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/FAAA/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.

It is the sixth largest private insurer in the general insurance sector of India with a market share of 4.0% (based on gross direct premium written in India in fiscal 2021). As macro growth prospects remained subdued after the outbreak of Covid-19, the company’s gross direct premium grew at 8.9% over fiscal 2021 as against the industrial growth of 5.2% for the same period. 

The slowdown was most evident in the motor segment wherein TATA AIG’s premium book grew by 7.4% as against a negative growth of 1.5% witnessed by the industry. The company also calibrated its growth strategy in the crop segment which has exhibited high losses in the past. Resultantly, this portfolio also declined by 85% over the year. However, the moderating impact of slowdown in these segments, was offset by moderate to healthy growth within most of the other segments like fire, health, liability and personal accident.

During the year, the company honoured Rs 94.2 crore of claims as coverage for Covid-19 cases. Apart from the standard product – Corona Kavach, these claims were also reported from the traditional medi-claim policyholders. However, claims for non-Covid illnesses/ casualties were lower during the year. Similarly, for other segments also – instances of claim reports were lower this year attributed to restricted public activity and vehicular traffic. This led to a reduced claims ratio of 68.7% for fiscal 2021 as compared to 77.4% for the previous fiscal. Resultantly, combined ratio of the company also improved to 103.3% from 109.6% over the same period.

With onset of the second wave, as the severity and frequency of casualties is higher and penetration of health insurance has increased in the last 1 year, an upward revision in Covid-19 coverage products could be in order so as to adequately factor in the increased risks. In the near to medium term, the losses incurred from Covid-19 and its impact on the company’s overall underwriting performance remains a key monitorable.

TATA AIG’s capitalization is adequate in relation to its scale and nature of operations. On March 31, 2021 – the company’s networth stood at Rs 2985 crore. Its solvency ratio was comfortable at 2.22 times as on March 31, 2021 and the buffer in it over regulatory stipulation, is expected to remain adequate.

The company’s underwriting performance, albeit improving, remains modest. Underwriting deficit for fiscal 2021 was Rs 511 crore and its impact on the overall profitability, was offset by a healthy investment income of Rs 1,100 crore. Net profit for the period was Rs 448 crore, 34% higher than the net profit for the last corresponding period.

For fiscal 2022, the growth in industry’s new business premium for larger segments like motor insurance could remain muted for a longer stretch as revival in new sales volumes in the auto sector will happen only at a gradual pace once the lockdowns across states are lifted. Renewal premiums from the retail segment could also been impacted on account of job losses and pay-cuts. For the health segment - which is the second largest after motor, CRISIL believes the growth prospects will remain strong driven by increased market awareness and demand for multiple covers. In a scenario where pricing for Covid-19 policies is revised upwards, growth in this segment could be higher than that of last fiscal. However, with 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

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 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 are 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's 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 4.05% based on gross direct premium for fiscal 2021, TATA AIG is the seventh 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 growth prospects for most of fiscal 2021 remained subdued in the aftermath of the pandemic, the company’s gross premiums grew at 8.9% during the year as against an industrial growth of 5.2%. This slowdown was most evident in the motor third party segment which grew at 2% as against a negative growth of 1.5% witnessed by the industry. The exposure to crop segment was also reduced significantly during the year, as part of medium term business strategy. The moderating impact of slowdown in these segments, however, was offset by healthy traction in the fire and health segment. Business mix has remained stable, dominated by motor segment to the extent of 54.0% based on gross direct premiums for fiscal 2021. This was followed by fire, which outgrew health during the year, to become the second largest portfolio in the company’s premium book forming 17.8%. Health accounted for 14.3% of the premium base. For the fire segment, growth was driven by standardisation of rates across industry, whereas within the health segment – increased awareness and demand for indemnity products was key growth factor.

 

Over the last two years, the company has strengthened its distribution network by venturing into newer geographies. Tata AIG has established many virtual offices in tier II and III cities which have shown good traction over the last 2 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 this year, such that the losses that TATA AIG incurred due to the pandemic were ~0.7% of those incurred by the industry as a whole. 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 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+. Its investment philosophy and prudent investment risk management, have enabled the company to maintain a fairly 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 sub 10% of total investments on book. Liquidity is also comfortable. Government securities accounted for 42.9% of investment portfolio based on book value as on December 31, 2020.

* Adequate capital position

In relation to its scale of operations, Tata AIG’s capital position is adequate evidenced by a reported networth of Rs 2,913 crore as of December 31, 2020. Networth remains supported by healthy internal accruals and, by frequent capital infusions by the parent companies. Over the last 3 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 March 31, 2021, the company reported a solvency ratio of 2.22 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.

 

Weakness:

* 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 claims ratios have remained within 78% over the last many years now – making it comparable to top peers, expense ratio – at over 32% - has been on the higher side. For fiscal 2021, the company’s combined ratio improved to 103.3% from 109.6% for the previous fiscal, driven by reduced instances of claims since outbreak of the pandemic which has resulted in a lower claims ratio for the period. This trend was observed across most of the key segments. Over fiscal 2021, while claims ratio reduced from 77.4% to 68.7%, expense ratio rose from 32.1% to 34.6%.Resultantly, underwriting deficit for fiscal 2021 was marginally higher at Rs 511 crore as compared to Rs 423 crore for the previous fiscal. Nonetheless, despite modest underwriting performance, overall earnings profile remains supported by healthy investment income.

 

In the medium to long term, Tata AIG's robust risk management practices are expected to result in gradual improvement in underwriting performance.

Liquidity: Strong

Liquidity position of Tata AIG remains comfortable supported by adequate investments in government securities and liquid mutual funds. Liquid investments were Rs 7,366 crore as on December 31, 2020 including a cash and bank balance of Rs 271 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’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 sixth-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 210 branches as of December 31, 2020.

Key Financial Indicators

As on/for the period ended March 31	Unit	2021	2020	2019
Gross direct premium written	Rs.Cr	8042	7385	7743
Networth	Rs.Cr	2985	2537	2002
Profit after tax	Rs.Cr	448	335	112
Combined ratio	%	103.3%	109.6%	107.6%
Solvency margin	Times	2.22	1.84	1.69

 

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
INE067X08018	Subordinated Debt^	21-Mar-17	8.52%	21-Mar-27	178	Complex	CRISIL AA+/Stable
INE067X08026	Subordinated Debt^	19-Dec-19	8.85%	19-Dec-29	185	Complex	CRISIL AA+/Stable

^Call option after 5 years of issue date