May 23, 2016
Mumbai
The Oriental Insurance Company Limited
 
Rating Reaffirmed    
 
Financial Strength Rating   AAA/Stable (Reaffirmed)

CRISIL has reaffirmed its 'AAA/Stable' rating on The Oriental Insurance Company Limited (Oriental Insurance), indicating that the company has the highest degree of financial strength to honour obligations of its policyholders. The rating continues to reflect the company's established market position in the Indian general insurance industry, its healthy capitalisation, sound portfolio quality, and comfortable liquidity. The rating also factors in Oriental Insurance's 100 percent ownership by, and its strategic importance to, the Government of India (GoI). These rating strengths are partially offset by Oriental Insurance's modest underwriting performance.
 
Oriental Insurance continues to be among the top four players in the Indian general-insurance industry despite intensifying competition in the sector with the entry of new players and de-tariffication in key products. The company had a 9 percent share of the gross premiums originated in India during the nine months through December 2015, registering a premium growth of 11.7 percent over the previous corresponding period. Oriental Insurance is expected to benefit from its long and established track record, extensive market reach, and its status as a GoI-owned company, and sustain its competitive position in the industry over the medium term.
 
Oriental Insurance has healthy capitalisation as reflected in its large networth of Rs.35 billion and solvency ratio of 1.7 times as on December 31, 2015. The networth and solvency ratio as on this date will improve to Rs.123 billion and 6.75 times, respectively, if the mark-to-market gains of Rs.88 billion from its investment portfolio (reflected in the fair value change account) are factored in. Moreover, Oriental Insurance has sound portfolio quality. More than 97 percent of its debt investments are in securities rated 'AA' or higher as on December 31, 2015. In addition, liquidity is comfortable, with a large proportion of liquid investments.
 
Oriental Insurance is also strategically important to GoI because of its established track record and extensive market reach. The importance of the general insurance sector, especially GoI-owned insurers such as Oriental Insurance, can be seen in the context of GoI's plan to materially enhance insurance penetration over the long term. CRISIL believes general insurance companies, especially government-owned entities, are systemically important and will receive support from GoI in the unlikely event of strain on their credit risk profile.
 
However, Oriental Insurance's underwriting performance remains modest as reflected in its underwriting loss of Rs.10.6 billion for the nine months through December 2015 (Rs.10.4 billion for the corresponding period of previous fiscal). Consistent losses in the motor (especially third-party motor pool) and health segments, high operating expense ratios, and inadequate pricing in the fire and engineering segments, as a result of de-tariffication, heavy corporate discounts for group health schemes, are the primary factors responsible for underwriting losses in the general insurance industry. The combined ratio1 also remained high at 118 percent for the nine months through December 2015, marginally decreasing from 121 percent the previous corresponding period. Oriental Insurance's financial position nevertheless is supported by its substantial investment income of Rs.13.7 billion for the nine months through December 2015 (Rs.15.2 billion for the corresponding period of previous fiscal). CRISIL believes the underwriting performance will improve over the medium term, supported by its efforts to control the performance of its health insurance portfolio and increase in tariffs in the motor third-party business. However, to ensure steady state underwriting profits, risk-based pricing needs to be implemented across all the corporate businesses such as group health, fire, and marine.

Outlook: Stable

CRISIL believes Oriental Insurance will maintain its competitive position in the Indian general insurance industry and sustain its healthy capitalisation, sound asset quality, and comfortable liquidity, over the medium term. CRISIL also believes the company will receive support from GoI in the unlikely event of financial distress. The outlook may be revised if the company incurs substantial underwriting losses, adversely impacting its profitability. A sizeable change in the extent of ownership or strategic importance of Oriental Insurance to GoI may also result in an outlook revision.

About the Company

Oriental Insurance is India's fourth-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. On nationalisation of the general insurance business in 1973, it became one of the four subsidiaries of General Insurance Company of India (GIC); the four general insurance companies were divided across four geographical regions in India, Oriental Insurance was allotted the northern zone. Oriental Insurance, with its head office in New Delhi, has an extensive network of 1909 branches across the country. The company also has operations in Nepal, Kuwait, and Dubai.
 
Oriental Insurance reported a profit after tax (PAT) of Rs.3.9 billion for 2014-15 (refers to financial year, April 1 to March 31) as against a PAT of Rs.4.6 billion for 2013-14. During 2014-15, the company generated gross premiums of Rs.75.6 billion in India, a 3.8 percent year-on-year growth, but much lower than the industry average of 11.5 percent. For the nine months ended on December 31, 2015, Oriental Insurance reported a PAT of Rs.3.3 billion as against a PAT of Rs.3.2 billion for the previous corresponding period.

1Combined ratio = Net incurred claims ratio + expense ratio. A high combined ratio indicates the company's high proportion of payouts vis-a-vis premium received. Net incurred claims ratio is calculated as a percentage of net premia earned.

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May 23, 2016

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