Rating Rationale
December 29, 2017 | Mumbai
United India Insurance Company Limited
'CRISIL AAA/Stable' assigned to Subordinated Debt Issue 
 
Rating Action
Rs.900 Crore Subordinated Debt Issue CRISIL AAA/Stable (Assigned)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has assigned its 'CRISIL AAA/Stable' rating to the Rs.900 crore subordinated debt issue (also known as hybrid instrument) of United India Insurance Company Limited (United India Insurance).

The rating on the hybrid instrument is centrally based on forbearance granted by 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 March 31, 2017.

The rating reflects the company's strategic importance to, and expectation of strong support from, the Government of India (GoI), an established market position in the Indian general insurance industry, sound portfolio quality, and adequate capitalisation (including un-booked appreciation in equity investments). These strengths are partially offset by significant weakening of the underwriting performance accentuated by additional reserving requirement for motor third-party business and the resultant pressure on profitability and solvency margin.

Analytical Approach

CRISIL has first assessed United India Insurance's financial strength, which is an indication of the company's ability to meet policyholders' obligations. For arriving at the financial strength, 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, that of the financial strength. 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, GoI
Strong government support is expected given the company's established track record and extensive market reach. The importance of the general insurance sector, especially government-owned insurers such as United India Insurance, can also be perceived in the context of GoI's plan to materially enhance insurance penetration over the long term. General insurance companies, especially government-owned entities, are systemically important and will receive support from the government in the event of strain on their credit risk profiles.

* Established market position
United India Insurance is the second-largest general insurance company in India. It has a market share of 13.2% based on gross premiums originated in India in fiscal 2017. The company registered healthy premium growth of over 31% during fiscal 2017 and underwrote premiums of Rs 16,063 crore as on March 31, 2017 (Rs 12,250 crore as on March 31, 2016). The growth has moderated in the first half of fiscal 2018 as the company is focusing on improving its underwriting performance across segments. However, despite the moderation, United India Insurance's market position remains strong as reflected in market share of 10.5% based on the gross premium written in India in the first half of fiscal 2018. Moreover, United India Insurance continues to benefit from its long and established track record, extensive market reach, and its status as a GoI-owned company, and is expected to remain a large player in the industry over the medium term.

* Sound portfolio quality
More than 98% of the debt investments were in securities rated 'AA' or higher as on September 30, 2017. In addition, liquidity is comfortable, with a large proportion of liquid investments. Government securities accounted for 42% of the debt investment portfolio, based on market value as on September 30, 2017.

* Adequate capital position
The adjusted solvency ratio was 2.13 times as on September 30, 2017, factoring in the entire un-booked appreciation of Rs 5388 crore in equity investment. The adjusted networth is also quite large at Rs 9266 crore as on September 30, 2017 (including the un-booked appreciation in equity investment). The reported solvency ratio, though, has been below regulatory stipulation since the last quarter of fiscal 2017 on account of deterioration in underwriting performance, and was modest at 1.08 times as on September 30, 2017. However, the capital position is expected to improve substantially over the medium term through subordinated debt issuance and an initial public offering. Ability to maintain adjusted solvency ratio comfortably above regulatory stipulation nevertheless remains critical and is a key rating sensitivity factor.

Weaknesses
* Significant weakening in underwriting performance
United India Insurance's underwriting performance declined sharply in fiscal 2017 as reflected in a steep deterioration in its combined ratio to 134% in fiscal 2017 from 120% in the previous fiscal. The decline in underwriting performance is largely attributable to high claims ratio in group health and fire segments and requirement of additional reserves for motor third party business. Though the underwriting performance is expected to improve because of significant correction in pricing in group health and fire segments, it is expected to remain under pressure over the medium term because of additional reserving requirement against claims incurred but not reported in the motor third party business.

* Pressure on profitability and solvency margin
The weakening in underwriting performance also impacted profitability. Underwriting deficit was Rs 4445 crore in fiscal 2017 against Rs 2216 crore in the previous fiscal. As a result, the company had a net loss of Rs 1913 crore for fiscal 2017 against a net profit of Rs 221 crore for fiscal 2016. During the first half of fiscal 2018, the company reported a marginal profit of Rs 61 crore. The management is undertaking measures to improve underwriting performance such as significant correction in pricing across segments and reduction in volumes from weaker performing branches. Profitability, nevertheless, is expected to remain under pressure due to requirement of additional reserves for the motor third-party business. The reported solvency ratio declined to 1.15 times as on March 31, 2017 (against a regulatory requirement of 1.5 times) from 1.91 times a year earlier.
Outlook: Stable

United India Insurance will maintain its market position in the Indian general insurance industry, and will sustain its sound portfolio quality, and 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 United India Insurance. The outlook may be revised to 'Negative' if underwriting performance weakens substantially, leading to an adverse impact on profitability and adjusted solvency margin. A sizeable change in the extent of ownership or strategic importance of United India Insurance to GoI may also result in a revision in the outlook to 'Negative'.

About the Company

United India Insurance is India's second-largest non-life insurance company. Wholly owned by GoI, the company commenced operations in 1938 and has a track record of over 75 years. On nationalisation of the general insurance business in 1972, it became one of the four subsidiaries of General Insurance Company of India (GIC). United India Insurance has its head office in Chennai and has 2100 offices across the country.

The company had a net loss of Rs 1913 crore in fiscal 2017 against a net profit of Rs 221 crore for the previous fiscal. The company had a marginal profit of Rs 61 crore in the first half of fiscal 2018 against a net loss of Rs 429 crore for the corresponding period of the previous fiscal.

Key Financial Indicators
As on/For the period ended March 31 Unit 2017 2016
Gross direct premium/Gross premium written Rs crore 16063 12250
Profit after tax Rs crore -1913 221
Combined ratio % 134.0 119.9
Solvency margin Times 1.15 1.91

Any other information: Not applicable

Note on complexity levels of the rated instrument:
CRISIL complexity levels are assigned to various types of financial instruments. The CRISIL complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL complexity levels for instruments that they consider for investment. Users may also call the Customer Service Helpdesk with queries on specific instruments.
Annexure - Details of Instrument(s)
ISIN Name of Instrument Date of Allotment Coupon
Rate (%)		 Maturity Date Issue
Size
(Rs. Cr)		 Rating Assigned  with Outlook
NA Subordinated Debt* NA NA NA 900 CRISIL AAA/Stable
*Yet to be Placed
Annexure - Rating History for last 3 Years
  Current 2017 (History) 2016  2015  2014  Start of 2014
Instrument Type Quantum Rating Date Rating Date Rating Date Rating Date Rating Rating
Subordinated Debt  LT  900  CRISIL AAA/Stable    --    --    --    --  -- 
Table reflects instances where rating is changed or freshly assigned. 'No Rating Change' implies that there was no rating change under the release.
Links to related criteria
Rating Criteria for General Insurance Companies
CRISILs criteria for Hybrid Issuances of General Insurance Companies
Criteria for Notching up Stand Alone Ratings of Entities Based on Government Support

For further information contact:
Media Relations
 Analytical Contacts
 Customer Service Helpdesk
Saman Khan
Media Relations
CRISIL Limited
D: +91 22 3342 3895
B: +91 22 3342 3000
saman.khan@crisil.com

Naireen Ahmed
Media Relations
CRISIL Limited
D: +91 22 3342 1818
B: +91 22 3342 3000
naireen.ahmed@crisil.com

Jyoti Parmar
Media Relations
CRISIL Limited
D: +91 22 3342 1835
B: +91 22 3342 3000
 jyoti.parmar@crisil.com
Krishnan Sitaraman
Senior Director - CRISIL Ratings
CRISIL Limited
D:+91 22 3342 8070
krishnan.sitaraman@crisil.com

Ajit Velonie
Director - CRISIL Ratings
CRISIL Limited
D:+91 22 4097 8209
ajit.velonie@crisil.com

Prashant Mane
Rating Analyst - CRISIL Ratings
CRISIL Limited
D:+91 22 3342 3397
prashant.mane@crisil.com 		Timings: 10.00 am to 7.00 pm
Toll free Number:1800 267 1301

For a copy of Rationales / Rating Reports:
CRISILratingdesk@crisil.com
 
For Analytical queries:
ratingsinvestordesk@crisil.com

 

Note for Media:
This rating rationale is transmitted to you for the sole purpose of dissemination through your newspaper / magazine / agency. The rating rationale may be used by you in full or in part without changing the meaning or context thereof but with due credit to CRISIL. However, CRISIL alone has the sole right of distribution (whether directly or indirectly) of its rationales for consideration or otherwise through any media including websites, portals etc.


About CRISIL Limited

CRISIL is an agile and innovative, global analytics company driven by its mission of making markets function better. We are India’s foremost provider of ratings, data, research, analytics and solutions. A strong track record of growth, culture of innovation and global footprint sets us apart. We have delivered independent opinions, actionable insights, and efficient solutions to over 100,000 customers.

We are majority owned by S&P Global Inc., a leading provider of transparent and independent ratings, benchmarks, analytics and data to the capital and commodity markets worldwide.

For more information, visit www.crisil.com 

Connect with us: TWITTER | LINKEDIN | YOUTUBE | FACEBOOK


About CRISIL Ratings
CRISIL Ratings is part of CRISIL Limited (“CRISIL”). We pioneered the concept of credit rating in India in 1987. CRISIL is registered in India as a credit rating agency with the Securities and Exchange Board of India (“SEBI”). With a tradition of independence, analytical rigour and innovation, CRISIL sets the standards in the credit rating business. We rate the entire range of debt instruments, such as, bank loans, certificates of deposit, commercial paper, non-convertible / convertible / partially convertible bonds and debentures, perpetual bonds, bank hybrid capital instruments, asset-backed and mortgage-backed securities, partial guarantees and other structured debt instruments. We have rated over 24,500 large and mid-scale corporates and financial institutions. CRISIL has also instituted several innovations in India in the rating business, including rating municipal bonds, partially guaranteed instruments and microfinance institutions. We also pioneered a globally unique rating service for Micro, Small and Medium Enterprises (MSMEs) and significantly extended the accessibility to rating services to a wider market. Over 1,10,000 MSMEs have been rated by us.

CRISIL PRIVACY NOTICE

CRISIL respects your privacy. We use your contact information, such as your name, address, and email id, to fulfil your request and service your account and to provide you with additional information from CRISIL and other parts of S&P Global Inc. and its subsidiaries (collectively, the “Company) you may find of interest.

For further information, or to let us know your preferences with respect to receiving marketing materials, please visit www.crisil.com/privacy. You can view the Company’s Customer Privacy at https://www.spglobal.com/privacy

Last updated: April 2016

DISCLAIMER

This disclaimer forms part of and applies to each credit rating report and/or credit rating rationale that we provide (each a “Report”). For the avoidance of doubt, the term “Report” includes the information, ratings and other content forming part of the Report. The Report is intended for the jurisdiction of India only. This Report does not constitute an offer of services. Without limiting the generality of the foregoing, nothing in the Report is to be construed as CRISIL providing or intending to provide any services in jurisdictions where CRISIL does not have the necessary licenses and/or registration to carry out its business activities referred to above. Access or use of this Report does not create a client relationship between CRISIL and the user.

We are not aware that any user intends to rely on the Report or of the manner in which a user intends to use the Report. In preparing our Report we have not taken into consideration the objectives or particular needs of any particular user. It is made abundantly clear that the Report is not intended to and does not constitute an investment advice. The Report is not an offer to sell or an offer to purchase or subscribe for any investment in any securities, instruments, facilities or solicitation of any kind or otherwise enter into any deal or transaction with the entity to which the Report pertains. The Report should not be the sole or primary basis for any investment decision within the meaning of any law or regulation (including the laws and regulations applicable in the US).

Ratings from CRISIL Rating are statements of opinion as of the date they are expressed and not statements of fact or recommendations to purchase, hold, or sell any securities / instruments or to make any investment decisions. Any opinions expressed here are in good faith, are subject to change without notice, and are only current as of the stated date of their issue. CRISIL assumes no obligation to update its opinions following publication in any form or format although CRISIL may disseminate its opinions and analysis. CRISIL rating contained in the Report is not a substitute for the skill, judgment and experience of the user, its management, employees, advisors and/or clients when making investment or other business decisions. The recipients of the Report should rely on their own judgment and take their own professional advice before acting on the Report in any way.

Neither CRISIL nor its affiliates, third party providers, as well as their directors, officers, shareholders, employees or agents (collectively, “CRISIL Parties”) guarantee the accuracy, completeness or adequacy of the Report, and no CRISIL Party shall have any liability for any errors, omissions, or interruptions therein, regardless of the cause, or for the results obtained from the use of any part of the Report. EACH CRISIL PARTY DISCLAIMS ANY AND ALL EXPRESS OR IMPLIED WARRANTIES, INCLUDING, BUT NOT LIMITED TO, ANY WARRANTIES OF MERCHANTABILITY, SUITABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE. In no event shall any CRISIL Party be liable to any party for any direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, or losses (including, without limitation, lost income or lost profits and opportunity costs) in connection with any use of any part of the Report even if advised of the possibility of such damages.

CRISIL Ratings may receive compensation for its ratings and certain credit-related analyses, normally from issuers or underwriters of the instruments, facilities, securities or from obligors. CRISIL’s public ratings and analysis as are required to be disclosed under the regulations of the Securities and Exchange Board of India (and other applicable regulations, if any) are made available on its web sites, www.crisil.com (free of charge). Reports with more detail and additional information may be available for subscription at a fee – more details about CRISIL ratings are available here: www.crisilratings.com.

CRISIL and its affiliates do not act as a fiduciary. While CRISIL has obtained information from sources it believes to be reliable, CRISIL does not perform an audit and undertakes no duty of due diligence or independent verification of any information it receives and / or relies in its Reports. CRISIL keeps certain activities of its business units separate from each other in order to preserve the independence and objectivity of the respective activity. As a result, certain business units of CRISIL may have information that is not available to other CRISIL business units. CRISIL has established policies and procedures to maintain the confidentiality of certain non-public information received in connection with each analytical process. CRISIL has in place a ratings code of conduct and policies for analytical firewalls and for managing conflict of interest. For details please refer to: http://www.crisil.com/ratings/highlightedpolicy.html

CRISIL’s rating criteria are generally available without charge to the public on the CRISIL public web site, www.crisil.com. For latest rating information on any instrument of any company rated by CRISIL you may contact CRISIL RATING DESK at CRISILratingdesk@crisil.com, or at (0091) 1800 267 1301.

This Report should not be reproduced or redistributed to any other person or in any form without a prior written consent of CRISIL.

All rights reserved @ CRISIL