September 02, 2020

Tata AIG General Company Limited: Issuer rating assigned; ratings reaffirmed for the subordinated debt programme

Summary of rating action Previous Rated Amount Current Rated Amount Instrument* Rating Action (Rs. crore) (Rs. crore) Issuer Rating - - [ICRA]AAA(stable); assigned Subordinated debt programme 363.00 363.00 [ICRA]AA+(stable); reaffirmed Total 363.00 363.00

Rationale ICRA’s Issuer Ratings (IRs) for companies is an opinion on the ability to pay claims, and policy-holder obligations in a timely manner. The Issuer rating of [ICRA]AAA is assigned to Tata AIG General Insurance Company Limited. (Tata AIG). The ratings take into account the parentage of Tata AIG with Private Limited (Tata Sons, rated [ICRA]AAA(Stable)/[ICRA]A1+) holding a majority stake (74%) and American International Group, Inc. (AIG, rated Baa1/A2 by Moody’s Investors Service) holding 26%. The presence of a shared brand name strengthens ICRA’s belief that Tata AIG will receive capital support from its parents, as and when the need arises. This is also supported by the track record of equity infusion received from the sponsors in the past (Rs 1,160 crore in the last five years). The ratings also take into its healthy market share (4.1% in FY2020). Tata AIG has further strengthened its bancassurance tie-ups, which would aid its future growth plans in the retail segment. ICRA takes note of the company’s current solvency indicators (2.13 times as on June 30, 2020 compared to the regulatory minimum of 1.50 times), and its policy and track record of adhering to the same. The rating also factors in the company’s focus on the retail business, diversified product mix, adequate re-insurance treaties and low risk in the investment book. The rating is however constrained by modest underwriting performance, though profitability has improved backed by higher investment income.

In the wake of the Covid-19 pandemic, ICRA expects the industry’s (including Tata AIG) premium growth to moderate along with moderation in claims ratio particularly for the motor segment. ICRA does expect the claims to increase for the health segment in FY2021. The impact of the same on the company’s underwriting performance amid the changing industry dynamics would remain a key monitorable. Going forward, increasing the scale while improving the operating cost and maintaining the quality of the book will be critical and would be a rating sensitivity.

The ratings also factor in the key features of the instrument, in line with the applicable guidelines for subordinated debt:

» Servicing of interest is contingent on the company maintaining a solvency ratio above the levels stipulated by the regulator (150%) » In case the interest pay-outs were to lead to a net loss or an increase in net loss, prior approval of the regulator would be required to service the debt Key rating drivers and their description

Credit strengths

Strong parentage; experienced senior management team – Tata AIG is owned by Tata Sons and AIG, holding a stake of 74% and 26%, respectively, as on June 30, 2020. Tata Sons is the principal holding company for the and holds

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a stake in Tata Group companies operating in numerous sectors including information technology, power, steel, chemical, vehicle manufacturing, , consumer goods, and jewellery, among others. AIG is a leading global insurance organisation serving customers in more than 100 countries and jurisdictions. The ratings factor in Tata AIG’s strong parentage and its importance to its sponsors, with the importance underscored by the presence of a shared brand name, board-level supervision and track record of equity infusion. Tata AIG’s operations are handled by a team of senior managers with considerable experience in the general insurance industry in India and other developed markets. Going forward, the importance of the company to its parents and the continued capital and operational support to aid business growth would be a key rating sensitivity.

Adequately capitalised for current scale of operations – Tata AIG’s capitalisation and solvency levels have been supported by moderate internal capital generation (return on average total assets of 1.1% in FY2019 and 2.6% in FY2020) and timely capital infusion from its sponsors. Over the last five years TATA AIG has received a total of Rs. 1,160 crore of capital from the parent entities. (including Rs. 200 crore in H1FY2020). TATA AIG reported solvency ratio was 2.13 as of June 2020, (1.84 as of March 2020). During FY2020, the solvency ratio improved due to higher profitability on subdued business and additional subordinated debt of Rs. 185 crore. Going forward, ICRA expects the profitability levels to improve as the operating expenses moderate with an increase in the scale of operations, as well as improved underwriting performance in its commercial lines of business.

Balanced portfolio across retail and corporate segments – TATA AIG’s products are relatively well diversified with the Health & Personal Accident segment comprising 15.63% of the gross direct premium written (GDPW) in FY2020, up from 14.46% in FY2019. The motor insurance segment (including motor-OD and motor-third party (TP)) continues to be the largest (54.67% of the total GDPW in FY2020 vis-à-vis 48.97% in FY2019). Fire insurance (12.81% of the total GDPW in FY2020 up from 9.60% in FY2019) and (4.23% of the total GDPW in FY2020) are the other large product segments. During FY2020, the company did not underwrite fresh crop business because of high losses in FY2019 and higher re-insurance costs, resulting in to decline in share of crop insurance to 5.58% in FY2020 from 15.19% in FY2019 and the share of other business segments improved during FY2020. Further, due to pandemic led lockdown in March 2020, total gross direct premium written (GDPW) de-grew by 5% YoY in FY2020. Though the market share1 declined to 4.1 % in FY2020 from 4.8% in FY2019, the company maintained its position as one of the leading private general insurers of the country.

Expansion in distribution channels and partnerships to help improve retail presence – Tata AIG has a reasonable presence in the commercial business segment due to the expertise derived from its parent, AIG. The company is looking to increase its retail and SME business. It has bancassurance tie-ups with , Canara Bank and Bank of Baroda. These tie-ups are likely to support the company’s efforts to increase its retail presence. Tata AIG is also expected to widen its distribution network by partnering with more automobile OEMs and banks, as well as expand its presence in tier 2 & tier 3 cities by empowering on-field staff to work from remote locations in absence of any branch and making the entire onboarding process app based for these empowered employees. All these efforts are expected to help the company maintain its pace of growth in its retail portfolio by expanding into new territories and hence, diversify its premium mix further.

1 Excluding Agriculture Insurance Company of India (AIC) and Export Credit Guarantee Corporation of India (ECGC)

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Credit challenges Moderate underwriting performance; though profitability supported by investment income – The company’s net loss ratio slightly improved to 77% in FY2020 vis-a-vis 78% in FY2019 despite higher gross loss ratios, due to lower risk retention during the period. Tata AIG has developed a detailed risk management framework, supported by separate underwriting teams for various business segments and the use of analytics for geographic and product-specific risk selection. Due to subdued business growth in FY2020, expense ratio remained elevated at 32.7% in FY2020 compared to 28.7% in FY2019. This has resulted deterioration in its combined ratio to 109.6%% in FY2020 from 107.6% in FY2019. The company reported underwriting deficit of Rs. 423 core compared to Rs. 485 crore in FY2019. Combined ratio is expected to come down in FY2021 on the back of lower claims in the motor segment and rationalization of its product offerings in fire insurance and lower crop insurance business. During Q1FY2021, the company reported underwriting surplus of Rs. 24 crore against underwriting deficit of Rs. 106 crore in Q1FY2020. The company also has various proportional, surplus and excess of loss treaties for each line of business to either rationalize risk or to conserve capital. It also has a company-wide excess of loss treaty limiting aggregate loss due to a single catastrophic event impacting multiple lines of business.

Backed by higher investment income, net profit of the company grew by 199% to Rs. 335 crore in FY2020 from Rs. 112 crore in FY2019. Net investment income grew by 41% to Rs. 835 crore in FY2020 from Rs. 593 crore in FY2019. Growth in investment income in FY2020 was aided by higher investment book (grew by 18% in FY2020 due to increase in advance premiums) and higher yield on investments. TATA AIG investment book remains healthy and with relatively lower risks in its debt portfolio. The company hasn’t reported any NPA over the past 5 years, nor has witnessed any material downgrades in its investment portfolio. This has led to stability in its investment income profile.

Liquidity position: Strong TATA AIG’s liquid investments were estimated at Rs. 12,369 crore as of June 30, 2020 (sum of total investments less haircuts estimated by ICRA, plus cash and bank balances plus net due from insurance companies), against which the company had a total liability build up Rs. 8,441 crore (total technical reserve 1 plus debt due in the next one year). The total gross claims payout in FY2020 was Rs. 3,817 crore, and Rs. 3,530 crore in FY2019. Moreover, the business generated in FY2021, would also provide for liquidity cushion. ICRA does not foresee any liquidity risk for the company in the near to medium term.

Rating sensitivities Positive triggers – The rating or outlook could be revised if the company is able to report underwriting surplus on a sustained basis, while improving market share and solvency levels, while being of strategic importance to its promoters.

Negative triggers – The rating or outlook could be revised if there is a downward revision in the rating for the promoter companies (TATA Sons) or a decline in the strategic importance of TATA AIG to its promoter companies or decline in expectation of support from promoters. In addition, a decline in the company’s solvency ratio to less than 1.7 times on a sustained basis could lead to rating downgrade.

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Analytical approach

Analytical Approach Comments ICRA’s Issuer Rating Methodology of General Insurance Companies ICRA’s Credit Rating Methodology for rating hybrid debt instruments issued by Applicable Rating Methodologies insurance companies Impact of Parent or Group Support on an Issuer’s Credit Rating Parent/Investor: Tata Sons and AIG ICRA factors in the implied support of the parent entities, Tata Sons and AIG, and Parent/Group Support takes comfort from the management team’s experience in the insurance business. Consolidation/Standalone The ratings are based on the standalone financial statements of the issuer.

About the company: Tata AIG General Insurance Company Limited (Tata AIG) is a joint venture between the Tata Group and American International Group (AIG). Tata AIG, which commenced operations in India on January 22, 2001, offers a range of general insurance covers for businesses and individuals. The company has a comprehensive range of general insurance products for liability, marine cargo, personal accident, travel, rural agriculture insurance, extended warranty, etc. The company is present in 205 locations across India.

In FY2020, Tata AIG reported a net profit of Rs. 335 crore on a total asset base of Rs. 13,518 crore compared to a net profit of Rs. 112 crore on a total asset base of Rs. 12,412 crore in FY2019.

Key financial indicators (Audited) Key Parameters FY2018 FY2019 FY2020 Q1FY2021 Gross Direct Premium 5,436 7,743 7,385 1,799 Total Underwriting Surplus/(Shortfall) (282) (485) (423) 24 Investment income + realised gains 511 651 921 268 PAT 157 112 335 205 Total Net Worth2 1,590 2,038 2,210 2,671 Total Technical Reserves 4,888 6,700 7,930 8,441 Total Investment Portfolio 6,621 10,050 11,893 13,427 Total Assets 8,031 12,412 13,518 14,838 Return on Equity3 11.1% 6.2% 15.8% 32.9%* Gearing (Sub-debt/Net Worth) 0.1 0.1 0.2 0.1 Combined Ratio 103% 108% 110% 99% Regulatory Solvency Ratio 1.69 1.63 1.84 2.13 Amount in Rs. crore Source: Tata AIG & ICRA research *Annualized

2 Including fair value change account (FVCA) 3 PAT/Average net worth (including FVCA)

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Status of non-cooperation with previous CRA: Not applicable

Any other information: None

Rating history for last three years Chronology of Rating History for the Current Rating (FY2021) Past 3 Years Instrument Amount Amount Date & Rating FY2020 FY2019 FY2018 Type Rated Outstanding 27-Nov- 14-Mar- 02-Sep-20 09-Feb-18 (Rs. crore) (Rs. crore) 19 19

Long [ICRA]AAA(stable); 1 Issuer Rating - - - - - Term assigned

Subordinated debt Long [ICRA]AA+ [ICRA]AA+ [ICRA]AA+ [ICRA]AA+ 2 363.00 363.00 programme Term (stable); reaffirmed (stable); (stable) (stable)

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 ISIN No. Instrument Name Date of Coupon Maturity Amount Current Rating Issuance / Rate Date Rated and Outlook Sanction (Rs. crore) NA Issuer Rating NA NA NA NA [ICRA]AAA(stable); assigned INE067X08018 Subordinated debt programme 21-Mar- 8.52% 21-Mar- 178.0 [ICRA]AA+(stable); 2017 2027 reaffirmed INE067X08026 Subordinated debt programme 19-Dec- 8.85% 19-Dec- 185.0 [ICRA]AA+(stable); 2019 2029 reaffirmed Source: Tata AIG

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 [email protected] [email protected]

Mayank Chheda Sudam Shingade +91 22 6114 3413 +91 22 6114 3425 [email protected] s udam.shingade @icraindia.com

RELATIONSHIP CONTACT L. Shivakumar +91 22 6114 3406 [email protected]

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Ms. Naznin Prodhani Tel: +91 124 4545 860 [email protected]

Helpline for business queries:

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

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 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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