Detailed Rationale

CRISIL has reaffirmed its Corporate Credit Rating (CCR) and rating on subordinated debt issue of The Oriental Insurance Company Limited (Oriental Insurance) at 'CCR AAA/Stable’ and ‘CRISIL AAA/Stable', respectively.

 

The rating on the hybrid instrument remains centrally based on forbearance granted by Insurance Regulatory and Development Authority of India (IRDAI) to Oriental 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 750 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, 2018.

 

The ratings reflect the company's strategic importance to, and expectation of strong support from, the Government of India (GoI), in addition to its established market position in the Indian general insurance industry. These strengths are partially offset by the low cushion in solvency ratio and capitalization remaining dependent on equity infusion by the government. The company’s underwriting performance remains modest, imposing pressure on overall profitability and solvency.

 

With a track record of over 60 years, Oriental ranked as the sixth largest insurer in the industry based on the gross premiums written during fiscal 2021 with a market share of 6.3%. As macro growth prospects remained subdued after the outbreak of Covid-19, the company’s gross direct premium de-grew by 8.9% over fiscal 2021, as against the industrial growth of 5.2% for the same period. 

 

During the year, the company honoured Rs 609.4 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 93.3% for the first nine months of fiscal 2021 as compared to 105.3% for the corresponding period of the previous fiscal. Resultantly, combined ratio of the company also improved to 129.6% from 137.3% 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.

 

The company's reported networth stood at Rs 2,201 crore on December 31, 2020, which, in addition to the balance in fair value change account, further increases to Rs 6,405 crore. Since Q4 2020, the company has received Rs 3,220 crore as equity capital from the government of India. This has added some cushion to the networth. Reported solvency, including 85% of the balance in fair value change account, stood at 1.53 times on December 31, 2020 and 1.55 times as on March 31, 2020.

 
While networth has increased after equity infusion by the government and revival in the fair value change balance after Q4 2020, the company's ability to accelerate the improvement in underwriting performance so as to self-sustain capital position in solvency remains critical in the medium to long run.

 
For nine months ended December 31, 2020, the company reported an underwriting deficit of Rs 2366 crore, which led to an overall loss of Rs 758 crore for the period. This modesty in earnings profile was partly offset by Rs 1737 crore of investment income earned during the first nine months of fiscal 2021.

 

For fiscal 2022, the growth in 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, 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 has first arrived at Oriental Insurance's corporate credit rating, which is an indication of the company's ability to honour its debt obligations and policyholders' obligations. For arriving at the CCR, CRISIL has factored in expectation of strong government support, in addition to the assessment of business, financial, and management risk profiles of the company. The subordinated debt instrument is then tested for additional risk factors to determine whether its rating should be the same as, or lower than the CCR. The extent of cushion that Oriental Insurance intends to maintain in the solvency ratio over and above the regulatory stipulation on a steady state basis is taken into consideration to arrive at the rating on the subordinated debt instrument.

 
In the case of Oriental Insurance, the regulatory forbearance granted to the company virtually eliminates the risk factor for its subordinated debt issue as it is 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:

• Support from, and strategic importance to, the Government of India (GoI)

Oriental 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). Oriental, National Insurance Company Ltd (National) 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, Oriental received Rs 50 crore in fiscal 2020 and Rs 3,170 crore in fiscal 2021.

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 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 would continue to monitor the developments in this aspect.

 

• Established market position with long track record and extensive market reach

Oriental Insurance, with a market share of 6.3% for fiscal 2021, is the sixth largest player in the Indian general insurance space with over 1670 branches across the country. More so, its status of being a GoI promoted entity would enable it to sustain competitive edge amidst intensifying competition.

 

The company underwrote a gross direct premium of Rs 12,452 crore during the year, which marks a decline of 8.9% over the business that it wrote in the last fiscal. This reduction primarily stemmed from negative growth in key segments like motor and crop – which is applicable for the entire sector. Over fiscal 2021, the general insurance sector witnessed a negative growth of 1.7% in the motor segment and of 3.4% in the crop segment. Against this, Oriental’s motor premium de-grew by 10.8% whereas premium from the crop segment de-grew by 61.1%. In the health segment, wherein the industry grew at a healthy 13.4% during fiscal 2021 driven by increased demand for products offering Covid-19 coverage, Oriental adapted a cautious approach in light of limited performance track record of Covid-19 products, and grew at 2.2% only. During fiscal 2021, ~6.3% of the total premium written within the health segment was contributed by Covid-19 products launched during the year.

 

Some impact of this calibrated growth strategy was offset by a healthy growth of 23.8% that Oriental witnessed in the fire segment – which was in line with the trend observed for the industry. This was stimulated by standardisation of rates across players.

 

Over the near to medium term, the company plans to grow at 5-10% with the underlying premise that the second wave of the pandemic should tail out by the end of Q1 2022. This growth will be driven by motor, health and fire segments. Oriental also plans to run down its loss making crop portfolio to ~10% of the total premium base.

 

Weaknesses:

• Reported solvency remains below regulatory stipulation, capitalisation is dependent on equity infusion by GoI

Capitalisation and solvency position of Oriental Insurance remains strained. On March 31, 2020, the company reported a solvency ratio of 0.92 times (factoring in 100% of the balance in fair value change account as on that date) as against 1.57 times reported on March 31, 2019 (factoring in 40% of the balance in fair value change account as on that date). This sharp decline was attributed to the reduction in fair value change balance imposed by volatility in equity markets, from Rs 7,586 crore to Rs 2261 crore over the same period. Thereafter, driven by capital infusion by the government and gradual recovery in equity markets, Oriental’s solvency ratio (factoring in 85% of the balance in fair value change account as on that date) recovered to 1.53 times and 1.55 times (provisional)  as of December 31, 2020 and March 31, 2021 respectively. As a result of this capital infusion, the company’s reported networth also increased from Rs 1389 crore (not adjusted for miscellaneous expenditure of Rs 1188 crore) as on March 31, 2020 to ~Rs 3000 crore (provisional) as of March 31, 2021.

 

Over the medium term, Oriental’s capitalisation and solvency position are 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 its solvency reporting. The company aims to restore its solvency position to 1.5 times (excluding fair value change balance) by the end of fiscal 2022. In the meantime, continued weakness in underwriting and overall profitability leading to further moderation in capital and solvency position of the company, will remain key rating sensitivity factors.

 

• Weak underwriting performance

Oriental’s underwriting performance remains weak. After recognition of additional reserving requirement in motor third party business in fiscal 2017, the company’s underwriting performance has remained volatile. After the loss reported in fiscal 2017, the company’s underwriting performance had improved momentarily in fiscal 2018. However, it has remained weak since then. For fiscal 2020, the company reported an underwriting deficit of Rs 4,515 crore, which was higher than Rs 3,771 crore of deficit reported for the previous fiscal. Correspondingly, the combined ratio also increased to 141.1% from 134.9% over this period driven by a rise in expense ratio from 28.8% to 38.8%. However, some of this moderation was offset by the improvement in claims ratio from 106.1% to 102.3%.

 

For nine months ended December 31, 2020, the company’s underwriting deficit stood at Rs 2366 crore – marginally lower than a deficit of Rs 2943 crore reported for the corresponding nine months of last fiscal. Combined ratio for the first nine months of fiscal 2021, at 129.6%, was lower than 137.3% exhibited for the corresponding nine months of the previous fiscal – driven by reduced instances of claims during the first half of fiscal 2021 due to the lockdown. While claims ratio for fiscal 2021 is not expected to increase materially from current levels, with restoration in operational activity – specially increased vehicular activity on the roads – claims would increase to its pre-covid levels.

 

Oriental’s underwriting performance is expected to remain modest over the medium term and improve only gradually in the long term. In the first nine months of fiscal 2021, of the total claims incurred by the company - ~15% were contributed by Covid-19 losses. However, with increased penetration of health insurance products over the last 3-4 quarters alongside surge in Covid-19 casualties, losses from Covid-19 are expected to have risen sharply over the first few months of fiscal 2022. However, similar to the last fiscal – its impact on the overall claims ratio would be net off by reduction in other, regular claims across motor, fire and other segments.

 

Any further deterioration in the company’s underwriting performance, straining its earnings profile and capitalisation further, will be a key rating sensitivity factor.

 

• Modest earnings profile

Oriental's earnings profile has remained modest because of its weak underwriting performance. Despite a stable investment income of Rs 3475 crore for fiscal 2020, the company reported a net loss of Rs 1524 crore for the year as against a loss of Rs 294 crore for fiscal 2019. This deterioration was a factor of increased underwriting deficit for fiscal 2020.

 

For nine months ended December 31, 2020, while the underwriting deficit did not increase materially from that of the corresponding nine months of fiscal 2020, income from investments declined sharply owing to volatility in the markets. For 9M 2021, Oriental earned Rs 1737 crore as income from investments as compared to Rs 2,477 crore earned for the corresponding previous period. With underwriting loss remaining almost flat at Rs 2,366 crore, net loss for nine months ended December 31, 2021 was Rs 758 crore as against Rs 388 crore for the first nine months of fiscal 2020.

 

Going forward, the company's ability to accelerate improvement in underwriting performance such that overall profitability is revived and, capital position and solvency is sustained at strong levels, will remain a key monitorable.

Liquidity: Superior

Liquidity position of Oriental Insurance remains comfortable, supported by adequate investments being parked in highly liquid ' Government securities. On December 31, 2020, such investments formed 57% of the investment portfolio with a larger share being parked in state government bonds. Liquid assets amounted to over Rs 14,000 crore on March 31, 2020 ' largely parked in G-Secs and as cash. Additionally, the company typically maintains a cash and bank balance of over Rs. 2,000 crore. The company also benefits from a large balance of un-booked appreciation from equity investments and an extensive base of fixed assets which can be dipped into if need be.

Outlook: Stable

Oriental Insurance should maintain its competitive position in the Indian general insurance industry, alongside sustaining its sound portfolio quality, adequate capitalisation, and will receive support from GoI in the unlikely event of financial distress. The rating on the subordinated debt instrument also factors in the regulatory forbearance granted to Oriental Insurance.

Rating Sensitivity factors

Downward factors

• Lack of improvement in underwriting performance within the expected timeline, leading to an adverse impact on overall profitability and solvency margin (excluding balance in fair value change account) remaining below 1.5 times for a prolonged period of time.
• A sizeable reduction in the extent of ownership or strategic importance, to Government of India.

About the Company

Oriental Insurance is India’s sixth-largest non-life insurance company. Set up in Mumbai in 1947, the company commenced its operations as a wholly owned subsidiary of Oriental Government Security Life Assurance Company Ltd. It was a subsidiary of Life Insurance Corporation of India (LIC) from 1956 to 1973. Oriental Insurance, with its head office in New Delhi, has an extensive network of 1676 branches across the country. The company also has operations in Nepal, Kuwait, and Dubai.

Key Financial Indicators

As on/For the period ended March 31	Unit	2020	2019	2018
Gross direct premium/Gross premium written	Rs crore	13,996	13,485	10,028
Profit/(loss) after tax	Rs crore	(1524)	(294)	1,510
Combined ratio	%	141.1	134.9	118.6
Solvency margin	Times	0.92^	1.57*	1.67
Adjusted solvency margin^	Times	0.92	2.79	4.89

*includes 40% of balance in fair value change account

^includes 100% of balance in fair value change account

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
INE06GZ08015	Subordinated Debt^	18-Mar-19	8.80%	18-Mar-29	750	Complex	CRISIL AAA/Stable

^call option after 5 years of issuance