SBI General Insurance Company Limited

Rating Reaffirmed

 

Rating Action

Corporate Credit Rating

CCR AAA/Stable (Renewed and Reaffirmed)

1 crore = 10 million   

Refer to annexure for Details of Instruments & Bank Facilities

Detailed Rationale

CRISIL Ratings has renewed and reaffirmed its 'CCR AAA/Stable' corporate credit rating (CCR) on SBI General Insurance Company Limited (SBI General).

The rating centrally factors in the company’s strategic importance to, and expectation of continued support from, State Bank of India (SBI; 'CRISIL AAA/CRISIL AA+/Stable'). The rating also reflects SBI General's diversified premium portfolio, sound investment portfolio quality, adequate risk management systems and practices, and better than industry average underwriting performance.

 

These strengths are partially offset by high reliance of overall profitability on income from investments and, exposure to inherent risks in the crop insurance segment owing to the sizable, though reducing, and share of this business in the company’s premium portfolio.

 

With a market share of 4.15%, SBI General is the sixth-largest private general insurer (multi-line) in the country and tenth-largest (including public insurers, excluding standalone health insurers) overall. In fiscal 2022, the company underwrote Rs 9,166 crore as gross direct premiums, indicating annual growth of 10.9% over the past year as against an industrial growth of 11.03%. Health portfolio, which grew at 48% and constituted about 20% of the company’s overall premium portfolio, was the primary driver for growth. Motor, the largest portfolio for SBI General, grew at 17% during the year. The company also calibrated its growth strategy in the crop segment, which has exhibited sizeable losses in the past. Resultantly, the premium in this segment registered a negative growth of 3% and its share in the total portfolio declined from 28% to 24% over fiscal 2022.

 

Underwriting performance for fiscal 2022 was impacted by the surge in Covid-19 claims incurred. Claims ratio for fiscal 2022 was 86.3%, as against 74.1% for the previous fiscal, and ~5% of the claims in fiscal 2022 were against Covid-19 losses. Resultantly, the company’s combined ratio for fiscal 2022 was higher than its average level, at 113.7%. However, with reduction in Covid-19 instances gradually, performance for Q1 2023 has revived, reflected in a claims ratio of 68.8% and a combined ratio of 99.5%.

 

Company’s capitalization and solvency position remains adequate however, the dependency of overall profitability on investment income remains a challenge to be overcome.

Analytical Approach

CRISIL Ratings has assessed the CCR of SBI General, which is an indication of the company's ability to meet the obligations of the policyholders. For arriving at the CCR, CRISIL Ratings has factored in the support SBI General receives from SBI in addition to assessment of the company's standalone business, financial and managerial risk profiles.

Key Rating Drivers & Detailed Description

Strengths:

• Support from the parent and majority owner, SBI

The company is strategically important to SBI and derives significant managerial, funding and branding support from the parent. This is reflected in representation of SBI's directors, including the chairman of SBI being the chairman of SBI General's board, and the bank's high involvement in SBI General's functioning. Moreover, SBI has a track record of extending capital support to the latter in times of need, indicated by cumulative capital infusion Rs 765 crore since inception of SBI General. Currently at 70%, SBI is expected to retain majority stake in the company over the medium term. SBI General's strategic importance to the bank is underpinned by the former's improving market position among private sector general insurance companies and expected sustenance in its underwriting profitability over the medium term. Furthermore, SBI General, being the general insurance arm of SBI, offers a variety of customized policies to the clients of SBI, which makes it a key element of the latter's bouquet of financial service offerings.

 

• Adequate capitalisation and healthy solvency ratio

Capitalisation remains adequate in relation to the company’s nature and scale of business, evidenced by a reported networth of Rs 3,013 crore on June 30, 2022. Cushion in solvency ratio has also been comfortable over the last 3 years, with solvency ratio remaining above 2 times since then. On June 30, 2022, reported solvency ratio was at 1.94 times. On a steady state basis – the company and the parent SBI – intend to maintain a solvency ratio of at least 1.7 times or above.

 

• Diversified presence across insurance segments

In comparison to the industry's higher reliance on traditional segments such as motor and health, SBI General has maintained a relatively diverse premium mix over the years. Apart from traditional segments like motor (27%) and health (20%), the company has been focused on fire (15%) and crop business (24%) as well. On a steady state basis, the company endeavours to limit exposure to any single segment at 30%. This premium mix is a function of company’s approach to maintain a diverse product suit so as to remain insulated in the event of segment related events. A number of products across niche segments are tailor made for customers of SBI – which are dispersed across sectors and geographies – adding to the diversity. During fiscal 2022, the health insurance portfolio grew by 48% resulting in a steep increase in its share in the gross premium, in line with the trend observed for the sector in general. This growth was propelled by increase in demand for health covers post Covid and new products being launched at a higher price.

 

Motor, which is the largest segment for the company, grew at a muted 17% owing to absence of hike in third party rates for the year and subdued sales volume.

 

While the focus on health has increased, the segmental diversity in SBI General’s gross premium remains the highest among peers.

 

• Underwriting performance remains above industry average, bolstered by benefits which accrue owing to association with SBI

With presence of a decade, the improvement in the company’s underwriting performance has been faster than that for peers. The company was operating at a combined ratio of 93-97% for five years through fiscal 2021, generating underwriting surplus for each of these years. Its claims ratio was 70-75% for the period, at par with most well performing players in the industry, but the key driver for its underwriting performance is low commission and expense ratio. As SBI's exclusive insurance partner, SBI General has access to the footfall at branches of SBI, which saves sourcing cost. Another key benefit derived from this association is the ability of SBI General to source business at competitive commission rates from SBI as its bancassurance partner. As much as 30% of the company’s business is sourced from this channel. Furthermore, the company maintains a low retention ratio, thereby earning high reinsurance ceding commission, which results in low net commission. In fiscal 2022, the metric stood at negative 2.5%, as against negative 3.6% for the previous fiscal. The ability of SBI General to sustain low commission ratios as it diversifies and expands its distribution channel remains to be seen. Over the medium term, the company’s claims ratio – which had elevated in fiscal 2022 due Covid-19 claims – is expected to correct to its previous levels. In line with its original plan, the company also incurred operational expenditure in fiscal 2022 for strengthening its digital infrastructure and undertaking additional marketing initiatives and its benefits shall materialize in the long run.

 

Weaknesses:

• Overall profitability, though benefitting from improvement is underwriting, remains contingent to investment income

While underwriting performance has been better than industry average, its contribution to the overall profit of the company is small. Therefore, the company’s earnings are largely dependent on income from investments – similar to that for rest of the industry. For fiscal 2022, the net profit of Rs 131 crore was constituted of Rs 838 crore investment income and Rs 622 crore of underwriting deficit stemming from Covid-19 losses. For Q1 2023, earnings revived with improvement in underwriting performance – net profit was Rs 139 crore. Over the medium term, rise in combined ratio may constrain the underwriting performance, resulting in a momentary, though marginal, impact on overall profitability.

 

• Large, though declining, proportion of the crop business poses inherent susceptibility to natural caprices

After 2017, crop insurance emerged as a key business area for SBI General with its share increasing to one-third of the total premium mix, as against less than one-fifth for the entire industry, stimulated by SBI's large rural reach and presence and the association with regional rural banks (RRBs). As a result, the company is exposed to inherent challenges such as natural calamities spoiling harvest, and irregular monsoon, which could lead to high claim volumes. However, the company reinsures 80% of its crop business which reduces the net impact. The combined ratio for this segment ranged from 128.5% in fiscal 2018 to 151.4% in fiscal 2022, driven by increase in the claims ratio from 135.3% to 135.6%. Particularly for fiscal 2022, the expense ratio in the crop segment was high at 15.8% as against sub 10% for previous years. Other issues such as untimely settlement of claims, delayed payment of premiums from state governments or socio-political issues impacting farmers could also impact the underwriting performance of this business. Lastly, the underwriting expertise required for this business is limited among non-life insurers, and the lack of knowledge has resulted in high combined ratios.

Liquidity: Superior

Liquidity was comfortable, reflected in substantial base of highly liquid investments in the form of government securities (34%; from both central and state government) based on carrying value and liquid mutual funds (5%). Additionally, the company maintains adequate reserve with a buffer of over 5% for claims at all times. The company also has various routes to avail short-term funding, if needed.

Outlook: Stable

SBI General will remain strategically important to, and receive strong support from, SBI. The company's underwriting performance should remain better than industry average, driven by its sound risk management practices and accrued benefits of association with SBI. The financial risk profile will remain stable, supported by healthy solvency ratio and stable internal accrual.

Rating Sensitivity factors

Downward factors

• Downward revision in SBI's rating or change in rating outlook will lead to a commensurate change in the rating or outlook of SBI General
• Substantial reduction in SBI’s ownership below majority or in the strategic importance of SBI General
• Weakening in underwriting performance of the company, resulting in combined ratio of more than 120%, impacting overall profitability
• Decline in cushion in solvency ratio such that it remains below 1.7 times

About the Company

SBI General Insurance Company Limited (‘the Company’) was incorporated on February 24, 2009 as a public limited company under the Indian Companies Act, 1956 (‘the Act’) and was originally a 74:26  joint venture between State Bank of India (SBI) and IAG International Pty Limited, a subsidiary of Insurance Australia Group Limited.

 

Out of the 74% stake in the Company, SBI had in mid - 2018 divested 4% stake to PI Opportunities Fund - I (2.35%) and Axis New Opportunities - AIF-I (1.65%). Further, IAG, the erstwhile JV partner of 26%, exited in March 2020, thereby divesting its entire stake of 26% to Napean Opportunities LLP (16.01%) and Honey Wheat Investments Ltd (9.99%). Other shareholders in the company are;, Axis New Opportunities - AIF-I (1.27%) and Avendus Future Leaders Fund I &II (0.38%).   

 
The company offers a complete suite of products ranging from motor, health, personal accident, travel and home insurance in the retail space, and products such as aviation, fire, marine, package, construction and engineering, and liability insurance in the commercial space.

Key Financial Indicators

As on / for the period ended March 31	Unit	2022	2021	2020
Gross direct premium / gross premium written	Rs crore	9,166	8,265	6,797
Profit after tax	Rs crore	131	544	412
Combined ratio	%	113.7%	95.7%	93.6%
Solvency margin	Times	1.85	2.00	2.27

 

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