| The Oriental Insurance Company Limited | ||||
| Rating outlook revised to 'Negative', Rating reaffirmed | ||||
| Rating Action | ||||
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| 1 crore = 10 million | ||||
| Refer to Annexure for Details of Instruments & Bank Facilities |
Detailed Rationale CRISIL Ratings has revised its rating outlook on the corporate credit rating and subordinated debt instrument of The Oriental Insurance Company Limited (Oriental Insurance) to 'Negative' from 'Stable', while reaffirming the ratings at 'CCR AAA' and 'CRISIL AAA', respectively.
The revision in outlook is primarily driven by the lack of improvement in the company’s underwriting performance which continues to constrain its overall earnings profile thereby imposing pressure on its capitalisation and solvency. The company’s underwriting performance remains weak reflected in a combined ratio of 141% for nine months ended December, 2021, higher than 130% for the corresponding period of previous fiscal. The increase is attributed to higher Covid claims incurred during the period, in addition to a few catastrophe related claims. For nine months fiscal 2022, 18% of the total claims incurred by the company were constituted by Covid-19. This resulted in an overall loss of Rs 1984 crore for the period as against a loss of Rs 758 crore for the corresponding nine months of the previous fiscal.
Negative accretions to networth have led to moderation in capital position and significant reliance on equity support from the parent – GOI. Reported networth as on December 31, 2021 declined to Rs 1050 crore from Rs 3033 crore on March 31, 2021 – owing to accumulating losses. While some comfort is drawn from the availability of balance in fair value change account, the ability to accelerate improvement in underwriting performance to prevent potential pressure on its solvency position remains key monitorable.
The company’s reported solvency ratio has remained vulnerable. From 1.32 times (including 35% balance of fair value change) as on March 31, 2021, the company’s solvency ratio has declined to 0.15 times (excluding the balance of fair value change) as of December 31, 2021 – driven by high underwriting losses due to Covid-19 claims incurred during the year. However, the government has infused Rs 1200 crore as equity into the company in March 2022, over and above the Rs 3220 crore infused between Q4 2020 and Q4 2021.
The ratings continue to centrally factor in the company's strategic importance to, and expectation of strong support from, the Government of India (GoI), in addition to its established market position in the Indian general insurance industry. These strengths are partially offset by the modest capital position with solvency ratio remaining below the regulatory stipulation. Further, the company’s underwriting performance also remains weak, imposing pressure on overall profitability.
The rating on the hybrid instrument remains centrally based on forbearance granted by Insurance Regulatory and Development Authority of India (IRDAI) to Oriental 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 750 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 September 30, 2018. With a track record of over 60 years, Oriental ranked as the sixth largest insurer in the industry based on the gross premiums written during nine months ended December 31, 2021 which translates to a market share of 6.3%. The company underwrote Rs 10,605 crore as gross direct premium during the nine months of fiscal 2022, registering a 13% year on year growth as against an industrial growth of 11% for the same period.
This growth was driven by healthy and continued traction in demand for health insurance products since the pandemic outbreak. Apart from health insurance, the company also grew in niche segments like Liability and Marine. |
Analytical Approach CRISIL Ratings has first arrived at Oriental Insurance's corporate credit rating, which is an indication of the company's ability to honour its debt obligations and policyholders' obligations. For arriving at the CCR, CRISIL Ratings 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 the CCR. The extent of cushion that Oriental Insurance 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. |
Key Rating Drivers & Detailed Description Strengths:
Oriental is expected to receive strong support from the government on a steady state basis, driven by its established market position in the Indian non-life insurance sector, which makes it strategically very important to the Government. The importance of the general insurance sector, especially government-owned insurers, can also be perceived in the context of GoI's plan to materially enhance insurance penetration over the long term. As a demonstration of their strategic importance to GOI and the latter’s stance on extending timely support, public general insurers were allotted Rs 12,450 crore of capital by the GoI in July 2020 (including Rs 2500 crore which had already been infused in March 2020). Oriental, National Insurance Company Ltd (National) and The United India Insurance Company Ltd (United) cumulatively received Rs 2500 crore in fiscal 2020 and Rs 9,950 crore in fiscal 2021. Of this allocation, Oriental received Rs 50 crore in fiscal 2020 and Rs 3,170 crore in fiscal 2021. Eventually, in Q4 fiscal 2022, the 3 PSUs received Rs 5000 crore from the government – of which Rs 3700 crore was infused in National, Rs 1200 crore in Oriental and balance Rs 100 crore was infused in United. Along with the capital allocation, the government also announced its decision of shelving the merger process of Oriental with National and United, and focusing on improving the standalone financial risk profiles of these entities. CRISIL also takes note of the government’s plan announced in the last annual budget – to privatise one of the public general insurers in the medium to long term, and would continue to monitor the developments in this aspect.
Oriental Insurance, with a market share of 6.3% for the 11 months of fiscal 2022, is the fifth largest player in the Indian general insurance space with over 1550 branches across the country. More so, its status of being a GoI promoted entity would enable it to sustain competitive edge amidst intensifying competition. For nine months ended December 31, 2021, the company underwrote a gross direct premium of Rs 10,605 crore, which marks a year on year rise of 13% as against an industrial growth of 11% over the same period. 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. Against a sectoral growth of 29% in health insurance premiums written over nine months of fiscal 2022, Oriental’s health insurance portfolio grew by 41% over the same period. Apart from health insurance which has outgrown motor to become the largest portfolio for Oriental Insurance, other niche segments like fire, engineering, marine, liability and aviation have also grown. Over the 11 months of fiscal 2022, the company has underwritten Rs 12,493 crore as gross direct premium and is expected to clock an annual growth of 12-15% for full fiscal 2022. Health and Fire segment are expected to derive this growth and growth in motor segment, which has remained subdued over the last few quarters owing to lower sales volume, supply side challenges and absence of tariff hikes in the Third party segment, remains subjected to a favourable turn out in macro factors.
Apart from the effect 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 23, 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 claims 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.
Weaknesses:
Capitalisation and solvency position of Oriental Insurance remains strained. Reported solvency ratio, excluding the balance in fair value change account, has remained sub 1.5 times for over 12 quarters now. However, IRDAI’s exceptional approval has allowed Oriental (along with United and National) to include the balance in fair value change account in the available solvency margin for calculating solvency. Resultantly, On March 31, 2021, the company reported a solvency ratio of 1.32 times (factoring in 65% of the balance in fair value change account as on that date, excluding the balance in fair value change account – solvency ratio was 0.49 times on that date).
Subsequently, the company’s underwriting performance and overall profitability deteriorated on account of surge in Covid claims during H1 2022 which resulted in a sharp decline in solvency ratio by the close of December 31, 2021 to 0.15 times (excluding balance in fair value change account). Upon including the balance in fair value change account as of that date, the solvency ratio is estimated to have been 1.42 times. On account of negative accruals to networth, the company’s networth also declined from Rs 3033 crore to Rs 1050 crore between March 2021 to December 2021. However, in the fourth quarter of fiscal 2022, the company has received Rs 1200 crore as capital from the government and this is expected to extend some cushion to the capital position over the near term. Nonetheless, Oriental’s capitalisation and solvency position are expected to remain dependent on equity support from the government and the company’s fair value change balance. Additional comfort is drawn from regulatory relaxations allowed by the government to the company, in terms of including fair value change balance in its solvency reporting. While the company has been taking measures to restore its solvency position to above 1.5 times, the traction is slow and has been disrupted by factors like pandemic outbreak. In the meantime, continued weakness in underwriting and overall profitability leading to further moderation in capital and solvency position of the company, remain key rating sensitivity factors.
Oriental’s underwriting performance remains weak. After recognition of additional reserving requirement in motor third party business in fiscal 2017, the company’s underwriting performance has remained volatile. For fiscal 2021, the company reported an underwriting loss of Rs 3,429 crore as against an underwriting loss of Rs 4,515 crore for the previous year. Correspondingly, the combined ratio for fiscal 2021 stood at 131.2% as against 141.1% for fiscal 2020. For nine months ended December 31, 2021, the company’s claims ratio surged to 111.2% from 93.3% for the corresponding period of the previous fiscal, due to a significant rise in Covid-19 claims following the second wave of the pandemic wave. Overall combined ratio rose to 141.4% from 129.6% for the respective periods – translating to an underwriting loss of Rs 3741 crore for nine months ended December 31, 2021 against an underwriting loss of Rs 2366 crore for the corresponding period of the previous fiscal. During the nine months of fiscal 2022, Oriental incurred Rs 1,776 crore as Covid claims which constituted 17% of the total claims incurred during the period as against 16% of total claims incurred in nine months of the previous fiscal being from Covid-19 policies. Majority of the claims incurred in 9M 2022 were reported in the first half of the fiscal, thereafter – as the frequency of Covid instances declined – the number of Covid claims did too. However, the average ticket size of claims increased for both Covid and non-Covid health claims resulting in weak underwriting performance of the portfolio. Any further deterioration in the company’s underwriting performance, straining its earnings profile and capitalisation further, will be a key rating sensitivity factor.
Oriental's earnings profile remains weak, constrained by the company’s modest underwriting performance and stable, though inadequate, investment income. Despite an investment income of Rs 1,669 crore, the company made an overall loss of Rs 1984 crore during nine months of fiscal 2022 driven by an underwriting loss of Rs 3741 crore for the period. For the corresponding period of the previous fiscal, the company reported an underwriting loss of Rs 2366 crore contributing to an overall loss of Rs 758 crore for the period.
Going forward, the company's ability to accelerate improvement in underwriting performance such that overall profitability is revived and, capital position and solvency is sustained at strong levels, will remain a key monitorable. |
Liquidity: Superior Liquidity position of Oriental Insurance remains comfortable, supported by adequate investments being parked in highly liquid ' Government securities. On December 31, 2021, such investments formed 58% of the investment portfolio with a larger share being parked in state government bonds. Liquid assets amounted to over Rs 14,000 crore on March 31, 2021' largely parked in G-Secs and as cash. Additionally, the company typically maintains a cash and bank balance of over Rs. 2,000 crore. The company also benefits from a large balance of un-booked appreciation from equity investments and an extensive base of fixed assets which can be dipped into if need be. |
Outlook: Negative Oriental Insurance should maintain its competitive position in the Indian general insurance industry and, will continue to receive support from GoI in the unlikely event of financial distress. However, its underwriting performance and overall profitability are expected to remain weak thereby constraining its capitalisation and solvency ratio. The rating on the subordinated debt instrument also factors in the regulatory forbearances granted to Oriental Insurance. |
Rating Sensitivity factors Upward factors
Downward factors
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About the Company Oriental Insurance is India’s sixth-largest non-life insurance company. Set up in Mumbai in 1947, the company commenced its operations as a wholly owned subsidiary of Oriental Government Security Life Assurance Company Ltd. It was a subsidiary of Life Insurance Corporation of India (LIC) from 1956 to 1973. Oriental Insurance, with its head office in New Delhi, has an extensive network of over 1500 branches across the country. The company also has operations in Nepal, Kuwait, and Dubai. |
Key Financial Indicators
*includes 40% of balance in fair value change account $ includes 35% of balance in fair value change account ^includes 100% of balance in fair value change account
# includes 85% of balance in fair value change account |
Any other information: Not applicable |
| Note on complexity levels of the rated instrument: CRISIL Ratings' complexity levels are assigned to various types of financial instruments. The CRISIL Ratings' complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL Ratings' 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)
^call option after 5 years of issuance |
| Annexure - Rating History for last 3 Years | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Criteria Details
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