Detailed Rationale

CRISIL Ratings has reaffirmed its ‘CRISIL AA+/Stable’ rating on the subordinated debt issuances (also known as hybrid instrument) of Tata AIG General Insurance Company Limited (Tata AIG).

 

The rating continues to centrally factor in the expectation that Tata AIG will maintain a sufficient level of cushion in its solvency ratio over and above regulatory stipulation, primarily backed by Tata AIG’s superior underwriting practices and further aided by strong support from its majority owner, Tata Sons Private Limited (Tata Sons, rated ‘CRISIL AAA/Stable/CRISIL A1+’). Tata Sons is also supportive of Tata AIG’s stance of maintaining a high level of cushion in its solvency ratio above the regulatory requirement.

 

The rating also factors in Tata AIG’s established market position in the commercial segment along with improving presence in the retail segment, its robust risk management practices, and prudent investment policies and, its adequate capital position.

 

Tata AIG is the fourth largest private insurer in the general insurance sector of India with a market share of 5.0% (based on gross direct premium written in India during nine months ended December 31, 2022). Against an industrial growth of 16% over the first nine months of fiscal 2023, the company’s gross direct premium grew at 35% driven by favourable demand prospects in Personal accident (PA), followed by health and motor segment, and revival in niche segments like liability, marine and fire. Motor, which remains the largest portfolio in the company’s premium base, also grew at 27% on a year-on-year basis.

 

During the first nine months of fiscal 2022, the company honoured Rs 199.9 crore of claims as coverage for Covid-19 cases, which constitutes 5.4% of the total claims incurred by the company during the period.  Owing to higher severity and frequency of Covid-19 cases following the second wave, the company’s claims ratio increased to 77.2% for 9M 2022 from 69.6% for the corresponding period of the previous fiscal. With marginal improvement in expense ratio, the combined ratio has witnessed slight improvement and stood at 111% during nine months ended December 2022 as compared to 114% during the corresponding period of previous fiscal (112% in Fiscal 2022). The claims ratio for the company has remained at similar level for Fiscal 2022 and nine months ended December 2022 at 75% (69% in fiscal 2021)

 

TATA AIG’s capitalization is adequate in relation to its scale and nature of operations. However, the company’s underwriting performance, albeit improving, remains modest. TATA AIG has managed to maintain a CAGR of 18%, and grew in all key segments i.e., motor, health, and commercial lines. The company has also managed to achieve profitability owing to steady level of accretions. Along-with comfortable solvency margin, TATA AIG has had nil cases of impairments or credit write downs.

Analytical Approach

CRISIL Ratings has first arrived at the corporate credit rating of Tata AIG, which is an indication of the company’s ability to meet policyholders’ obligations. For this, CRISIL Ratings has factored in the support Tata AIG receives from its parent companies, in addition to the assessment of business, financial, and management risk profiles of Tata AIG. The subordinated debt instrument is then tested for additional risk factors to determine whether its rating should be same as, or lower than, the corporate credit rating. The extent of cushion that Tata AIG intends to maintain -- over and above the regulatory stipulation -- on an ongoing basis, is taken into consideration to arrive at the rating on subordinated debt instrument. The stance of Tata Sons on the level of cushion Tata AIG would maintain in solvency ratio has also been factored in.

Key Rating Drivers & Detailed Description

Strengths:

Strong support from Tata Sons and AIG

Tata AIG derives significant funding, branding and technical support from Tata Sons and AIG. Its technical expertise is accredited to its association with American International Group (AIG) which has helped Tata AIG in institutionalizing robust risk management systems.

 

Its majority parent, Tata Sons has provided timely capital support to Tata AIG by investing its share of capital. Tata Sons will continue to support Tata AIG's growth plans and will contribute to any incremental capital requirement. Reduction in ownership by Tata Sons below a majority holding, or any change in CRISIL ratings on Tata Sons or in its opinion on Tata AIG's strategic importance to Tata Sons, will be rating sensitivity factors.

 

Established market position in the commercial segment with gradually growing presence in retail segment

With a market share of 5.0% based on gross direct premium for nine months of fiscal 2023, TATA AIG is the fourth largest private general insurer in the country. Over its operational history of over two decades, the company has consistently remained among the top players within the Indian general insurance sector and established its leadership in niche segments like liability and domestic leisure travel. As against an industrial growth of 16% for nine months ended December 31, 2022, the company’s gross premiums grew at 35% over the same period driven by favourable demand prospects in Personal accident (PA), followed by health and motor segment, and revival in niche segments like liability, marine and fire.

 

The company has also demonstrated significant growth in motor segment over 9M 2023 which remained muted during covid period. Motor, which remains the largest portfolio in the company’s premium base, also grew at 27% on a year-on-year basis. While motor has remained the largest portfolio for TATA AIG contributing to 47% of the total premiums for nine months ended fiscal 2023, increased demand and growth for the health insurance segment has resulted in its share increasing to 21% based on gross premiums written during nine months of fiscal 2023, from 17% in the corresponding period of fiscal 2022. Fire, which accounts for ~16% of the total premiums during nine months of fiscal 2023, has marginally reduced from 18% of the total premiums during the corresponding period of fiscal 2022. Over the last three years, the company has strengthened its distribution network by venturing into newer geographies and extending its channels – particularly for health insurance products. Tata AIG has established many virtual offices in tier II and III cities which have shown good traction over the last 3 fiscals. This has enabled the company to cater to the large untapped market for general insurance products and has helped it in sustaining its portfolio diversity.

 

Robust risk management practices

Tata AIG has developed, over time, a comprehensive risk management framework to identify, assess, and monitor risks across business lines in the commercial segment. A specialized underwriting team comprising segment experts enables efficient assessment and management of business specific risks. Tata AIG's association with AIG further bolsters its risk management expertise which have aided the development of competitive underwriting capability in certain niche segments such as liability, property, and casualty. In terms of underwriting performance, the company's combined ratio has remained in line with that of top players, with claims ratio having been the lowest among private general insurers for many years now. Attributed to this expertise, the company was able to adequately price the risks for Covid-19 products launched in 2021, such that the losses that TATA AIG incurred due to the pandemic were <1% of those incurred by the industry. Reinsurance practices like association with high quality global reinsurers, predominantly rated 'A+' or above on international scale, also limit risks on book. The company has favourable treaty arrangements with the reinsurers wherein the risk beyond a certain quantum (retention limit) is covered through reinsurance. TATA AIG follows a prudent philosophy by focusing on an appropriate product mix, geography, and channel. In motor insurance, almost all policies are sold as comprehensive policies. Higher own damage losses get set-off under comprehensive policies. For health products, TATA AIG has invested a lot in technology and innovation labs, thereby resulting in smooth product performance.

 

Tata AIG also maintains adequate cushion in reserves and monitors it on a regular basis. These robust risk management practices will enable Tata AIG in maintaining stability in operating performance and solvency margins however, its ability to demonstrate strong underwriting performance particularly in the retail segments commensurate to increase in scale remains a monitorable.

 

Prudent investment policy

The company follows stringent investment strategies and invests in sovereign securities or corporate debt instruments typically rated above AA+. As stated by the management of the company, Indian markets, especially the debt side, are more matured. The company does not foresee any contingency unless there is a direct correlation with global markets. Post 2008 financial crisis, the company has followed ring fenced strategy. TATA AIG will increase its focus on the Govt securities, as corporate bond market is jittery. TATA AIG’s investment philosophy and prudent investment risk management have enabled the company to maintain a healthy investments portfolio with stability in returns from this book and, no write offs in the last many years.  Over the last few quarters, the investment exposure to corporate debt and equity has been declining, being replaced by G-Secs. Presently, investments in equities are maintained at around 10% of total investments on book. Liquidity is also comfortable. Government securities accounted for 39% of investment portfolio based on book value as on December 31, 2022.

 

Adequate capital position

In relation to its scale of operations, Tata AIG's capital position is adequate evidenced by a reported networth of Rs 3911 crore as of December 31, 2022. Networth remains supported by healthy internal accruals and, by frequent capital infusions by the parent companies. Total capital infused since 2012 aggregated to Rs 1,000 crore, with latest equity infused in 2020 aggregating to Rs 200 crore. Over the last 4 years, Tata Sons and AIG have infused fresh capital in Tata AIG in multiple tranches which is demonstrative of the strategic importance of the latter to its parent companies and, of the strong support which Tata Sons and AIG continue to extend to Tata AIG.

 

Expected high level of cushion in solvency ratio above regulator-specified minimum on a steady state basis

In line with expectation, Tata AIG has maintained sufficient cushion in solvency margin over the regulatory stipulation. As on December 31, 2022, the company reported a solvency ratio of 1.95 times. Tata AIG's solvency ratio is expected to remain comfortably above the regulator-specified minimum over the medium term. This is supported by the company's currently healthy capital position, robust risk management processes and, if needed, expected timely capital infusion from parents. Tata AIG continues to uphold its stance on maintaining a high level of cushion in its solvency ratio at all points in time, of which Tata Sons is also supportive. The cushion in solvency ratio over the regulator-specified minimum is a rating sensitivity factor, given likelihood of default in debt servicing on the subordinated debt instrument if the ratio falls below the regulator-specified minimum.

 

Modest albeit gradually improving underwriting performance

Underwriting performance of TATA AIG, though better than industry average, remains constrained by relatively higher operating expenses. While the company’s average claims ratios have remained at 75% over the last many years now – making it comparable to top peers, expense ratio – at over 30% - has been on the higher side. For nine months ended December 31, 2022, the company’s combined ratio reduced to 110.9% from 113.5% for the corresponding period of the previous fiscal. Over last one year, claims ratio decreased from 77.2% to 74.7% whereas expense ratio was at similar levels in both periods at 36% Resultantly, underwriting deficit for fiscal 9M 2023 marginally increased to Rs 679 crore from Rs 654 crore for the corresponding period of fiscal 2022. Nonetheless, despite modest underwriting performance, overall earnings profile remains supported by healthy investment income.

Liquidity: Strong

Liquidity position of Tata AIG remains comfortable supported by adequate investments in government securities. Liquid investments were Rs 9131.2 crore as on December 31, 2022, including a cash and bank balance of Rs 263 crore. Additionally, the company enjoys a high degree of flexibility to raise need-based funds from its parent companies.

Outlook:Stable

CRISIL Ratings believes Tata AIG will continue to derive strong financial, branding, and technical support from its parents, Tata Sons and AIG, both on an ongoing basis and during distress, and maintain high level of cushion in its solvency margin over and above regulatory minimum. Tata AIG will also continue to benefit from its expertise in niche segments in the commercial business and maintain robust risk management practices and sound investment quality. However, like most of the general insurance companies, Tata AIG is yet to demonstrate its ability to generate underwriting profits on a consistent basis.

Rating Sensitivity factors

Upward factors

• Significant increase in the extent of ownership in, or strategic importance of, Tata AIG to Tata Sons.
• Significant improvement in competitive positioning in the retail segment alongside improvement in underwriting profitability, reflected in the combined ratio remaining below 99% consistently.

 

Downward factors

• Decline in steady state solvency ratio to below 1.7 times.
• Substantial increase in underwriting losses, thereby adversely impacting the solvency ratio
• A downward revision in CRISIL rating’s view on Tata Sons or/and, a sizeable reduction in the extent of ownership in, or strategic importance of, Tata AIG to Tata Sons.

About the Company

Tata AIG is India’s fourth-largest private sector general insurance company. It is a joint venture between Tata Sons and AIG in a 74:26 ratio. Tata AIG operates through a network of over 213 branches as of December 31, 2022.

As on / for the period ended 31		Dec-22	Mar-22	Mar-21
Gross direct premium written	Rs. Cr.	9350	10025	8042
Networth	Rs. Cr.	3911	3439	2984
Profit after tax	Rs. Cr.	473	454	448
Combined ratio	%	110.9%	112.2%	110.1%
Solvency margin	Times	1.95	1.97	2.22

Any other information: Not applicable

Annexure - Details of Instrument(s)

ISIN	Name of Instrument	Date of Allotment	Coupon Rate (%)	Maturity Date	Issue Size (Rs. Cr)	Complexity Level	Rating Assigned  with Outlook
NE067X08026	Subordinated Debt^	19-Dec-19	8.85%	19-Dec-29^	185	Complex	CRISIL AA+/Stable

^Call option at the end of 5 years from issuance date