| National Insurance Co. Limited. | ||||
| Rating reaffirmed at 'CRISIL AA-/Stable' | ||||
| 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 reaffirmed its 'CRISIL AA-/Stable' rating on corporate credit rating (CCR) and subordinated debt issue of National Insurance Co. Limited (National Insurance).
The ratings continue to reflect the company's strategic importance to, and expectation of strong support from, the Government of India (GoI), and its established market position in the Indian general insurance industry. These strengths are partially offset by the low cushion in solvency ratio and dependence on equity infusion by the government, and weak underwriting performance, which continues to constrain earnings and solvency margin. The company’s underwriting performance remains weak reflected in the combined ratio of 143% for nine months ended December 2022, higher than 129% for the corresponding period of the previous fiscal. The increase in combined ratio is attributed to the increase in the expenses due to retrospective wage revision. The company has incurred Rs. 2121 crore as wage arrears related payments and actuarial valuations related to wage revision in 9M2023 Negative accretions to networth have led to moderation in capital position and significant reliance on equity support from the parent – GOI. Reported networth as on December 31, 2022 declined to Rs 476 crore from Rs 2751 crore on March 31, 2022 – owing to accumulating losses. While some comfort is drawn from the availability of balance in fair value change account, the ability to accelerate improvement in underwriting performance to prevent potential pressure on its solvency position remains a key monitorable.
The company’s reported solvency ratio has remained vulnerable. From 0.59 times (1.09 times after including 75% balance of fair value change as per forbearance granted by IRDAI) as on March 31, 2022, the company’s solvency ratio has sharply declined to 0.05 times (without factoring the balance of fair value change) as of December 31, 2022 – driven by high underwriting losses. The government has already infused Rs 3700 crore as equity into the company in March 2022, over and above the Rs 5575 crore infused between Q4 2020 and Q4 2021. However, there has been no infusion in fiscal 2023.
The rating on the hybrid instrument remains centrally based on forbearance granted by Insurance Regulatory and Development Authority of India (IRDAI) to National Insurance from adhering to provisions 3(vii) and 5(vii) of Insurance Regulatory and Development Authority of India (Other Forms of Capital) Regulations, 2015, for this specific subordinated debt issue of Rs 895 crore. The forbearance allows the company to service the interest or coupon payments to the investors in the issue throughout the life of the instrument, irrespective of solvency ratio. IRDAI has also granted forbearance against provision 14 of the regulation and has allowed the company to issue subordinated debt to the extent of 25% of its networth as on September 30, 2017.
With a track record of over 115 years, National ranked as the seventh largest insurer in the industry based on the gross premiums written during nine months ended December 31, 2022 which translates to a market share of 6.2%. The company underwrote Rs 11,593 crore as gross direct premium during the nine months of fiscal 2023, registering a 15% year on year growth as against an industrial growth of 16% for the same period.
This growth was driven by healthy and continued traction in demand for health insurance products since the pandemic outbreak. Apart from health insurance, the company also grew in niche segments like personal accident, liability, marine and engineering. |
Analytical Approach CRISIL Ratings has first arrived at its CCR on National Insurance, which is an indication of the company's ability to honour all debt obligations and policyholders' obligations. For arriving at the CCR, CRISIL Ratings has factored in expectation of strong government support, in addition to the assessment of business, financial and management risk profiles of the company. The extent of cushion National Insurance intends to maintain in the solvency ratio over and above the regulatory stipulation on a steady state basis has been taken into consideration to arrive at the rating on the subordinated debt instrument.
In the case of National Insurance, the regulatory forbearance granted to the company virtually eliminates the risk factor for its subordinated debt issue, as it is now allowed to service the interest or coupon payments throughout the life of the instrument irrespective of the solvency ratio. |
Key Rating Drivers & Detailed Description Strengths: Strategic importance to, and expectation of strong support from, GoI National Insurance is expected to receive strong support from the government on a steady state basis, driven by its established market position in the Indian non-life insurance sector, which makes it strategically very important to the Government. The importance of the general insurance sector, especially government-owned insurers, can also be perceived in the context of GoI's plan to materially enhance insurance penetration over the long term. As a demonstration of their strategic importance to GOI and the latter’s stance on extending timely support, public general insurers were allotted Rs 12,450 crore of capital by the GoI in July 2020 (including Rs 2500 crore which had already been infused in March 2020). National Insurance, The Oriental Insurance Company (Oriental) and The United India Insurance Company Ltd (United) cumulatively received Rs 2500 crore in fiscal 2020 and Rs 9,950 crore in fiscal 2021. Of this allocation, National received Rs 2400 crore in fiscal 2020 and Rs 3,175 crore in fiscal 2021. Eventually, in Q4 fiscal 2022, the 3 PSUs received Rs 5000 crore from the government – of which Rs 3700 crore was infused in National, Rs 1200 crore in Oriental and balance Rs 100 crore was infused in United. However, government has not infused anything in fiscal 2023. Along with the capital allocation, the government also announced its decision of shelving the merger process of Oriental with National and United, and focusing on improving the standalone financial risk profiles of these entities. CRISIL Ratings also takes note of the government’s plan announced in the annual budget two year ago – to privatise one of the public general insurers. That plan has also been put off the table as of now. CRISIL Ratings would continue to monitor the developments in this aspect.
Strong market position National Insurance holds a market share of 6.2% based on gross premiums originated in India in nine month ended fiscal 2022 is the seventh largest player in the Indian general insurance space with 1039 branches across the country. More so, its status of being a GoI promoted entity would enable it to sustain competitive edge amidst intensifying competition. For nine months ended December 31, 2022, the company underwrote a gross direct premium of Rs 11,593 crore, which marks a year on year rise of 15% as against an industrial growth of 16% over the same period. In line with the trend observed for most of the peers and the sector as a whole, continued traction in health insurance segment has been the key driver for it.
Against a sectoral growth of 21% in health insurance premiums written over nine months of fiscal 2023, National’s health insurance portfolio grew inline with the industry over the same period. Apart from health insurance, other niche segments like personal accident, liability, marine and engineering have also grown at a good pace. Over the 11 months of fiscal 2023, the company has underwritten Rs 13,656 crore as gross direct premium and is expected to clock an annual growth of 14-16% for full fiscal 2023 driven by Health and personal accident segment
Sound investment portfolio quality The investment portfolio quality of National Insurance has remained strong, supported by stringent regulations and benefits of historical investments accumulating as mark to market gains over the years. Close to 99% of the debt investments of National Insurance were in securities rated ‘AA’ or higher or sovereign in nature as on December 31, 2022. On a market value basis, government securities accounted for 40% of the investment portfolio, while equity investments formed 33% as on December 31, 2022. However, equity investments are largely in the approved category, which indicates that these companies have declared dividends in the last two years. In terms of exposure to precarious investments, the company follows a judicious provisioning policy.
Weaknesses: Reported solvency remains below regulatory stipulation, with capitalisation dependent on equity infusion by GoI The capitalisation and solvency position of National Insurance remains strained. Reported solvency ratio, excluding the balance in fair value change account, has remained sub 1.5 times for over 16 quarters now. However, IRDAI’s exceptional approval has allowed National (along with United and Oriental) to include the balance in fair value change account in the available solvency margin for calculating solvency. On March 31, 2022, the company reported a solvency ratio of 0.59 times (without factoring the balance in the fair value change account) as against 0.62 times on March 31, 2021 (factoring in 65% of the balance in the fair value change account). Upon including 75% of the balance in fair value change account as per forbearance granted by the IRDAI, the solvency ratio is reported to be 1.09 times as on March 31, 2022. On account of negative accruals to networth, the company’s networth also declined from Rs 2751 crore to Rs 476 crore between March 2022 to December 2022. Over the medium term, the capitalisation and solvency position of National Insurance is expected to remain dependent on equity support from the government and the company’s fair value change balance. Additional comfort is drawn from regulatory relaxations allowed by the government to the company in terms of including fair value change balance in the solvency reporting. The company aims to restore its solvency position to 1.5 times (excluding the fair value change balance) over the medium term. In the meantime, any weakening in underwriting performance and overall profitability leading to further moderation in the capital and solvency position of the company will remain key rating sensitivity factors.
Weak underwriting performance The underwriting performance of National Insurance has deteriorated significantly after fiscal 2016 because of additional provisioning requirement in the motor third-party segment and has remained weak since then. In fiscal 2022, the company reported an underwriting deficit of Rs 4,155 crore compared with Rs 2,855 crore in the previous fiscal. Correspondingly, the combined ratio stood at 134% as compared to 121% in the previous fiscal. For nine months ended December 31, 2022, the company’s combined ratio surged to 143% from 129% for the corresponding period of the previous fiscal, on account of retrospective wage revision to the tune of Rs 2121 crore –translating to an underwriting loss of Rs 4066 crore for nine months ended December 31, 2022 against an underwriting loss of Rs 2645 crore for the corresponding period of the previous fiscal. Excluding the impact due to wage revision, company has shown improvement in the overall underwriting performance which stood at 121% for nine months ended December 31, 2022. However, continuous deterioration in the company’s underwriting performance, straining its earnings profile and capitalisation, has remained a key rating sensitivity factor.
Modest overall profitability metrics Earnings profile of National Insurance remains constrained because of high underwriting losses. The deficit generated at the underwriting level resulted in net loss of Rs 1,675 crore and Rs 563 crore in fiscals 2022 and 2021, respectively. The impact of high underwriting losses was partially offset by investment income of Rs 2,641 crore in fiscal 2022 and Rs 2,724 crore in fiscal 2021.
For the nine months ended December 31, 2022, underwriting losses stood at Rs 4,066 crore from Rs 2,644 in the corresponding period of fiscal 2021. For the first nine months of fiscal 2023, National Insurance earned Rs 2,158 crore as income from investment compared with Rs 1,981 crore earned in the corresponding period of the previous fiscal. With higher underwriting losses in December 2022 due to wage revision, the company reported loss Rs 2,389 crore compared with a loss of Rs 679 crore in the corresponding period of the previous fiscal. Going forward, company’s ability to improve underwriting performance, such that overall profitability is revived, and capital position and solvency are sustained at strong levels, will remain a key monitorable. |
Liquidity: Strong Almost 99% of the debt investments were in securities rated ‘AA’ or higher or in sovereign securities as on December 31, 2022. In addition, liquidity is comfortable with a large proportion of liquid investments, which stood at Rs 14,529 crore as on December 31, 2022. Government securities accounted for 40% of the investment portfolio based on market value as on December 31, 2022. Liquid assets to technical reserve ratio remained adequate at 88% on December 31, 2022. |
Outlook: Stable National Insurance’s credit risk profile remains centrally driven by expectation of strong and continued support from the GoI given the company's high strategic importance to the latter, supported by its strong market position in the general insurance industry in India and expectation of improvement in the underwriting performance of the company. The rating on the subordinated debt instrument also factors in the regulatory forbearances granted to National Insurance. |
Rating Sensitivity factors Upward factors
Downward factors
|
About the Company National Insurance is one of the largest non-life insurance companies in India. Wholly owned by GoI, the company commenced operations in 1906 and has a track record of over 100 years. On nationalisation of the general insurance business in 1973, it became one of the four subsidiaries of General Insurance Corporation of India.
The company is wholly owned by GoI and has its head office in Kolkata. It has an extensive network of 1039 branches (including business centres) across India. |
Key Financial Indicators
$ includes 100% fair value change account balance as on Feb 28, 2020, for which the company got approval from IRDAI # includes 65% fair value change account balance for which the company got approval from IRDAI ^ includes 75% fair value change account balance for which the company got approval from IRDAI
@includes 85% fair value change account balance for which the company got approval from IRDA |
Any other information: Not applicable |
Note on complexity levels of the rated instrument: |
Annexure - Details of Instrument(s)
|
| Annexure - Rating History for last 3 Years | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| All amounts are in Rs.Cr. | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Criteria Details
|