Detailed Rationale

CRISIL Ratings has downgraded its corporate credit rating (CCR) and rating on subordinated debt issue of National Insurance Co. Limited. (National Insurance) to ‘CRISIL AA-/CCR AA-/Stable’ from ‘CRISIL AA/CCR AA/Negative’.

 

This rating action is primarily driven by the lack of improvement in the company’s underwriting performance which continues to constrain its earnings profile thereby imposing pressure on its capital position and solvency. The company’s underwriting performance remains weak reflected in a combined ratio of 129% for nine months ended December 31, 2021, higher than 115% for the corresponding period of previous fiscal. This was largely driven by claims ratio remaining at elevated level of 103.5% in September 2021 and 101.6% in December 2021. As far as, covid claims are concerned, for nine months fiscal 2022, 10-12% of the total claims incurred by the company were constituted by Covid-19. The company reported investment income of Rs 1,981 crore during nine months fiscal 2022 (broadly similar to corresponding period of last fiscal wherein it reported investment income of Rs 1,978 crore). Despite this, the weak underwriting performance lead to overall net loss of Rs 679 crore for nine months fiscal 2022 as against a PAT of Rs 140 crore for the corresponding nine months of the previous fiscal.

 

Negative accretions to networth have led to moderation in capital position and significant reliance on equity support from the parent – GOI. Reported networth declined to Rs 17.1 crore as on December 31, 2021, from Rs 590.4 crore on March 31, 2021 – owing to accumulated losses. While the fair value change account balance provides some comfort, ability to accelerate improvement in underwriting performance to prevent potential pressure on the solvency position remains a key monitorable. The revision in the outlook is primarily driven by expectation of continued support from the GOI with the capital infusion supporting the solvency position and expectation of sustaining the underwriting performance of the company.

 

The solvency margin continued to show declining trend owing to underwriting losses due to Covid claims falling to 0.09 times (without including any fair value change forbearance) as on December 2021 from about 0.29 times (excluding balance of fair value change) as on March 31, 2021. Nevertheless, the company did receive equity infusion of Rs 3,700 crore during Q4 fiscal 2022 which is expected to result in improvement in solvency margin. Therefore, the ability of the company to improve its underwriting performance in order to have material improvement solvency margin to reach close to regulatory minimum will remain key monitorable.

 

The ratings reflect the company's strategic importance to, and expectation of strong support from, the Government of India (GoI), in addition to its strong market position in the general insurance industry in India and sound investment portfolio quality. These strengths are partially offset by the low cushion in the solvency ratio and capitalisation remaining dependent on equity infusion by the government. Continued weakening of the company’s underwriting performance imposes pressure on overall profitability and solvency. The rating on the hybrid instrument remains centrally based on forbearance granted by Insurance Regulatory and Development Authority of India (IRDAI) to National Insurance by 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 the solvency ratio. IRDAI has also granted forbearance against provision 14 of the regulation and has allowed the company to issue subordinated debt for 25% of its networth as on September 30, 2016.

 

With a track record of over 115 years, National Insurance ranked as the seventh largest insurer in the industry based on the gross premiums written in fiscal 2022 with a market share of 5.95%. The company underwrote gross premium of Rs 13,077 crore for fiscal 2022, registering a negative growth of 7.2% against industry-level growth of 11%. This reduction primarily stemmed from negative growth in key segments such as motor and company’s decision to stop crop insurance business. In line with the trend observed for most of the peers and the sector as a whole, continued traction in health insurance segment post Covid outbreak has been the key driver for it. Apart from health insurance which has outgrown motor to become the largest portfolio for National, other niche segments like engineering, marine, liability and aviation have also grown.

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 strong market position in the non-life insurance sector in India, making it strategically important to the GoI. The importance of the general insurance sector, especially government-owned insurers, can also be perceived in the context of the plan of GoI to materially enhance insurance penetration over the long term. As a demonstration of their strategic importance to the government and the latter’s stance on extending timely support, public general insurers were allotted Rs 12,450 crore of capital by the government in July 2020 (including the Rs 2,500 crore already infused in March 2020). United India Insurance, National Insurance and The Oriental Insurance cumulatively received Rs 2,500 crore in fiscal 2020 and Rs 9,950 crore in fiscal 2021. Of this, National Insurance received Rs 2400 crore and Rs 3,175 crore, respectively. 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.

Along with the capital allocation, the government also announced its decision of shelving the merger process of Oriental with National Insurance 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 last annual budget to privatise one of the public general insurers in the medium to long term and will continue to monitor the developments in this aspect.

 

• Strong market position

National Insurance holds a market share of 5.95% based on gross premiums originated in India in fiscal 2022. Due to decline in the gross direct premium, company has lost its market share in fiscal 2022 and is now the seventh largest general insurer in the country as of March 2022. However, its status of being a GoI-promoted entity would enable it to sustain competitive edge amid intensifying competition. The company underwrote gross premium of Rs 13,077 crore for fiscal 2022, registering a negative growth of 7.2% against industry-level growth of 11%. This reduction primarily stemmed from negative growth in key segments such as motor and company’s decision to stop crop insurance business. In line with the trend observed for most of the peers and the sector as a whole, continued traction in health insurance segment post Covid outbreak has been the key driver for it. Apart from health insurance which has outgrown motor to become the largest portfolio for National, other niche segments like engineering, marine, liability and aviation have also grown.

 

While on one hand, Covid has affected the underwriting performance for the industry, on other side it has also helped increase in awareness particularly for health insurance products. For fiscal 2023, the growth in health insurance portfolio of the sector is expected to correct marginally and stablise thereafter. An upward revision in pricing of health products is expected which would also contribute to this correction. New business and renewal premium for larger segments like motor insurance could witness some traction as the impact of Covid-19 on the claims’ performance starts to fade. A hike in tariff rates within the Third-Party segment, which was absent for over two years now, can also be expected. However, with increasing ticket size of non-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.

 

• 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, 2021. On a market value basis, government securities accounted for 41.3% of the investment portfolio, while equity investments formed 32.4% as on March 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 12 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, 2021, the company reported a solvency ratio of 0.62 time (factoring in 65% of the balance in the fair value change account) as against 0.02 times on March 31, 2020 (factoring in 100% of the balance in the fair value change account as on Feb 28, 2020). Subsequently, the company’s underwriting performance and overall profitability deteriorated on account of surge in Covid claims during H1 fiscal 2022 which resulted in a sharp decline in solvency ratio by the close of December 31, 2021 to 0.09 times (excluding balance in fair value change account). Upon including the balance in fair value change account as of that date, the solvency ratio is estimated to have been 0.77 times. On account of negative accruals, the company’s networth also declined to Rs 17.1 crore as on December 2021 from Rs 590.4 crore as on March 2021. Nevertheless, the company did receive equity infusion from GoI of Rs 3,700 crore during Q4 fiscal 2022 which is expected to result in improvement in solvency margin.  

 

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.

 

• Prolong weakening of the 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 2021, the company reported an underwriting deficit of Rs 2,855 crore compared with Rs 3,365 crore in the previous fiscal. Correspondingly, the combined ratio stood at 121.1% as compared to 160.8% in the previous fiscal. For the nine months ended December 31, 2021, underwriting deficit stood at Rs 2,644 crore as compared to Rs 1,562 crore for the corresponding period previous fiscal. Combined ratio for the nine months of fiscal 2022 stood at 128.6% as compared to 115.0% in the corresponding period in fiscal 2021 - driven by increase instances of claims due to second wave of covid.

 

Of the total claims incurred, National incurred Rs 1,217 crore (till February 28, 2022) as covid claims which account for around 10-12% of the total claims incurred by the company. Majority of the claims incurred in 9M 2022 were reported in the first half of the fiscal, thereafter – as the frequency of Covid instances declined – the number of Covid claims did too. However, any further deterioration in the company’s underwriting performance, straining its earnings profile and capitalisation further, will be 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 563 crore and Rs 4108 crore in fiscals 2021 and 2020, respectively. The impact of high underwriting losses was partially offset by investment income of Rs 2,724 crore in fiscal 2021 and Rs 1,950 crore in fiscal 2020.

 

For the nine months ended December 31, 2021, underwriting losses stood at Rs 2,644 crore from Rs 1,562 in the corresponding period of fiscal 2021. For the first nine months of fiscal 2022, National Insurance earned Rs 1,981 crore as income from investment compared with Rs 1,978 crore earned in the corresponding period of the previous fiscal. With underwriting losses in December 2021, the company reported loss Rs 679 crore compared with profit of Rs 140 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, 2021. In addition, liquidity is comfortable with a large proportion of liquid investments, which stood at Rs 13,799 crore as on December 31, 2021. Government securities accounted for 41.3% of the investment portfolio based on market value as on December 31, 2021. Liquid assets to technical reserve ratio remained adequate at 82% on December 31, 2021.

Outlook: Stable

National Insurance 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 sustenance of 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

• Significant and sustained improvement in underwriting performance and overall profitability of the company, leading to significant improvement in capital position.
• Substantial and sustained improvement in the reported solvency ratio such that it stays above 1.5x on a steady state (excluding all forbearances)

 

Downward factors

• Lack of improvement in underwriting performance and overall profitability such that it continues to pose stress to the capitalisation and solvency position (reported and adjusted) remains below 1.5x (without factoring in any forbearance) for a prolonged period
• Any change in the stance of support of GoI or significant dilution of stake by GoI in National Insurance

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 Company Corporation of India.

 

The company is wholly owned by GoI and has its head office in Kolkata. It has an extensive network of around 1,400 branches (including business centres) across India.

Key Financial Indicators

As on/For the period ended March 31	Unit	9M2022	2021	2020	2019
Gross direct premium/gross premium written	Rs crore	10,071	14,186	15,313	15,180
Profit after tax	Rs crore	-679	-563	-4018	-1696
Combined ratio	%	128.6	121.1	160.8	145.4
Solvency margin	Times	0.09	0.62#	0.02$	1.04 @

$ includes 100% fair value change account balance as on Feb 28, 2020, for which the company got approval from IRDA

# includes 65% fair value change account balance for which the company got approval from IRDA

@ includes fair value change account at 100% and Motor TP IBNR discounting @ 2.5%.

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 Level	Rating assigned with outlook
INE168X08014	Subordinated Debt	27-Mar-17	8.35%	26-Mar-27*	895	Complex	CRISIL AA-/Stable

*The company has a call option exercisable five years from the date of allotment