Detailed Rationale

CRISIL Ratings has reaffirmed its ‘CRISIL A+/Stable’ corporate credit rating on Go Digit General Insurance Limited (GoDigit).

 

The rating centrally factors in the strategic importance of GoDigit to, and expectation of continued financial support from its ultimate co-promoter, Fairfax Financial Holdings Ltd (Fairfax, rated ‘BBB/Stable’ by S&P Global Ratings [S&P Global]), both on an ongoing basis and in the event of distress. Fairfax has been its key stakeholder and demonstrated need-based capital support to GoDigit. Go Digit Infoworks Services Pvt Ltd (GDISPL), a joint venture between Fairfax and Mr Kamesh Goyal, holds 83.5% stake in GoDigit while the balance is held by private equity funds along with certain individuals and other entities.

 

At GDISPL level, Fairfax (through FAL Corporation) and Mr. Kamesh Goyal (along with his entity – Oben Ventures LLP) hold 37.8% and 45.7% equity stake in GDISPL, respectively. Additionally, FAL Corporation holds compulsorily convertible preference shares (CCPS) issued by GDISPL which, upon conversion, will result in a maximum shareholding of 82.07% in share capital for FAL Corp. Consequent to conversion of the CCPS, the indirect shareholding of FAL Corp in GoDigit (on a fully diluted basis) will be a maximum of up to 68.65%.

 

Insurance regulations currently specify a ceiling of 74% on foreign shareholding which applies to Fairfax and a few other existing investors of GoDigit. Thus, Fairfax can increase its stake up to ~71.5% in GoDigit (direct or/and indirect) which provides the former adequate headroom to infuse further capital into GoDigit, if there is any exigency. Fairfax can either infuse capital into GoDigit through GDISPL or directly – subject to regulatory approvals and consent of the other joint venture partners.

 

The rating is also driven by the growing market presence of GoDigit, adequate risk management systems and practices, and adequate capital position backed by regular capital infusion from the investors. These strengths are partially offset by the company’s modest, though stabilizing underwriting performance and weak profitability.

Analytical Approach

For arriving at the corporate credit rating, CRISIL Ratings has evaluated the business and financial risk profile of GoDigit, and the standalone rating thus arrived at, has been notched up for the support received from the co-promoter – Fairfax Financial Holdings Ltd (rated ‘BBB/Stable’ by S&P Global) – on an on-going basis and in the event of distress.

Key Rating Drivers & Detailed Description

Strengths:

Strategic importance to, and expectation of strong financial support from, Fairfax

GoDigit is strategically important to Fairfax and derives operational and financial support from it. Fairfax exercises oversight on GoDigit’s operations through periodic performance reviews. However, the leadership of the company operates autonomously and the involvement of Fairfax in the day-to-day operations of the company is limited. Currently, GDISPL, a joint venture between Fairfax and Mr Kamesh Goyal holds 83.5% stake in GoDigit while the balance is held by private equity funds along with certain individuals and other entities. There is one representative director from Fairfax on the board of GDISPL and GoDigit.

 

CRISIL Ratings also notes that the joint venture agreement provides that in the event GoDigit requires additional capital and GDISPL is not able to contribute towards such requirement, then Kamesh Goyal group and Fairfax may jointly agree to subscribe to equity shares in GDISPL in proportion to their respective shareholding. And in the event of Kamesh Goyal group being unable to fund its pro-rata share of capital called by GDISPL, Fairfax will have the right exercisable in its sole discretion, to subscribe to such number of compulsorily convertible preference shares (CCPS) as Fairfax may decide.

 

Insurance regulations currently specify a ceiling of 74% on foreign shareholding which applies to Fairfax and a few other existing investors of GoDigit. Consequently, Fairfax can increase its stake in GoDigit (direct or/and indirect) which provides the former adequate headroom to infuse further capital into GoDigit, if there is any exigency. Fairfax can either infuse capital into GoDigit through GDISPL or directly – subject to regulatory approvals and consent of the other Joint Venture partners.

 

Over the near to medium term, Fairfax is expected to retain a significant stake (directly and/or indirectly) in the company and remain a critical shareholder with representation on the board and management oversight.

 

GoDigit’s strategic importance to Fairfax is underpinned by the former's growing market presence among private sector non-life insurance companies in India and expectation of gradual improvement in its market share and overall profitability over the medium term. Further, Fairfax’s presence in India through GoDigit – enhances its market position in the Indian market and adds diversity to the bouquet of insurance product offerings.

 

Growing market presence supported by the company’s digitally driven business model portfolio diversity remains an area of improvement.

Within the first 5 years of its operations, GoDigit has attained a market share of 2.4% based on gross direct premium written in fiscal 2023 – clocking a 3-year CAGR of 48%. The company’s business model is based on leveraging the digital infrastructure to provide a faster and more seamless insurance service to customers. Because of this remote operational model – over 60% of the company’s insurance premium flows in from tier II and III cities and most of the portfolio is retail. For fiscal 2023, gross direct premium by GoDigit amounted to Rs 6,160  crores, making it the fastest general insurance company to cross the Rs 5000 crore benchmark from its inception, in terms of gross premium written. In terms of portfolio concentration, motor insurance remains the largest segment for GoDigit - accounting for  65% of the gross premium written during fiscal 2023 followed by health insurance which constituted 12% of the total premium base.

 

Premium during first quarter ended June 30, 2023 stood at Rs 1,989 crore with motor portfolio constituting 60% share of the mix.  While the premium mix remains concentrated within the motor segment, its share has declined from ~95% in fiscal 2019. Over the medium term, the company’s healthy growth rate is expected to sustain alongside gradual diversification into fire and liability segments though motor would remain dominant in the company’s premium base.

 

Adequate risk management systems

With its focus on making insurance simple for its customers, GoDigit has taken many steps to streamline its entire underwriting process such that the operation time for all process relating to customer on-boarding, policy issuance, claim assessment and settlement of small ticket claims is significantly reduced. By leveraging its digital infrastructure and extending the interface to its stakeholders, the company has expanded its operational network to tier II and III cities such that over 60% of its premiums are contributed by customers residing in these locations. The company has stationed its sales team across 170 cities and has a team of 354 in-house service engineers. The company also has 98 lawyers and investigators. Its network also covers 374 surveyors and over 17290 workshops. Also, all the employees at GoDigit are employed on an on-roll basis. With regards to claims settlement – the stage where probability of conflict and delays in settlement is highest – the company ensures efficiency through online due diligence and assessment of the accident and damage, for small ticket claims and endeavours to settle most of these at the earliest. For larger ticket exposures in segments like fire and property, physical verification is done. The adequacy of GoDigit’s risk management systems is also reflected in the company claims ratio which, at 67% for fiscal 2023 and 68% for the first quarter of fiscal 2024, remains at par with that for established players.

 

Adequate capital position supported by frequent capital infusions:

Capitalisation has remained adequate in relation to its scale and nature of operations, primarily supported by its track record of frequently raising capital from existing and new investors. Considering the company has turned profitable only recently, its networth has been primarily funded by frequent capital raises. Since inception, the company has cumulatively raised over Rs 3,200 crore as capital as a result of which – its networth stood at Rs 2,384 crore as on June 30, 2023 corresponding to a solvency ratio of 1.69 times on the same date.

 

Over the medium term, the company plans to raise further capital to the tune of Rs 1250 crore as part of its public listing process which will augment the net worth further. Presence of high pedigree investors like Fairfax Financial Group, Sequoia would continue to be a strength for GoDigit’s capitalisation however, on a steady state basis – the company’s ability to improve its profitability and sustain its networth through internal accruals remains critical and a key rating sensitivity factor.

 

Weakness:

Modest earnings profile

Given the company has been in its growth phase, it was reporting losses until fiscal 2022 and, has turned profitable in fiscal 2023 on the back lower underwriting deficit and higher investment income. For fiscal 2023, the company reported an underwriting deficit of Rs 683 crore which, after adjusting for an investment income of Rs 722 crore for the period, yielded a net profit of Rs 36 crore for the period. For Q1 2024, the company incurred underwriting losses of Rs 167 crore. However, this was offset by investment income of Rs 225 crore which resulted in a reported profit of Rs 58 crore. Over the near to medium term, the company’s underwriting performance is expected to improve gradually, however, it will remain a constraint on the overall profitability. In such a scenario, income from investment will be the key driver for profitability – as in the case of most other peers.

 

Modest albeit gradually improving underwriting performance:

GoDigit’s underwriting performance, though stabilising, remains modest. For fiscal 2023, the company reported a combined ratio of 107% as compared to 113% for fiscal 2022. The improvement was attributed to a reduction in the Covid-19 related claims. While the company’s claims ratio is at par with seasoned general insurers within the range of 70-75%,its expense ratio has remained high at 35-40% since inception due to early phase of operations and high retention philosophy. For fiscal 2023, claims ratio stood at 67% whereas expense ratio was 40%. For Q1 2024, the performance has remained stable evidenced by a claims ratio of 68% and an expense ratio of 38%. With sustenance in loss ratios, the company’s expense ratio should decline with economies of scale – resulting in a corresponding improvement in overall combined ratio in the long run.

Liquidity: Strong

Liquidity should remain comfortable supported by adequate investments in government securities and liquid mutual funds. Investments in Government Securities were Rs 8,635 crore as on June 30, 2023 and cash and bank balance was Rs 175 crore.

Outlook: Stable

CRISIL Ratings believes GoDigit will remain strategically important to, and continue to receive support from, Fairfax on a steady state basis. The company will continue to grow its market presence while maintaining sound risk management systems and prudent investment policies. However, its overall profitability will remain constrained by high underwriting losses. Capitalisation and solvency will remain dependent on regular equity infusion from existing and new investors for the medium term,

Rating Sensitivity Factors

Upward Factors

• An upward revision in rating or outlook on the co-promoter – Fairfax, will result in a similar action for GoDigit or/and increase in the latter’s strategic importance to Fairfax, supported by relaxation in regulatory ceiling on FDI.
• Significant improvement in market share and competitive positioning alongside portfolio diversification.
• Material and sustained improvement of underwriting performance reflected in combined ratio reducing to, and remaining below, 105% on a sustained basis.

 

Downward Factors

• Material change in expectation of support from, and/or reduction in strategic importance to, Fairfax.
• Decline in steady state solvency ratio to below 1.7 times.
• Substantial increase in underwriting losses leading to further moderation of earnings profile and adverse impact on its solvency ratio.

About the Company

Having started operations in 2017, GoDigit is a new age general insurance company with a market share of 2.4% as on March 31, 2023 - offering insurance cover for motor, health, fire, property, and liability segments. The company is backed by Mr. Prem Watsa’s Fairfax Financial Group, which holds 38% stake in the company through GoDigit Infoworks Services Private Limited, and 46% is held by Mr. Kamesh Goyal. In January 2021, GoDigit became a unicorn with a valuation of USD 1.9 billion. Subsequently, in July 2021 – the company raised USD 200 million from investors at a valuation of USD 3.5 billion. Since inception, the company has issued over 36 million policies and is the fastest general insurer to cross the Rs 5000 crore mark in terms of gross direct premium.

Any other information: Not applicable