May 15, 2019

National Insurance Company Limited: Update on 9M FY2019 results

Summary of rating action

Previous Rated Amount Current Rated Amount
Instrument* Rating Action
(Rs. crore) (Rs. crore)
[ICRA]AA (negative);
Subordinated Debt Programme 895.00 895.00
outstanding
Total 895.00 895.00
*Instrument details are provided in Annexure-1
Update
National Insurance Company Limited (NIC)1 reported Q3 FY2019 and 9M FY2019 results. The company reported a
deterioration in its capitalization levels with a weak solvency ratio at 1.01 times as on December 31, 2018 which was
below minimum regulatory requirement of 1.50 times. Further, the company continue to report weak profitability with
underwriting losses of Rs. 3,170.9 crore, thereby resulting in net loss of Rs. 1,177.6 crore in 9M FY2019. ICRA will closely
monitor the company's capital raising plans for FY2020 and will take appropriate rating action accordingly.

ICRA has rating outstanding of [ICRA]AA (pronounced ICRA double A) for the Rs. 895 crore subordinated debt
programme of NIC. The outlook on the long-term rating is Negative.

Rationale
The rating takes into account NIC’s continued pressure on profitability driven by weak underwriting performance due to
high combined ratio. Despite considering 100% of the fair value change account (FVCA) for solvency purpose, NIC
reported weak solvency ratio of 1.01 times as on December 31, 2018. The company continues to report solvency ratio
below regulatory minimum from Q1 FY2019 onwards. The rating takes note of the specific regulatory forbearance
allowed to the company by the IRDAI for the entire tenure of the instrument, which allows NIC to service the debt
instrument even if the solvency ratio is below the minimum regulatory requirement. ICRA believes that the company’s
solvency ratio is likely to remain weak unless there is capital infusion from the Government of India (GoI) or significant
improvement in its underwriting performance.

The rating continues to favourably factor in NIC’s sovereign ownership, given that it is entirely owned by the GoI, and
expectation of continued GoI support in future. The rating continues to reflect NIC’s position as one of the leading
players in the market by virtue of being the fourth-largest company in the domestic general insurance industry. The
rating is further supported by NIC’s healthy investment buffer in the form of the FVCA (unrealised gains) in its equity
holdings and its comfortable liquidity buffer.

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For complete rating scale and definitions, please refer to ICRA's website www.icra.in or other ICRA Rating Publications

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Outlook: Negative
The outlook may be revised to Stable if the company is able to improve its solvency ratio above the minimum regulatory
requirement or gets a capital infusion from the GoI and is able to report consistent improvement in its underwriting
performance. However, there could be a rating action if the company’s solvency ratio continues to remain below
minimum regulatory requirement and if there is no capital infusion development in FY2020.

Key rating drivers

Credit strengths
Sovereign ownership, with 100% equity owned by the GoI - NIC is entirely owned by the GoI. ICRA expects the company
to continue to receive strong Government support given its systemic importance to the general insurance industry and
wide distribution network. The role of Government-owned insurers such as NIC becomes more important given the very
low insurance penetration in India. Further, to improve the financial health of general insurance companies and reduce
the intense competition in the industry, the GoI announced (in the February 2018 Union Budget) plans to merge three
public sector general insurance companies (National Insurance Company Limited, The Oriental Insurance Company Ltd.
and United India Insurance Company). The GoI plans to list the merged entity, which will help raise capital and will
support the credit profile. The merged entity is expected to control around 33% of the market share and have better
pricing ability due to higher bargaining power, which is likely to result in improved underwriting performance. However,
ICRA does not foresee the completion of the merger in CY2019.

Leading market share with a long operating history - NIC is the fourth largest general insurance company in the country
with a sound franchise value in eastern India and a long operating history. During 9M FY2019, NIC had operations across
36 states and Union Territories. Around 50.9% of the gross direct premium written in India (GDPI) was contributed by
five states namely – Maharashtra (17.6%), Delhi (9.5%), West Bengal (8.7%), Karnataka (8.0%) and Telangana (7.1%).
NIC’s market share, in terms of GDPI, was around 11.5% in FY2018 compared to 11.8% in FY2017. NIC’s portfolio
concentration continues to remain high in the motor and health & personal accident segments which accounted for 42%
and 39% respectively, of total GDPI during 9M FY2019 compared to 44% and 34% share respectively, during 9M FY2018.
However, the company plans to gradually reduce the portfolio concentration further in the motor and group health
portfolio and focus more on non-motor retail products (NIC has increased its crop portfolio in the last two years).

Credit challenges
Weak reported solvency levels below regulatory requirement - Despite considering 100% of FVCA, the company’s
solvency ratio declined to 1.01 times as on December 31, 2018 compared to 1.53 times as on December 31, 2017 and
was below the minimum regulatory requirement of 1.50 times. The company continues to report solvency ratio below
regulatory requirement from the last two quarters at 1.43 (June 30, 2018) and 1.21 (September 30, 2018). ICRA notes
that the company’s solvency ratio is supported by subordinated debt of Rs. 895 crore raised in FY2017. Management
stated that the sharp decline in the solvency ratio was due to higher absorption of high incurred but not reported (IBNR)
provisions during 9M FY2019. The high IBNR provisions was driven by company’s transition from the existing software
system to a new core system resulting in multiple data inconsistencies (w.r.t to claims outstanding). As per the
management, a part of the additional reserves created would be reversed once the software inconsistencies are
stabilised. The company does not have headroom to raise additional subordinated debt. As per ICRA’s estimates, NIC is
expected to report solvency ratio below regulatory minimum for FY2019 as well. Management expects the GoI to
announce capital infusion in the final budget for FY2020 which is expected to support the solvency levels.

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Weak underwriting performance - NIC continues to report weak underwriting performance with its underwriting losses
increasing to Rs. 3,171 crore during 9M FY2019 compared to Rs. 2,129 crore during 9M FY2018. A decline in GDPI by
9.5% YoY to Rs. 10,681.2 crore (9M FY2019) from Rs. 11,805.4 crore (9M FY2018) coupled with a rise in net claims ratio
to 110% (9M FY2019) from 94% (9M FY2018) primarily resulted in a rise in underwriting losses. The high claims ratio was
mainly driven by a rise in claims ratio in the motor (own damage) and health & personal accident segments to 108% and
118%, respectively, in 9M FY2019 from 83% and 89%, respectively, in 9M FY2018. As a result, the combined ratio
deteriorated to 144.8% in 9M FY2019 compared to 125.4% in 9M FY2018. In future, the company’s ability to increase its
business while diversifying and improve its underwriting standards remains a key monitorable.

Muted profitability metrics - NIC’s profitability remains under pressure with loss before tax of Rs. 1,177.6 crore in 9M
FY2019 compared to profit before tax of Rs. 16.5 crore in 9M FY2018. The elevated level of underwriting losses mainly
resulted in loss before tax which was partially offset by investment income of Rs. 1,056.9 crore in 9M FY2019 (Rs. 1,130.9
crore in 9M FY2018) and realised gains of Rs. 969.8 crore in 9M FY2019 (Rs. 1,095.5 crore in 9M FY2018). Consequently,
the company reported negative return on asset and return on reported net worth of -5.3% and -43.1%, respectively, in
9M FY2019 compared to positive return on asset and return on reported net worth of 0.1% and 0.2% respectively in 9M
FY2018. In addition, the company has an exposure of ~Rs. 226 crore to IL&FS group companies which needs to be
provided for as per the IRDAI’s regulations. ICRA expects the profitability to remain muted in the near future, given the
low expected GDPI growth and likely high claims ratio.

Liquidity position
NIC had a liquidity buffer of Rs. 2,937 crore (calculated as 50% of the sum of total investments and cash and bank
balance less technical reserve and net dues to other insurance companies) as of December 2018. The nearest debt
repayment is the coupon payment of the subordinated debt programme, amounting to Rs. 74.7 crore, falling due on
March 27, 2020. The subordinated debt repayment of Rs. 895 crore is due on March 27, 2022 in case the company
exercises the call option. The maturity date of the Rs. 895-crore subordinated debt is March 26, 2027. ICRA does not
foresee any liquidity risk in the near term, and the company has paid its obligation for interest within the due date of
March 27, 2019.

Analytical approach
Analytical Approach
Applicable Rating Methodologies
Parent/Group Support
Consolidation/Standalone
Comments
ICRA’s Credit Rating Methodology for rating hybrid debt instruments issued by
insurance companies
Parent/Group Company: Government of India (GoI)
ICRA factors in the implied support from the GoI (100% owned by the sovereign)
and takes comfort from NIC’s extensive experience in operating an insurance
business
The rating is based on the standalone financial statements of the issuer

About the company

NIC is India's fourth-largest non-life insurance company based on GDPI in 9M FY2019. Wholly owned by the GoI, the
company commenced operations in 1906 and has a track record of more than 100 years. Following the nationalisation of
the general insurance business in 1973, NIC became one of the four subsidiaries of General Insurance Corporation of
India (GIC). NIC, with its head office in Kolkata, has an extensive network of 1,742 offices across the country as on March
31, 2018.

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In 9M FY2019, NIC reported gross premium of Rs. 10,681.2 crore and loss before tax of Rs. 1,177.6 crore compared to
gross premium of Rs. 11,805.4 crore and profit before tax of Rs. 16.5 crore for 9M FY2018. The company reported
solvency of 1.01 times as on December 31, 2018 compared to 1.53 times as on December 31, 2017.

Key financial indicators (audited)

FY2017 FY2018 9M FY2018 9M FY2019
Gross Direct Premium 14,282 16,244 11,805 10,681
Total Underwriting Surplus/(Shortfall) (3,324) (5,600) (2,129) (3,171)
Total Investment + Trading Income# 3,746 3,504 2,226 2,027
PAT 46 (2,171) 17 (1,178)
Total Net Worth2 9,645 5,714 9,634 3,642
Total Technical Reserves 15,777 19,384 17,760 20,257
Total Investment Portfolio 25,012 25,345 26,497 24,106
Total Assets 32,245 34,783 35,716 32,668
Return on Net Worth 0.5% -38.0% 0.2% -43.1%
Gearing 0.09 0.16 0.09 0.25
Combined Ratio* 131.6% 149.1% 125.4% 144.8%
Regulatory Solvency Ratio 1.90 1.55 1.53 1.01
Amount in Rs. crore
Source: Company & ICRA research
#
Includes investment and other income (including capital gains)
* Combined ratio – (net claims incurred/net premium earned) + (mgmt expenses + net commission expenses)/net premium written

Status of non-cooperation with previous CRA: Not applicable

Any other information: None

2
Including FVCA

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Rating history for last three years
Chronology of Rating History for the Past 3
Current Rating (FY2020) Years
Date &
Rating Date &
Date & Rating in FY2019
Amount Date & in Rating in
Rated Amount Rating FY2018 FY2017
(Rs. Outstanding March
Instrument Type crore) (Rs. crore) May 2019 Dec 2018 April 2018 - 2017
1 Subordinated Long 895.00 895.00 [ICRA]AA [ICRA]AA [ICRA]AA+ - [ICRA]AA+
Debt Term (Negative); (Negative); (Stable); (Stable);
Programme outstanding Downgraded Reaffirmed Assigned

Complexity level of the rated instrument

ICRA has classified various instruments based on their complexity as "Simple", "Complex" and "Highly Complex". The
classification of instruments according to their complexity levels is available on the website www.icra.in

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Annexure-1: Instrument details
Date of Amount
Instrument Issuance / Coupon Maturity Rated Current Rating and
ISIN No Name Sanction Rate Date (Rs. crore) Outlook
Subordinated
INE168X08014 27-Mar-17 8.35% 26-Mar-27* 895.00 [ICRA]AA (negative)
Debt
* The company has a call option, which is exercisable five years from the date of allotment
Source: National Insurance Company Limited

Annexure-2: List of entities considered for consolidated analysis

Company Name Ownership Consolidation Approach
NA NA NA

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ANALYST CONTACTS
Karthik Srinivasan Sahil Udani
+91 22 6114 3444 +91 22 6114 3429
karthiks@icraindia.com sahil.udani@icraindia.com

Niraj Jalan Prateek Mittal

+91 33 7150 1146 +91 33 7150 1132
niraj.jalan@icraindia.com prateek.mittal@icraindia.com

RELATIONSHIP CONTACT
L. Shivakumar
+91 22 6114 3406
shivakumar@icraindia.com

MEDIA AND PUBLIC RELATIONS CONTACT

Ms. Naznin Prodhani
Tel: +91 124 4545 860
communications@icraindia.com

Helpline for business queries:

+91-9354738909 (open Monday to Friday, from 9:30 am to 6 pm)

info@icraindia.com

About ICRA Limited:

ICRA Limited was set up in 1991 by leading financial/investment institutions, commercial banks and financial services
companies as an independent and professional investment Information and Credit Rating Agency.

Today, ICRA and its subsidiaries together form the ICRA Group of Companies (Group ICRA). ICRA is a Public Limited
Company, with its shares listed on the Bombay Stock Exchange and the National Stock Exchange. The international Credit
Rating Agency Moody’s Investors Service is ICRA’s largest shareholder.

For more information, visit www.icra.in

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