Detailed Rationale

CRISIL Ratings has reaffirmed its corporate credit rating (CCR) of ‘CCR AA/Stable’ on IFFCO Tokio General Insurance Company Limited (IFFCO Tokio).

 

The rating continues to reflect an expectation of strong support from IFFCO Tokio’s domestic parent, Indian Farmers Fertiliser Cooperative Limited (IFFCO; 'CRISIL AA+/Stable/CRISIL A1+'), driven by a strong written articulation from IFFCO to maintain majority stake in IFFCO Tokio and aid the company on an ongoing basis and in the event of distress. IFFCO’s management remains committed to ensuring that IFFCO Tokio maintains a comfortable level of cushion in solvency ratio over regulatory stipulation at all times. IFFCO Tokio is also expected to receive strong financial, managerial and operational support from its foreign parent, Tokio Marine Asia Pte Ltd (Tokio Marine Asia; a part of the Tokio Marine group). During second half fiscal 2022, the company received capital infusion of Rs 400 crore (in respective proportion of shareholding). This in-turn resulted in boosting the solvency margin to 1.74 times as on December 31, 2021.

 

The rating also factors in IFFCO Tokio’s longstanding presence in the Indian general insurance industry, adequate risk management practices, healthy investment quality and comfortable liquidity. These strengths are partially offset by modest-albeit-improving underwriting performance.

 

IFFCO Tokio is in top 10 private general insurance company in India, with a market share of 3.83% (based on gross direct premium written in India in fiscal 2022). Against an industrial growth of 11% in fiscal 2022, the company’s gross direct premium grew at mere 0.5%. The lower growth primarily stemmed from slowdown in key segments such as motor and company’s decision to limit exposure in the crop insurance business.

 

In the motor segment, IFFCO Tokio’s premium book degrow by 0.5% as against a growth of 4% witnessed by the industry. The crop segment declined by 39% over fiscal 2021. However, the moderating impact of slowdown in this segment, was offset by moderate-to-healthy growth within most of the other segments such as fire (13%), health (12%), Marine (62%), engineering (19%) and liability (28%).

 

As far as health segment is concerned, the company incurred Covid claims of about Rs 280 crore which was around 20% of the total health claims during nine months of fiscal 2022. Owing higher severity and frequency of Covid-19 cases following the second wave, the company’s claims ratio in health segment increased to 134.7% for nine months fiscal 2022 from 94.2% for the corresponding period of the previous fiscal. With this, the overall combined ratio increased to 116.0% as compared to 102.5% over this period. CRISIL Ratings overall believes that given the severity and instances of claims due to Covid has seen declining trend, ability of the company to regain its position thereby improving underwriting performance will remain key monitorable. 

Analytical Approach

CRISIL Ratings has assessed the standalone business, financial and management risk profiles of IFFCO Tokio and then, a notch up has been applied to indicate the company’s strategic importance to its majority parent (IFFCO) and support expected thereof.

Key Rating Drivers & Detailed Description

Strengths:

• Expectation of strong support from parent companies, IFFCO and Tokio Marine Asia

IFFCO Tokio derives strong managerial, operational and funding support from parent companies, IFFCO and Tokio Marine Asia. Strong managerial support is reflected in the significant representation of the parent companies on the company's board and their high involvement in its functioning. IFFCO's position as India's leading fertiliser manufacturer and its extensive cooperative network benefits IFFCO Tokio not only in terms of low cost of operations but also greater opportunities for entering highly under-penetrated rural markets. The company also benefits from the Tokio Marine group's association with established automobile manufacturers and strong risk management capabilities. Both parent companies are committed to provide strong financial support to IFFCO Tokio; this can be evidenced from Rs 400 crore of capital infused by IFFCO and Tokio Marine into IFFCO Tokio in the third quarter of fiscal 2022. The company will continue receiving additional capital from the parents over the medium term to support its growth plans.

 

• Longstanding presence in the Indian general insurance industry

IFFCO Tokio, one of India’s first private sector general insurance companies, has been in the industry for over two decades. It is the seventh-largest private sector general insurance company, with a market share of 3.83% based on gross direct premium written in India in fiscal 2022, declined from 4.23% for fiscal 2021 owing to lower growth in the motor segment and a decline in the crop segment.

 

The company underwrote gross direct premium of Rs 8,453 crore for fiscal 2022, registering a marginal growth of 0.5% against industry-level growth of 11.1%. The lower growth primarily stemmed from slowdown in key segments such as motor and company’s decision to limit exposure in the crop insurance business. In line with the trend observed for most of the peers and the sector as a whole, continued traction in health insurance segment post Covid outbreak has been the key driver for it. Apart from health insurance other niche segments such as fire, engineering, marine, liability have also shown good growth in fiscal 2022.

 

Business mix has remained stable, dominated by the motor segment to the extent of 43.8% based on gross direct premiums for fiscal 2022. The share of health segment increased to 20.7% in fiscal 2022 as compared to 18.6% in fiscal 2021 owing to increased awareness and demand for indemnity products. The share of fire segment stood at 10.9% in fiscal 2022. Over the last three years, the company has strengthened its distribution network by venturing into newer geographies. This enabled the company to cater to the large untapped market for general insurance products and has helped it in sustaining its portfolio diversity.

 

While on one hand, Covid has affected the underwriting performance for the industry, on other side it has also helped increase in awareness particularly for health insurance products. For fiscal 2023, the growth in health insurance portfolio of the sector is expected to correct marginally and stablise 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.

 

• Adequate risk management practices

IFFCO Tokio has a comprehensive risk management policy and framework to ensure all material risks that may affect the company are identified, assessed and monitored periodically and reported to the management in a structured manner. In addition, the company has laid down adequate controls to mitigate business risks such as the risk of loss due to inadequate pricing, reserving or reinsurance protection. The company is also undertaking multiple steps such as having the quick claims settlement platform, intended to speed up claims settlement. The risk management committee, comprising the chief risk officer and other senior executives, meet regularly to identify and assess enterprise level risks including business risks and take necessary corrective actions. The committee also continuously reviews the investments, reinsurance securities, adequacy of reserve and solvency ratio to ensure financial stability. IFFCO Tokio is expected to benefit from its adequate risk management practices and continue maintaining a stable financial risk profile.

 

• Healthy investment quality and comfortable liquidity

The company’s 99% debt investments are in government securities (G-secs) or corporate securities rated ‘AAA’ as on December 31, 2021. In addition, liquidity is comfortable, with a large proportion of liquid investments, G-secs accounted for 44% of the investment portfolio based on market value as on December 31, 2021. The portfolio quality is expected to remain healthy, supported by its conservative approach towards risk in the investment portfolio.

 

Weakness:

• Modest underwriting performance

IFFCO Tokio’s underwriting performance got impacted as reflected in underwriting losses of Rs 715 crore and combined ratio of 116.0% for nine months through December 2021 as compared to loss of Rs 137 crore and combined ratio of 102.5% for the corresponding nine months previous fiscal driven by severity of Covid-19 after the second wave and increased instances of claims. Over nine months through December 2021, claims ratio increased to 93.9% as compared to 84.4% for the same period previous fiscal. Expenses ratio also increased to 22.2% for nine months through December 2021 as compared to 18.1% during the same period previous fiscal. Nonetheless, despite modest underwriting performance, overall earnings profile remains supported by healthy investment income. Over the medium to long term, IFFCO Tokio’s robust risk management practices are expected to gradually boost the underwriting performance of the company.

Liquidity: Strong

Liquidity, in relation to the scale of business, has been strong. Apart from adequate reserving against anticipated claims, liquidity is supported by a highly liquid investment portfolio. As on December 31, 2021, G-secs formed 44% of the investment portfolio with a majority of other investments remaining in debt securities. As a philosophy, the company continues to maintain negligible investments in equity. Also, majority of the company's investment in corporate debt securities are rated AAA. As on December 31, 2021, liquid assets stood at Rs 6,011 crore, which is adequate to the balance of technical reserves maintained by the company as on that date. On a steady-state basis, the company maintains Rs 300-400 crore of investments in liquid assets. Investments cover on networth has also been comfortably above 300% over the last many years. More so, given the constant support from the parent companies – as demonstrated in the past, flexibility to raise timely, need-based funds from parents remains high.

Outlook: Stable

IFFCO Tokio is strategically important to the parent companies and will receive strong financial, managerial, and operational support from both the parents on an ongoing basis and in the event of distress. IFFCO Tokio will benefit from its longstanding presence in the Indian general insurance industry and continue to maintain its market share, while sustaining adequate risk management practices, healthy investment quality and comfortable liquidity.

Rating Sensitivity factors

Upward factors

• An upward revision in the rating of IFFCO – the parent entity
• Sustained improvement in underwriting profitability, reflected in the combined ratio at below 100% consistently
• Ability to maintain adequate cushion in solvency ratio above regulatory minimum on sustained basis

 

Downward factors

• Diminution in the extent of support available from parent companies
• Significant increase in IFFCO Tokio's underwriting losses with combined ratio increasing and remaining beyond 120% or a substantial decrease in its investment income, thereby adversely impacting its capitalisation such that solvency ratio declines to 1.55 times.
• Prolonged deterioration of the market position

About the Company

IFFCO Tokio is in top 10 private general insurance company in India and has been in this business for almost two decades. IFFCO (India’s largest fertiliser manufacturer) and Tokio Marine Asia (a part of the Tokio Marine group; Japan’s oldest and largest general insurance group) have ownership of 51% and 49%, respectively, in IFFCO Tokio, as on December 31, 2021.

Key Financial Indicators

As on / for the period ended March 31		Nine months ended 2022	2021	2020	2019	2018
Gross direct premium written	Rs crore	6314	8411	7961	7002	5632
Net premium earned	Rs crore	4123	4899	4625	4030	3236
Profit after tax	Rs crore	91	319	205	179	189
Combined ratio	%	116.0	103.9	107.8	106.7	105.5
Solvency margin	Times	1.74	1.73	1.58	1.66	1.62

 

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
NA	NA	NA	NA	NA	NA	NA	NA