Detailed Rationale

CRISIL Ratings has assigned its ‘CRISIL AA/Stable’ rating on the subordinated debt issue (also known as hybrid instrument) of Cholamandalam MS General Insurance Company Limited (Chola MS). Chola MS has received Insurance Regulatory and Development Authority of India (IRDAI) approval to exercise call option on the existing subordinated debt of Rs 100 crore. As per the instrument terms, this call option will be exercised on May 25, 2022. Further, the company has also received approval from IRDAI for reissuance of new subordinated debt with same quantum of Rs 100 crore. Accordingly, the issuance of new subordinate debt instrument of Rs 100 crore will be done post exercising call option on May 25, 2022 and redemption of existing subordinated debt. The total outstanding subordinated debt will not exceed Rs 100 crore.

The rating continues to factor in the strong support from the parents: the Murugappa group (60% stake through Cholamandalam Financials Holdings Ltd) and Mitsui Sumitomo Insurance Co Ltd (MSIG; rated 'A+/Stable/A-1' by S&P Global Ratings). The company also benefits from its association with Cholamandalam Investment and Finance Co Ltd (Chola Finance; 'CRISIL AA+/Stable/CRISIL A1+') and has a strong presence in the motor segment.

The rating also factors in Chola MS’s adequate capital position, sound risk management practices, and sound investment policies. However, product diversity is limited as the motor segment majority of gross premium.

Chola MS is the eighth largest private player in the general insurance sector of India with a market share of 2.14% (based on sectoral gross direct premium written in India during nine months ended December 31, 2021). Against an industrial growth of 11% over the first nine months of fiscal 2022, the company’s gross direct premium grew at 10%. This growth was primarily driven by motor segment, which remains the largest portfolio which grew by around 12% on a year on year basis.

During the nine months of fiscal 2022, the company honoured Rs 270 crore of claims as coverage for Covid-19 cases, which constitutes 14.7% of the total claims incurred by the company during the period. Nevertheless, on overall underwriting performance, the company’s claims ratio stood at 71.4% for nine months fiscal 2022 as compared to 72.6% for the corresponding period of the previous fiscal. With increase in expense ratio, combined ratio increased to 113.0% from 107.1% for the same period

Analytical Approach

CRISIL Ratings has first assessed the financial strength of Chola MS, which indicates ability to meet policyholder obligations. For arriving at the financial strength rating, CRISIL Ratings has factored in the strong support from the Murugappa group, and the business, financial, and management risk profiles of Chola MS. The subordinated debt instrument is then tested for additional risk factors to determine whether the rating should be the same as, or lower than, the financial strength rating. The extent of cushion that the company 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 stance of the Murugappa group on the level of cushion the company would maintain in the solvency ratio on a steady-state basis has also been factored in.

Key Rating Drivers & Detailed Description

Strengths:

• Strong support from the Murugappa group and MSIG

The company receives significant funding, branding, managerial and technical support from the Murugappa group and MSIG. The Murugappa group, that includes Cholamandalam Financial Holdings Ltd, have two common members on board of Chola MS. Both the parents are expected to continue to support the company’s growth plan and contribute to any incremental capital requirement. The Murugappa group is also likely to provide timely capital support in case of distress. Reduction in ownership by the group below a majority holding, or any change in CRISIL Ratings’ view on the group or opinion on Chola MS's strategic importance to the group, will be rating sensitivity factors.

 

• Established presence in the motor segment and growth in other segments expected to remain stable

The company is a sizeable player in the motor segment with a market share of 4.9%, based on motor gross premium written during nine months ended December 2021. Motor segment premium registered a growth of 12% as compared to corresponding period of previous fiscal and amounted to Rs 2,442 crore during nine months ended December 2021 as compared to industry growth of 3.75% (Rs 3,125 crore in Fiscal 2021). The company benefits from its association with Chola Finance and is the preferred insurer for nearly 30% of commercial vehicles funded by the latter. Chola MS also benefits from its association with MSIG and has made robust inroads in garnering business from Japanese and Korean automobile companies established in India. Within the motor segment, it focuses on commercial vehicles, which account for nearly 48% of gross premium.

 

The fire segment premium grew by 15% to Rs 361 crore during nine months ended December 31, 2021 as compared to 313 crore in corresponding period of previous fiscal whereas the health segment witnessed degrowth of 6% on account of economic conditions. The company has tie ups with large private and public sector banks to expand its presence in the health and personal accident segments as well as commercial lines of business. The company is expected to grow in health segment going forward however it is expected to remain largely focused towards retail/individual segment.

 

Apart from the impact that Covid-19 has had on the underwriting performance of the insurance companies, it has also led to an increased awareness about health insurance products among the customers. For fiscal 2023, the growth in health insurance portfolio of the sector is expected to correct marginally and stabilize thereafter. An upward revision in pricing of health products is expected which would also contribute to this correction. New business and renewal premium for larger segments like motor insurance could witness some traction as the impact of Covid-19 on the claim’s performance starts to fade. A hike in tariff rates within the Third Party segment, which was absent for over two years now, can also be expected. 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.

 

• Sound risk management practices

The company has a comprehensive risk management policy. Its risk management committee discusses and reviews the risks on a quarterly basis and periodically reviews changes in risk categorization both in terms of risk improvement and risk deterioration, as well as emerging risks. The company has been able to maintain stable underwriting performance, with overall combined ratio below 107% in the three fiscals through 2021 (107% in fiscal 2021). However, during nine month ended December 2021, the combined ratio increased and stood at 113% driven primarily by higher claims dur to Covid’19 over last year and also  due to an increase in operating expenses of the company on account of digitization initiatives taken by the company. The combined ratio for motor segment and health segment stood at 101% and 250% respectively for nine month ended December 2021. Increasing profitable mix of business within the motor segment has resulted overall claims ratio being stable largely between 60-63% during three quarters of fiscal 2022. The deterioration in underwriting performance of health segment is on account of inadequate pricing of Covid related products. Though robust risk management practices will enable the company to maintain operating performance and solvency margin, ability to maintain strong underwriting performance in other retail segments with increase in scale is yet to be demonstrated.

 

• Sound investment quality supported by stringent investment policy

The company follows stringent investment strategies and invests in sovereign securities or corporate debt instruments typically rated 'AA' or higher. Investments in equities are kept below 5% of the total investments on book. Liquidity is also comfortable. Government securities accounted for around 64% of the investment portfolio based on book value as on December 31, 2021.

 

• Adequate capital position

Chola MS reported networth of Rs 1,946 crore as on December 31, 2021 (Rs 1,885 crore as on March 31, 2021). Networth remains supported by healthy internal cash accruals. The solvency margin stood at 1.86 times as compared to 2.08 times as on March 31, 2021. The company witnessed decline in solvency margin in which stood at 1.79 times and 1.77 times respectively for Q1 fiscal 2022 and Q2 fiscal 2022. The decline in solvency margin was on account of IRDA disallowing Rs. 166 crore of deposit from the computation of the available solvency margin (ASM) that was deposited with Income Tax (IT) Department against contingent liabilities of Rs 511 crore. However, the current level of solvency margin is well above stipulated regulatory levels and CRISIL ratings believes that the capital position in the long run will be supported by sound risk management practices and timely, need-based capital infusion by the parents. The management has articulated that it will maintain a high level of cushion in the solvency ratio on a steady-state basis, and the Murugappa group is supportive of this. The ability to maintain solvency ratio at a similar level on a sustained basis remains a key rating sensitivity factor.

 

Weakness:

• Limited diversity in product segments

The motor segment accounts for nearly 71% of gross premium, against an average of 50% for private insurers. Moreover, the motor third-party segment contributes to 64% of the premium, making the company susceptible to the associated underwriting risks, given the long tail and unlimited exposure. However, it has maintained a sound underwriting performance so far by being selective about asset segments and geographies. Moreover, it clears 80% of claims pertaining to motor third-party through out-of-court settlements, thereby reducing uncertainty of long tail claims exposure. Furthermore, it is focusing on improving product diversity in the retail segment as well as commercial lines of business through associations with large private and public sector banks. The company is gradually expanding its presence in retail health, personal accident, and small and medium enterprise segments through the bancassurance channel. It continues to face intense competition from the public sector and other large private insurers, which have strong distribution networks due to their association with large banks, non-banking financial companies, and dealers of large auto manufacturers. The ability to strengthen its distribution network and increase scale in other retail segments, while keeping cost under control and report underwriting profits, remains a monitorabl

Liquidity: Strong

Liquidity position of Chola MS remains comfortable supported by adequate investments in government securities and liquid mutual funds. Around 88% of the debt investments were in securities rated 'AA' or higher as on December 31, 2021. Liquid investments were Rs 7,603 crore as on December 31, 2021. Government securities accounted for 64% of the debt investment portfolio, based on market value as on December 31, 2021.

Outlook: Stable

CRISIL Ratings believes Chola MS will continue to derive strong financial, branding, and technical support from the parents, both on an ongoing basis and during distress, and maintain high level of cushion in its solvency margin over and above the regulatory minimum. The company will also benefit from its established presence in the motor segment and maintain sound risk management practices and investment quality

Rating Sensitivity factors

Upward factors

• Ability to maintain adequate cushion in solvency ratio above regulatory minimum on sustained basis
• Improvement in product diversity and earnings with return on equity maintained at 15-17%

 

Downward factors

• Decline in solvency margin to below 1.55 times on a sustained basis
• Continued moderation in underwriting performance, leading to an adverse impact on profitability
• Sizeable reduction in ownership by, or strategic importance to, the Murugappa group

About the Company

Chola MS is a joint venture of the Murugappa group and MSIG. The company has a large presence in the motor segment with overall market share 2.2% (4.9% for motor segment) based on gross premium written in fiscal 2022. Networth was Rs 1,946 crore and solvency ratio was 2.01 times as on December 31, 2021.

 

Chola MS had a profit after tax of Rs 282 crore on gross written premiums of Rs 4,388 crore in fiscal 2021, against profit after tax of Rs 149 crore on gross written premiums of Rs 4,398 crore in the previous fiscal. For nine months ended December 2021, the company reported profit after tax of Rs 62 crore on gross written premium of Rs 3,442 crore.

Key Financial Indicators

As on / for the period,		Mar-22	Dec-21	Mar 21
Gross premium written	Rs. Cr.	4824	3442	4388
Networth	Rs. Cr.	1962	1946	1885
Profit after tax	Rs. Cr.	77	62	282
Combined ratio	%	111.0	113.0	107.3
Solvency margin	Times	1.95	1.86	2.08

 

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
INE439H08012	Subordinated Debt	25-May-17	8.75%	25-May-27*	100	Complex	CRISIL AA/Stable
NA	Subordinated Debt#^	NA	NA	NA	100	Complex	CRISIL AA/Stable

*The company has a call option exercisable five years from the deemed date of allotment

#Proposed issuance. Total outstanding Subordinated Debt will not exceed Rs 100 crore, to be issued after exercising call option on 25th May 2022

^yet to be issued