Detailed Rationale

CRISIL Ratings has reaffirmed its Corporate Credit Rating (CCR) and rating on subordinated debt issue of United India Insurance Company Ltd (United India Insurance) at ‘CCR AAA/Negative’ and ‘CRISIL AAA/Negative’, respectively.

The rating on the hybrid instrument remains centrally based on forbearance granted by the Insurance Regulatory and Development Authority of India (IRDAI) to United India 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 900 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 continue to reflect the company's strategic importance to, and expectation of strong support from, the Government of India, 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 dependence of capitalisation on equity infusion by the government.

The Negative outlook continues to reflect weakness in the underwriting performance of United India Insurance over the medium term, thereby constraining its overall profitability, capitalisation and solvency position.

With a track record of over 75 years, the company ranked as the second-largest insurer in the industry based on the gross premiums written during fiscal 2021, with a market share of 8.4%. As macro growth prospects remained subdued after Covid-19, its gross direct premium de-grew by 4.6% over fiscal 2021 against industrial growth of 5.2%. 

The company honoured Rs 896.7 crore of claims in the fiscal as coverage for Covid-19 cases. Apart from the standard product, Corona Kavach, these claims were also reported from the traditional mediclaim policyholders. However, claims for non-Covid illnesses/casualties were lower during the year. Instances of claim reports for other segments were also lower during fiscal 2021 due to restricted public activity and vehicular traffic. This led to a reduced claims ratio of 89.9% for the first nine months of fiscal 2021 compared to 106.7% for the corresponding period previous fiscal. Hence, the combined ratio improved to 122.7% from 135.4%.

Since the severity and frequency of casualties are higher in the second wave of the pandemic, penetration of health insurance has increased in the last one year. Hence, an upward revision in Covid-19 coverage products could be in order to adequately factor in the increased risks. Over the medium term, losses incurred from the pandemic and their impact on the overall underwriting performance remain key monitorables.

Reported networth was Rs 3,962 crore on December 31, 2020, which, in addition to the balance in fair value change account, further increases to Rs 5,920 crore. Since the fourth quarter of fiscal 2020, the company has received Rs 3,655 crore as equity capital from the government, which has provided some cushion to networth. Reported solvency, including 85% of the balance in fair value change account, stood at 1.38 times on December 31, 2020 (0.30 time as on March 31, 2020). However, ability to accelerate and sustain the improvement in underwriting performance so as to self-sustain capital position in solvency remains critical in the long run. For the nine months ended December 31, 2020, underwriting deficit of Rs 2,263 crore led to an overall loss of Rs 452 crore. However, this was partly offset by Rs 2,077 crore of investment income.

For fiscal 2022, growth in new business premium for larger segments such as motor insurance could remain muted for a longer stretch as revival in new sales volumes in the auto sector will happen only gradually once 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 grew 16.9% year-on-year in fiscal 2021, the prospects will remain strong on the back of 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 last fiscal. However, with the increasing ticket size of Covid-19 claims, the impact of actual losses borne by the insurers after the second wave remains to be seen.

Analytical Approach

CRISIL Ratings first arrived at the corporate credit rating of United India Insurance, which is an indication of its ability to honour its debt and policyholder obligations. For arriving at the CCR, CRISIL Ratings has factored in the expectation of strong government support, in addition to the assessment of the company’s business, financial, and management risk profiles. 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 United India 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.

 

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:

* Strategic importance to, and expectation of strong support from, the Government of India

United India Insurance is expected to receive strong government support on a steady state basis, driven by its established track record and extensive market reach that make it strategically important to the government. The importance of the general insurance sector, especially government-owned insurers such as United India Insurance, can also be perceived in the context of 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.

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 Ratings also takes note of the government plan announced in the last annual budget to privatise one of the public general insurers in the long term, and would continue to monitor developments in this aspect.

 

* Established market position

United India Insurance is the second-largest general insurance company in India with a market share of around 8.4% based on gross premiums originated during fiscal 2021. The company underwrote gross premium of Rs 16,711 crore for fiscal 2021, registering a negative growth of 4.6% against industry-level growth of 5.2%. This reduction primarily stemmed from negative growth in key segments such as motor and crop, which is applicable for the entire sector. Over fiscal 2021, the general insurance sector witnessed negative growth of 1.7% in the motor segment and 3.4% in the crop segment. Against this, United India Insurance motor premium de-grew by 11.2% whereas premium from the crop segment de-grew by 53.8%. In the health segment, wherein the industry grew at a robust rate of 13.4% during fiscal 2021 driven by increased demand for products due to the pandemic, health insurance portfolio of the company grew at 16.9%. General insurance sector in the fire segment grew at 28.1%, stimulated by standardisation of rates across players. However, United India Insurance witnessed a growth of 13.7%

 

Over the next fiscal, the company plans to grow at 5-7% with the underlying premise that the second wave of the pandemic should tail out by the end of the first quarter of fiscal 2022. This growth will be driven by the motor, health and fire segments.

 

Weakness:

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

Capitalisation and solvency position of United India Insurance remains strained. On March 31, 2020, the company reported a solvency ratio of 0.30 time (factoring in 100% of the balance in fair value change account) against 1.52 times as on March 31, 2019. The sharp decline was because of the reduction in fair value change balance imposed by volatility in equity markets to negative Rs 618 crore from Rs 3,454 crore. With capital infusion by the government and gradual recovery in equity markets, solvency ratio (factoring in 85% of the balance in fair value change account as on that date) recovered to 1.38 times as on December 31, 2020. Reported networth also increased to Rs 3,962 crore as on December 31, 2020, from Rs 1,511 crore as on March 31, 2020.

 

Over the medium term, capitalisation and solvency position are expected to remain dependent on equity support from the government and the fair value change balance of the company. 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) over the next 5-6 quarters. In the meantime, delay in improvement in underwriting performance and overall profitability, thereby significantly impacting capital and solvency position, will remain 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 2020, the company reported an underwriting deficit of Rs 4,398 crore compared to a Rs 5,024 deficit in fiscal 2019. Correspondingly, the combined ratio also improved marginally to 132.0% from 136.9% driven by improvement in claim ratio to 101.5% from 109.4%. However, some of this improvement was offset by the increase in expense ratio to 30.6% from 27.5%.

 

For the nine months ended December 31, 2020, underwriting deficit stood at Rs 2,263 crore, lower than the deficit of Rs 3,477 crore for the corresponding period previous fiscal. Combined ratio for the first nine months of fiscal 2021 stood at 122.7% - better than 132.0% in the corresponding period in fiscal 2020 - driven by reduced instances of claims due to the lockdown. While claims ratio for fiscal 2021 is not expected to increase materially from current levels, with restoration of operational activity – mainly increased vehicular activity – claims would increase to pre-Covid levels.

 

Underwriting performance is expected to remain modest over the medium term and improve only gradually in the long term. However, with increased penetration of health insurance products over the last 3-4 quarters alongside surge in Covid-19 casualties, losses from the pandemic 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 (such as motor and fire).

 

Any significant deterioration in the underwriting performance straining earnings profile and capitalisation will be a key rating sensitivity factor.

 

* Moderation in profitability metrics posing pressure on capital position and profitability

Earnings profile has remained modest because of average underwriting performance. Despite a stable investment income of Rs 3,177 crore for fiscal 2020, the company reported a net loss of Rs 1,486 crore for the fiscal, against loss of Rs 1,878 crore in the previous fiscal. These losses was a factor of higher underwriting deficit for both the fiscals.

 

For the nine months ended December 31, 2020, while underwriting deficit improved from the corresponding period previous fiscal, income from investments remained almost stable. For the nine months of fiscal 2021, the company earned Rs 2,077 crore as income from investments compared to Rs 1,979 crore earned in the corresponding period previous fiscal. With underwriting loss of Rs 2,2,63 crore, net loss for the nine months ended December 31, 2021, was Rs 452 crore against Rs 1,359 crore for the same period in fiscal 2020.

 

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 97% of the debt investments were in securities rated ‘AA’ or higher or in sovereign securities as on December 31, 2020. Healthy liquid investments of Rs 14,088 crore also support liquidity. Government securities accounted for 60% of the investment portfolio based on market value as on December 31, 2020. Liquid assets to technical reserves ratio[1] remains adequate at 91% and 53% as on December 31 and March 31, 2020, respectively.

Outlook\: Negative

Despite improvement after capital infusion by the government, capital position of United India Insurance is expected to remain vulnerable because of weak underwriting performance and modest earnings profile. Nonetheless, credit risk profile remains centrally driven by expectation of strong and continued support from the government given the high strategic importance of the company to the latter, and is supported by its established market position in the general insurance industry and sustenance of sound portfolio quality. 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 the Government of India. 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 head office in Chennai and over 2,000 offices across the country.

 

 

[1] Liquid assets = Cash balance + investments in liquid mutual funds + government securities

Technical reserves = Reserve for unexpired risks, premium deficiency and outstanding claims.

Key Financial Indicators

		9M2021	FY 2020	FY 2019	FY 2018
Gross direct premium written	Rs.Crore	11,893	17,515	16,420	17,429
Profit/ (loss) after tax	Rs.Crore	(452)	(1486)	(1878)	1,003
Combined ratio	%	122.7%	132.0%	136.9%	120.7%
Solvency ratio	Times	1.38#	0.30*	1.52*	1.54

*includes 100% of fair value change balance

#includes 85% of fair value change balance

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
INE346Z08011	Subordinated Debt	2-Feb-18	8.25%	2-Feb-28	900	Complex	CRISIL AAA/Negative
NA	Corporate Credit Rating	NA	NA	NA	NA	NA	CCR AAA/Negative