio, and modest underwriting performance constraining the earnings.

 

The rating on the hybrid instrument is also centrally based on the approval by the Insurance Regulatory and Development Authority of India (IRDAI) to Magma HDI, as allowed under provision 5(iii) of the Insurance Regulatory and Development Authority of India (Other Forms of Capital) Regulations, 2022, for this specific proposed subordinated debt issue of Rs 75 crore and the previously rated instrument of Rs 250 crore. As and when received from the regulator, the approval allows the company to make interest or coupon payments to investors for the period for which it has been received, irrespective of reported losses. Previously, the company has sought similar regulatory approvals for interest payment on its existing hybrid debt of Rs 100 crore issued in March 2022.

Analytical Approach

CRISIL Ratings has first assessed the corporate credit rating of Magma HDI, which is an indication of the company's ability to meet obligations to policy holders. For arriving at the corporate credit rating, CRISIL Ratings has assessed the standalone business, financial and management risk profiles of Magma HDI, and then factored in the strategic importance of the company to, and expectation of strong support from, its majority shareholder, Sanoti Properties LLP (Sanoti Properties). Sanoti Properties is significantly held by Mr. Adar Poonawalla (90%) and Rising Sun Holdings Private Limited (RSHPL) (10%). Mr. Adar Poonawalla is CEO of Cyrus Poonawalla group of companies. Furthermore, during the previous years, the group, including Serum Institute of India Pvt Ltd (SIIPL; ‘CRISIL AAA/Stable/CRISIL A1+’) have invested substantial funds in RSHPL. This capital was used to infuse funds into financial services and various businesses of the group.

 

The subordinated debt instrument has then been assessed for additional risks to determine whether its rating should be the same as, or lower than, the corporate credit rating. The extent of cushion that Magma HDI intends to maintain over and above the regulatory stipulation on a steady state basis has been considered. The parent’s stance to support Magma HDI in maintaining a solvency ratio comfortably above the regulatory requirement has also been factored into the rating.

Key Rating Drivers & Detailed Description

Strengths:

Expectation of continued strategic importance to, and strong support from, parent

As on December 31, 2023, Sanoti Properties held 74.5% stake in Magma HDI. Sanoti Properties is jointly held by Adar Poonawalla (90%) and Rising Sun Holdings Pvt Ltd (RSHPL; 10%).

 

Other key shareholders in Magma HDI are Celica Developers Pvt Ltd (Celica), Jaguar Advisory Services Pvt Ltd and (Jaguar). Before Sanoti Properties came in as a shareholder (fiscal 2023), Poonawalla Fincorp Ltd (PFL), the non-banking financial company (NBFC) promoted by the Poonawalla family, held a majority stake in Magma HDI. Magma HDI derives funding support and strategic oversight from the parent, as indicated by cumulative capital infusion of ~Rs 1,350 crore since inception. Sanoti Properties infused Rs 734 crore into Magma HDI in fiscal 2023 and Rs 181 crore in the first quarter of fiscal 2024. Resultantly, the stake of Sanoti Properties increased from 55.4% in June 2022 to 64.7% in June 2023. The shareholding of Sanoti Properties has further increased to ~74.5% by virtue of secondary acquisition of 9.9% stake from HDI Global SE. Incrementally, the company has also on-boarded Mr. Keki Mistry as an investor with ~2% stake in the company. Given the high strategic importance of Magma HDI and the parent’s intent of maintaining majority shareholding on a steady state basis, the company will continue to receive strong financial and strategic support.

 

Adequate capitalisation and expectation of high level of cushion in solvency over regulatory stipulation

The capital position remains adequate as reflected in reported networth of Rs 969.16 crore as on December 31, 2023, supported by cumulative capital infusion of Rs 915 crore since fiscal 2023. The equity infusion improved the solvency ratio to 2.10 times as on March 31, 2023, and to 2.11 times as on December 31, 2023, from 1.76 times as on March 31, 2022. The solvency ratio was also supported by tranches of Rs 100 crore and Rs 200 crore raised as subordinated debt in fiscals 2023 and 2024, respectively.

 

The buffer in the solvency ratio will support the company’s medium-term business strategy of scaling up the health insurance and corporate insurance portfolios by ramping up its distribution network. The company may raise more equity in the near term, which will enhance its solvency ratio. The solvency position has been above the regulatory stipulation of 1.5 times over the years, and will remain comfortably so over the medium term, with the parent being supportive of this stance. The cushion is crucial, given the likelihood of default in the subordinated debt instrument if the solvency ratio falls below the stipulated minimum.

 

Sound investment quality

100% of the company's debt investments as on December 31, 2023, were in sovereign securities or corporate debt instruments rated 'AA' or better. Moreover, a large proportion of liquid investments bolsters its liquidity profile. Government securities (G-secs), both state and central, accounted for 47.3% of the investment book as on December 31, 2023. Since inception, the company has seen two account exposures slip into non-performing assets (NPAs), but both were fully written off. Magma HDI will maintain its sound investment portfolio, given its prudent investment policy and stringent regulatory guidelines.

 

Weaknesses:

Small scale of operations with limited, though increasing, diversification

Magma HDI is a small player in the Indian general insurance sector with market share below 1% until fiscal 2023. The size of operations continues to remain modest with gross direct premium (GDP) of Rs 2534 crore for fiscal 2023 as against Rs 1757 crore in previous fiscal.

 

While the company has started diversifying gradually, its portfolio mix remains skewed towards motor insurance. Until March 2023, motor insurance constituted over 73% of the gross direct premiums, followed by health insurance (~10%). However, the concentration has started to reduce, with motor insurance forming 69% of the gross direct premiums in the nine months period of fiscal 2024, and the share of health and commercial segments rising to 18% and 13%, respectively. This was catalyzed by the company’s initiatives to reduce concentration as well as favourable macro growth prospects in the health and commercial segments and receipt of fresh equity capital from the parent.

 

The scale of operations is expected to remain small over the medium term as growth and diversification will happen gradually and organically, along with the development of bancassurance and agency channels and improvement in in-house underwriting practices.

 

Modest underwriting performance resulting in weak profitability

The company’s underwriting performance and profitability have remained modest. It reported an underwriting deficit of Rs 574 crore translating to a combined ratio of 123.8% for fiscal 2023, compared with an underwriting loss of Rs 262 crore and combined ratio of 117.5% for the previous fiscal. While the claims ratio remains at par with close peers, the elevated expense ratio of Magma HDI has been the key constraint for its operating performance. For fiscal 2023, the company reported a claims ratio of 72.6% (68.6% for fiscal 2022) alongside a high operating expense ratio of 47.3% (50.8%). In this regard, the negative commission ratio, resulting from low retention of risks on the book, has been of marginal benefit. With upward revision in reinsurance rates by global reinsurers post pandemic and less ceding in motor quota treaty, the retention ratio of Magma HDI has increased, leading to a corresponding increase in its commission ratio to 3.9% for fiscal 2023 from net negative in the past.

 

The loss ratio for the nine months period of fiscal 2024 increased to 80.0% from 69.8% for the corresponding of the previous fiscal, owing to steeper losses in the increased health insurance segment. The overall combined ratio, however, improved to 117.3% from 123.1%, driven by reduction in expense ratio. Underwriting loss for the nine months period was Rs 445 crore compared with Rs 376 crore for the corresponding period of fiscal 2023.

 

Earnings remain constrained due to upfronting of expenses resulting in weak underwriting performance and, largely comprise income from investments. The RoE has historically been below 5% and the company incurred losses for fiscals 2022 and 2023. The net loss of Rs 287 crore for fiscal 2023 factored in the investment income of Rs 301 crore (net loss of Rs 12 crore and investment income of Rs 233 crore for fiscal 2022). The company reported a net loss of Rs 73 crore for nine months ended December 31, 2023 as compared with Rs 238 crore of loss reported for the corresponding period of fiscal 2023. While the underwriting performance has started to stabilise, it will improve only gradually over the long term, thereby constraining profitability. Thus, the company will continue incurring losses over the medium term. In lieu of the expected losses, it intends to seek approval  from IRDAI under clause 5 (iii) of the Insurance Regulatory and Development Authority of India (Other Forms of Capital) Regulations, 2022 for honouring obligation pertaining to its subordinated debt issuance.

Liquidity: Strong

The company’s liquidity position is comfortable, backed by highly liquid investments in the form of G-Secs (49% of the total investment portfolio on book value). Additionally, the company maintains adequate reserve for claims outstanding at all points in time.

Outlook: Stable

Magma HDI will continue to derive strong financial and managerial support from its parent, both on an ongoing basis and during financial distress. The company will maintain comfortable cushion in its solvency ratio, backed by healthy capitalisation and sound investment portfolio. However, profitability will remain constrained by high underwriting losses.

Rating Sensitivity factors

Upward factors

• Significant increase in strategic importance, reflected in brand sharing of, Magma HDI to the parent and related entities, and substantial increase in ownership of the parent and related entities in Magma HDI
• Significant improvement in market position and sustained improvement in profitability, with combined ratio improving to and remaining below 105%

 

Downward factors

• Decline in steady state solvency ratio below 1.7 times.
• Substantial increase in underwriting losses, adversely impacting earnings Decline in support from, or in strategic importance to, the parent and related entities, or material change in shareholding in Magma HDI or in any downward revision in CRISIL Ratings’ view on the parent and related entities.   

About the Company

Magma HDI was incorporated in 2009 as a joint venture between PFL (erstwhile Magma Fincorp Ltd), HDI Global SE Germany, Celica Developers Private Limited (Celica) and Jaguar Advisory Services (Jaguar)

 

In fiscal 2023, Sanoti Properties bought the entire stake of PFL (23.2%) and SIIPL (9.9%). This change in shareholding was because of the Reserve Bank of India (RBI) and IRDAI stipulations, which cap the shareholding of NBFCs in an insurance company at 50% and state that the holding company of an insurance company cannot be a subsidiary.

 

As on December 31, 2023, Sanoti Properties held 74.5% stake in Magma HDI, with Celica, Jaguar and being the other key stakeholders.

 

Magma HDI offers a wide range of retail and commercial general insurance products and operates in three lines of business: motor insurance (69% of gross direct premiums), health insurance (18%) and commercial insurance (13%), which includes fire insurance (around 10%). The company has a pan-India presence with 97 branches in different cities.

Any other information: Not Applicable

Annexure - Details of Instrument(s)

ISIN	Name of instrument	Date of allotment	Coupon rate (%)	Maturity date	Issue size (Rs.Crore)	Complexity	Rating assigned with outlook
NA	Subordinated debt*	NA	NA	NA	125	Complex	CRISIL AA/Stable
INE312X08026	Subordinated debt	28-Dec-2023	9.7	28-Dec-2033	200	Complex	CRISIL AA/Stable

*Yet to be issued