Detailed Rationale

CRISIL Ratings has reaffirmed its ‘CCR AAA/Negative’ corporate credit rating and ‘CRISIL AAA/Negative’ rating on the subordinated debt issue of United India Insurance Company Limited (United India Insurance).

 

The ratings continue to reflect the company's strategic importance to, and expectation of strong support from, the Government of India (GoI), and its established market position in the Indian general insurance industry. These strengths are partially offset by the low cushion in solvency ratio and dependence on equity infusion by the government, and weak underwriting performance, which continues to constrain earnings and solvency margin.

 

The underwriting performance has weakened as reflected in the increase in the combined ratio to 132.7% for the nine months through December 2021 from 122.7% for the corresponding period of the previous fiscal because of higher Covid claims. Till February 28, 2022, around 10% of the total claims (Rs 1,346 crore) were due to Covid-19. This resulted in a loss of Rs 1,194 crore for the period as against a loss of Rs 452 crore for the corresponding period of the previous fiscal. Negative accretion to networth led to moderation in capital position and significant reliance on equity support from the parent, GoI. Reported networth declined to Rs 2,936 crore as on December 31, 2021, from Rs 4,130 crore on March 31, 2021, owing to accumulating 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 solvency margin continued to decline owing to underwriting losses due to Covid claims, falling to 0.72 time (without including any fair value change forbearance) as of December 2021 from about 1.0 times (excluding balance of fair value change) as on March 31, 2021. Nevertheless, the company did receive equity infusion of Rs 100 crore during Q4 fiscal 2022 which is expected to result in marginal improvement in solvency margin. Therefore, the ability of the company to improve its underwriting performance in order to have material improvement solvency margin will remain key monitorable.

 

The rating on the hybrid instrument remains centrally based on forbearance granted to the company by the Insurance Regulatory and Development Authority of India (IRDAI) from adhering to provisions 3(vii) and 5(vii) of the Insurance Regulatory and Development Authority of India (Other Forms of Capital) Regulations, 2015, for the specific subordinated debt issue of Rs 900 crore. The forbearance allows the company to make interest or coupon payments to investors 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 to the extent of 25% of its networth as on March 31, 2017.

 

With a track record of over 75 years, United India Insurance is ranked as the third-largest insurer in India based on gross premiums during fiscal 2022, with a market share of 7.1%. The company underwrote Rs 15,721 crore as gross direct premium in fiscal 2022, down 5.9% on-year as against an industrial growth of 11% for the period. The degrowth can be attributed to decline in the motor insurance gross direct premium and the company’s decision to stop crop insurance business. However, it has shown good growth in niche segments such as fire, marine and aviation.

Analytical Approach

CRISIL Ratings first arrived at the corporate credit rating of United India Insurance, which is an indicator of the company’s ability to honour its debt and policyholder obligations. For arriving at the rating, CRISIL Ratings has factored in the expectation of strong government support. 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 corporate credit rating. The extent of cushion that United India Insurance intends to maintain in the solvency ratio over and above the regulatory stipulation on a steady state basis is considered to arrive at the rating on the subordinated debt instrument.

 

The regulatory forbearance granted to the company virtually eliminates the risk factor for its subordinated debt issue as it is allowed to make 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

United India Insurance is likely to receive strong government support on a steady state basis, driven by its established track record and extensive market reach which make the company strategically important to GoI. The importance of the general insurance sector, especially government-owned insurers such as United India Insurance, can also be perceived from the government plan to materially enhance insurance penetration in 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 Company Ltd (National) and The Oriental Insurance Company (Oriental) cumulatively received Rs 2,500 crore in fiscal 2020 and Rs 9,950 crore in fiscal 2021. Of this, United India Insurance received Rs 50 crore and Rs 3,605 crore, respectively. In the fourth quarter of fiscal 2022, the three PSUs received Rs 5,000 crore from the government, of which Rs 3,700 crore was infused in National, Rs 1200 crore in Oriental and Rs 100 crore in United India Insurance.

Along with the capital allocation, the government also announced its decision to shelve the merger of United India Insurance with National and Oriental and to focus on improving the standalone financial risk profiles of these entities. CRISIL Ratings has noted the government plan announced in the last annual budget to privatise one of the public general insurers in the long term, and will continue to monitor developments in this aspect.

 

* Established market position

United India Insurance is the third-largest general insurance company in India with a market share of 7.1% based on gross premiums originated during fiscal 2022. The company underwrote gross premium of Rs 15,721 crore in fiscal 2022, down 5.9% on-year against industry growth of 11%. This reduction stemmed from negative growth in key segments such as motor and the company’s decision to stop crop insurance. In line with the trend observed for most of its peers and the sector as a whole, continued traction in health insurance post Covid has been the key driver. Apart from health insurance which has outgrown motor to become the largest portfolio for United India Insurance, niche segments such as fire, engineering, marine, liability and aviation have also grown.

 

While on one hand, Covid has affected the underwriting performance for the industry, on the other, it has helped increase awareness particularly for health insurance products. The growth in health insurance portfolio is expected to correct marginally in fiscal 2023 and stabilise thereafter. An upward revision in pricing of health products is expected which will also contribute to the correction. New business and renewal premium for larger segments such as motor insurance may witness some traction as the impact of Covid-19 on the claims performance starts to fade. Tariff rates may be hiked in the third-party segment, which was absent for over two years. 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.

 

Weakness:

* Reported solvency remains below regulatory stipulation and capitalisation dependent on equity infusion by the government

Capitalisation and solvency position of United India Insurance remain strained. Reported solvency ratio, excluding the balance in fair value change account, has been below 1.5 times for over 12 quarters now. However, IRDAI’s exceptional approval has allowed the company (along with National and Oriental) to include the fair value change account balance in the available solvency margin for calculating solvency. Resultantly, on March 31, 2021, the company reported a solvency ratio of 1.41 time (factoring in 65% of the balance in fair value change account; excluding the fair value change account balance, the solvency ratio was 1.0 times). Subsequently, the company’s underwriting performance and profitability weakened on account of the surge in Covid claims during the first half of fiscal 2022 which resulted in a sharp decline in the solvency ratio to 0.72 time (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 1.53 times. Negative accrual pulled networth down to Rs 2,936 crore as on December 31, 2021, from Rs 4,130 crore as on March 31, 2021. The company received equity infusion of Rs 100 crore during the fourth quarter of fiscal 2022, which may improve the solvency margin marginally.  

 

Nonetheless, capitalisation and solvency position will remain dependent on equity support from the government and the fair value change balance over the medium term. Regulatory relaxations allowed by the government to the company may provide some support, in terms of including fair value change balance in solvency reporting. The company aims to restore its solvency position to 1.5 times (excluding fair value change balance) over the next 5-6 quarters. In the meantime, delay in improvement in underwriting performance and profitability, thereby significantly impacting capital and solvency position, will remain a key rating sensitivity factor.

 

* Modest underwriting performance

Underwriting performance had moderated after fiscal 2017 because of additional provisioning requirement in the motor third party segment. After fiscal 2017, however, underwriting performance had improved momentarily in fiscal 2018; however, it has remained weak since then. For fiscal 2021, the company reported an underwriting deficit of Rs 3,218 crore compared to a Rs 4,398 deficit in fiscal 2020. correspondingly, The combined ratio stood at 122.7% from 132% For the nine months ended December 31, 2021, underwriting deficit stood at Rs 3,062 crore as compared to Rs 2,263 crore for the corresponding period previous fiscal. Combined ratio for the nine months of fiscal 2022 stood at 132.7% as compared to 122.7% in the corresponding period in fiscal 2021 - driven by increase instances of claims due to second wave of covid.

 

Around 10% of the total claims (Rs 1,346 crore) till February 28, 2022, comprised Covid claims. Majority of the claims in the first nine months of fiscal 2022 were reported in the first half of the fiscal; the number of Covid claims declined thereafter as the second wave of the pandemic subsided. However, any deterioration in the company’s underwriting performance, further constraining its earnings and capitalisation, will be a key rating sensitivity factor.

 

* Weak earning putting pressure on capital position

Earnings remain weak, constrained by modest underwriting performance and inadequate, though stable, investment income. Despite investment income of Rs 2,799 crore for fiscal 2021, the company reported a net loss of Rs 985 crore, against a loss of Rs 1,486 crore in the previous fiscal. For the nine months of fiscal 2022, the company earned Rs 2,149 crore from investments compared to Rs 2,077 crore earned in the corresponding period of the previous fiscal. With underwriting loss of Rs 3,062 crore, net loss for the first nine months of fiscal 2022 was Rs 1,194 crore against Rs 452 crore for the corresponding period of fiscal 2021. 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: Superior

Almost 99% of the debt investments as on December 31, 2021, were in securities rated ‘AA’ or higher or in sovereign securities. Healthy liquid investments of Rs 19,325 crore also support liquidity. Government securities accounted for 64% of the investment in debt portfolio based on market value as on December 31, 2021. Liquid assets to technical reserves ratio[1] was adequate at 62% as on December 31, 2021, and March 31, 2021.

 

[1]Liquid assets = Cash balance + investments in liquid mutual funds + government securities Technical reserves = Reserve for unexpired risks, premium deficiency and outstanding claims.

Outlook: Negative

Despite capital infusion by the government, capital position of United India Insurance will remain vulnerable because of weak underwriting performance and modest earnings. The credit risk profile remains driven by expectation of strong and continued support from the government given the high strategic importance of the company to the latter. The rating on the subordinated debt instrument also factors in the regulatory forbearance granted to United India Insurance.

Rating Sensitivity Factors

Upward Factors

• Revival in reported solvency ratio to above 1.5 times (excluding balance in fair value change account) and maintaining it at above regulatory stipulation on a steady state basis
• Substantial and sustained improvement in underwriting performance leading to improvement in earnings and networth

 

Downward Factors

• Continued moderation in underwriting performance, leading to an adverse impact on profitability, and solvency margin remaining below 1.5 times for a long time
• Sizeable reduction in extent of ownership or strategic importance to the Government of India

About the Company

United India Insurance is the second-largest non-life insurance company wholly owned by GoI. The company commenced operations in 1938. After nationalisation of the general insurance business in 1972, it became one of the four subsidiaries of General Insurance Company of India (GIC). In December 2000, the subsidiaries of GIC were restructured as independent companies and GIC became a national reinsurer. United India Insurance has its head office in Chennai and has over 1,800 offices across the country.

Key Financial Indicators

		Nine months fiscal 2022	2021	FY 2020	FY 2019
Gross direct premium written	Rs crore	11,004	16,705	17,515	16,420
Profit/ (loss) after tax	Rs crore	(1,194)	(985)	(1486)	(1878)
Combined ratio	%	132.7	122.7%	132.0%	136.9%
Solvency ratio	Times	0.72	1.41#	0.30	1.52*

*Includes 100% of fair value change balance

#Includes 65% of fair value change balance

Any other information: Not applicable