SINGAPORE: AM Best has downgraded the Financial Strength Ratings (FSR) of insurance companies in India including United India Insurance Company Limited, National Insurance Company Limited and Oriental Insurance Company Limited.
AM Best has downgraded the Financial Strength Rating (FSR) to C++ (Marginal) from B (Fair) and the Long-Term Issuer Credit Rating (Long-Term ICR) to “b+” from “bb+” for United India Insurance Company Limited.
The outlook of the FSR remains stable, while the outlook of the Long-Term ICR remains negative.
The Credit Ratings (ratings) reflect the company’s balance sheet strength, which AM Best categorizes as adequate, marginal operating performance, neutral business profile and marginal enterprise risk management. The rating downgrades reflect a deterioration in AM Best’s view of United’s balance sheet strength and operating performance fundamentals.
Risk-adjusted capitalization, as measured by Best’s Capital Adequacy Ratio (BCAR), deteriorated to adequate from very strong during fiscal-year 2019 due to a combination of significant reserve strengthening for motor third-party liability business and large underwriting losses from other product lines.
Capital and surplus declined significantly by 29.1% to INR 64.0 billion (USD 0.9 billion) as of March 31, 2019, from INR 90.1 billion (USD 1.4 billion) in the same prior-year period. The company repeatedly has fallen short of local minimum regulatory solvency requirements in recent years. To support an improvement in this position, the company issued INR 9 billion of subordinated debt in 2017.
Furthermore, in 2019, the company also has obtained a special exemption from the Insurance Regulator and Development Authority of India to include fair value credit for certain investment assets for the purposes of its solvency calculation. Despite this, the company still operates at a very thin regulatory solvency margin. Further offsetting balance sheet factors include the company’s moderate risk investment portfolio, which is composed of approximately 28% in equities and mutual funds.
This subjects the balance sheet to volatility in the event of fair value fluctuations. The company’s liquidity position, as measured by its liquid assets to net technical reserves ratio, also has declined, to 101% as of fiscal year-end 2019 from 118% as of fiscal year-end 2018.
AM Best views the company’s operating performance as marginal, as evidenced by a five-year average return-on-equity (ROE) ratio of -4.9% (2015-2019). Underwriting performance has been consistently loss-making, with a five-year average combined ratio of 128.2% (2015-2019) and a very weak combined ratio of 138.3% for fiscal-year 2019. Operating results have been dependent on investment income in recent years, which includes material realized and unrealized gains.
Notwithstanding this, the company recorded a pre-tax operating loss of INR 19 billion (USD 271 million) in fiscal-year 2019 as compared with a pre-tax operating profit of INR 10 billion (USD 154 million) in fiscal-year 2018.
Inadequate pricing on key lines of business and reserve strengthening over the past three fiscal years have been the primary drivers of the company’s poor underwriting results. Additionally, the requirement to service its interest expenses on its subordinated debt further affects operating results negatively.
The negative rating outlook for the Long-Term ICR reflects the potential for further deterioration in United’s risk-adjusted capitalization and operating performance over the near to medium term.
AM Best has removed from under review with negative implications and downgraded the Financial Strength Rating to C (Weak) from C++ (Marginal) and the Long-Term Issuer Credit Rating to “ccc” from “b” of National Insurance Company Limited (National) (India).
The outlook assigned to these Credit Ratings (ratings) is negative.
The ratings reflect National Insurance’s balance sheet strength, which AM Best categorizes as weak, as well as its marginal operating performance, neutral business profile and weak enterprise risk management.
The rating downgrades reflect a deterioration in National’s balance sheet strength fundamentals. The company’s risk-adjusted capitalization, as measured by Best’s Capital Adequacy Ratio (BCAR), deteriorated to a very weak level at fiscal year-end 2019 due to a combination of significant reserve strengthening for motor third-party liability business and continued large underwriting losses from several other product lines.
Capital and surplus declined significantly by 51% to INR 28 billion (USD 401 million) as of March 31, 2019, from INR 57 billion (USD 880 million) in the same prior-year period. Furthermore, the company’s net underwriting leverage and equity investment leverage has surged to a very unhealthy level at 1,091% and 385%, respectively.
As of fiscal year-end 2019, the company’s local solvency margin reduced to 1.04 times, which is significantly below the regulatory control level minimum requirement (1.5 times), despite the company receiving favorable treatments from the regulator on certain investment assets to alleviate pressures on capital adequacy.
Furthermore, while the company’s capital position has continued to deteriorate, the previously anticipated capital support from the Government of India has yet to materialize, and there is limited visibility on the progress of this capital injection plan.
AM Best views the company’s operating performance as marginal, as evidenced by a five-year average return-on-equity ratio of -6.7% (2015-2019). Underwriting performance has been persistently loss-making, with a five-year average combined ratio of 134.7% (2015-2019) and a very weak combined ratio of 142.8% for fiscal-year 2019.
Operating results have been dependent on investment income in recent years, which includes material realized and unrealized gains. Inadequate pricing on key lines of business and reserve strengthening over the past three fiscal years have been the primary drivers of the company’s poor underwriting results.
The negative rating outlooks reflect the potential for further deterioration in National’s balance sheet strength fundamentals over the near to medium term if the current trends in financial metrics are not reversed, or sufficient capital is not received from the Government of India.
AM Best has downgraded the Financial Strength Rating (FSR) to B+ (Good) from B++ (Good) and the Long-Term Issuer Credit Rating (Long-Term ICR) to “bbb-” from “bbb+” of Oriental Insurance Company Limited (Oriental) (India).
The outlook of the FSR has been revised to negative from stable, while the outlook of the Long-Term ICR remains negative.
The Credit Ratings (ratings) reflect Oriental’s balance sheet strength, which AM Best categorizes as very strong, marginal operating performance, neutral business profile and marginal enterprise risk management (ERM).
The rating downgrades follow a deterioration in AM Best’s view of Oriental’s operating performance and ERM fundamentals. In particular, the company recorded a sizable underwriting loss of INR 38 billion (USD 549 million) in fiscal-year 2019 (FY2019), equivalent to 32% of its capital base in the prior year, as a result of reserve strengthening from the motor third-party business and the continuation of weak performance from its health portfolio.
The company reported a combined ratio of 136% for FY2019 and a five-year average combined ratio of 132% (FY2015-FY2019). Investment income, including a notable realized gain from the sale of its equity investments, was insufficient to offset the weak technical performance, resulting in an after-tax loss of INR 2.9 billion (USD 42 million) for FY2019.
The marginal assessment on ERM reflects the company’s inability to control its underwriting performance, coupled with the negative impact on its balance sheet strength and earnings. Furthermore, while the company has initiated and implemented several remedial actions over the past few years, Oriental’s risk management capabilities are viewed to be marginal compared with the profile of its key risks.
The company’s risk-adjusted capitalization, as measured by Best’s Capital Adequacy Ratio (BCAR), deteriorated during FY2019, although it remained at the strongest level. This was supported partially by the company’s issuance of subordinated debt in the last quarter of the fiscal year.
Oriental’s balance sheet strength has been under further pressure as a result of large underwriting losses and substantially increased underwriting leverage stemming from reserve strengthening. The company’s capital and surplus reduced by 11% in FY2019 to INR 104 billion (USD 1.5 billion) from INR 118 billion (USD 1.8 billion), increasing the company’s sensitivity to underwriting and investment shocks.
The negative outlooks reflect AM Best’s expectation that Oriental’s rating fundamentals may weaken further if the company is unable to stabilize its risk-adjusted capitalization and operating performance over the near term.