November 27, 2019

Tata AIG General Company Limited: Ratings reaffirmed and fresh rating assigned to the subordinated debt programme

Summary of rating action Previous Rated Amount Current Rated Amount Instrument* Rating Action (Rs. crore) (Rs. crore) Claims paying ability - - iAAA; reaffirmed Subordinated debt programme 178.00 178.00 [ICRA]AA+(stable); reaffirmed Subordinated debt programme - 185.00 [ICRA]AA+(stable); assigned Total 178.00 363.00

Rationale The ratings take into account the parentage of Tata AIG Company Limited 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. The ratings also take into consideration the improvement in the scale of operations and the concurrent improvement in the market share supported by growth in focus areas. Tata AIG has further strengthened its bancassurance tie-ups, which would aid its future growth plans in the retail segment. The ratings continue to factor in the technical support received from the foreign sponsor.

ICRA also takes note of Tata AIG’s moderate profitability, reduction in solvency levels, and its relatively concentrated geographical presence. 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 rating also factors in the company’s focus on the retail business, diversified product mix, adequate re-insurance treaties, comfortable capitalisation, growing scale of business, and low risk in the investment book. TATA AIG’s strategic importance to both TATA and AIG are reflected in the presence of their respective managements on the company’s board.

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, 2019. Tata Sons is the principal holding company for the and holds a stake in Tata Group companies operating in numerous sectors including information technology, power, steel,

1

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; subordinate debt headroom for higher growth – Tata AIG’s capitalisation and solvency levels have been supported by moderate internal capital generation (return on average total assets of 2.3% in FY2018 and 1.1% in FY2019) and timely capital infusion from its sponsors. Over the last three years TATA AIG has received a total of Rs. 750 crore of capital from the parent entities. (including Rs. 200 crore in H1FY2020), as the company continues to grow at a rate higher than the industry. TATA AIG reported solvency ratio was 1.70 as of June 2019, (1.63 as of March 2019, the solvency levels were tight in the last one year due to rapid business growth, and higher claims ratio). In addition, with the infusion of subordinated debt of Rs. 185 crore, the solvency ratio should improve further. 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 – With a market share of 4.8 % in FY2019, the company maintained its position as one of the leading private general insurers of the country. It saw a healthy growth of 43.4% YoY in the total GDPW in FY2019. TATA AIG’s products are relatively well diversified with the Health & Personal Accident segment comprising 14.46% of the gross direct premium written (GDPW) in FY2019, up from 13.33% in FY2018. The motor insurance segment (including motor-OD and motor-third party (TP)) continues to be the largest (48.97% of the total GDPW in FY2019 vis-a-vis 51.77% in FY2018). Fire insurance (9.59% of the total GDPW in FY2019) and (4.23% of the total GDPW in FY2019) are the other large product segments. Crop insurance contributed 15.19% in FY2019, however, the company is not looking to underwrite this business in FY2020 because of high losses in FY2019, and higher re-insurance costs for FY2020.

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 entered into new bancassurance tie-ups with Canara Bank and Bank of Baroda in FY2018, apart from its existing tie-up with . These tie-ups are likely to support the company’s efforts to increase its retail presence. Tata AIG is also expected widen its distribution network by partnering with more automobile OEMs and banks, as well as expand its 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.

Prudently managed investment book– 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. Its investment income (incl. realized gains) has aided the company’s profitability, rising by a CAGR of ~25% over the past three fiscals (FY2017-FY2019) in line with its growing scale of business.

2

Credit challenges Moderate yet Improving underwriting performance – Despite an increase in FY2019, Tata AIG’s loss ratios remain in line with those of its peers. The company’s net loss ratio deteriorated to 78% in FY2019 vis-a-vis 71% in FY2018 despite unchanged gross loss ratios, due to lower risk retention during the period and various catastrophic event which increased losses in its property and energy business, while loss ratio in crop business continued to remain high. 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. This has resulted in the company improving its combined ratio to 102.7% in FY2018 compared to the average of 106.2% during the three years from FY2015 to FY2017. In FY2019, the combined ratio stood at 107.6% due to higher loss ratio because of reasons specified above. Combined ratio is expected to come down in FY2020 as the company is expected to rationalise its product offerings in fire insurance, and reduce crop insurance business. 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.

Competitive pressure from public and private sector players – The general insurance industry in India remains very competitive with price wars in various business segments, which have resulted in high loss ratios. Most general insurance players have been reporting underwriting losses. Further, while the underwriting performance of the retail business segments is better than that of the corporate segments, acquiring new business in the increasingly competitive retail segment continues to be a challenge. Also, the motor TP segment, which forms a considerable part of the industry’s gross written premium (GWP) remains tariffed with high loss ratios (more than 100% against 73% for Tata AIG in FY2019). ICRA expects the operating environment to improve marginally with the introduction of multi-year TP products, and rationalising of Motor TP rates by IRDAI.

Liquidity position: Strong

TATA AIG’s liquid investments were estimated at Rs. 9,350 crore as of June 30, 2019 (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. 7,011 crore (total technical reserve1 plus debt due in the next one year). Moreover, the business generated in FY2020, 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 AIG) 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.

1 Technical reserves = Total Reserve for Unexpired Risk + Estimated Liability in Respect of Outstanding Claims

3

Analytical approach

Analytical Approach Comments Methodology for claims paying ability rating for 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 207 locations across India.

In FY2019, Tata AIG reported a net profit of Rs. 112 crore on a total asset base of Rs. 11,782 crore compared to a net profit of Rs. 157 crore on a total asset base of Rs. 8,031 crore in FY2018.

Key financial indicators (Audited) Key Parameters FY2017 FY2018 FY2019 Q1FY2020 Gross Direct Premium 4,168 5,436 7,743 2,155 Total Underwriting Surplus/(Shortfall) (265) (282) (485) (106) Investment income + realised gains 399 515 643 244 PAT 118 157 112 103 Total Net Worth2 1,241 1,590 2,038 2,319 Total Technical Reserves 3,577 4,888 6,700 6,996 Total Investment Portfolio 4,851 6,621 10,050 11,171 Total Assets 5,887 8,031 12,412 13,681 Return on Equity3 10.4% 11.1% 6.2 - Gearing (Sub-debt/Net Worth) 0.1 0.1 0.1 0.1 Combined Ratio 104% 103% 108% 115% Regulatory Solvency Ratio 1.80 1.69 1.63 1.70

Amount in Rs. crore Source: Tata AIG & ICRA research

2 Including fair value change account (FVCA)

3 PAT/Average net worth (including FVCA)

4

Status of non-cooperation with previous CRA: Not applicable

Any other information: None

Rating history for last three years

Current Rating (FY2020) Chronology of Rating History for the Past 3 Years

Amount Date & Amount FY2019 FY2018 FY2017 Instrument Rated Rating Type Outstanding (Rs. (Rs. crore) 27-Nov-19 14-Mar-19 09-Feb-18 14-Mar-17 09-Mar-17 crore)

Claims Long iAAA; 1 - - iAAA iAAA iAAA - paying ability Term reaffirmed Subordinated [ICRA]AA+ Long [ICRA]AA+ [ICRA]AA+ [ICRA]AA+ [ICRA]AA+ 2 debt 178.0 178.0 (stable); Term (stable) (stable) (stable) (stable) programme reaffirmed Subordinated [ICRA]AA+ Long 3 debt 185.0 0.0 (stable); - - - - Term programme 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

5

Annexure-1: Instrument Details Amount Date of Coupon Maturity Rated Current Rating ISIN No. Instrument Name Issuance / Rate Date (Rs. and Outlook Sanction crore) NA Claims paying ability rating NA NA NA NA iAAA Subordinated debt 21-Mar- 21-Mar- [ICRA]AA+ INE348L08025 8.52% 178.0 programme 2017 2027 (stable) Yet to be Subordinated debt [ICRA]AA+ NA NA NA 185.0 issued programme (stable) Source: Tata AIG

6

ANALYST CONTACTS Karthik Srinivasan Sahil Udani +91 22 6114 3444 +91 22 6114 3429 [email protected] [email protected]

Rohan Rustagi Parvathy S +91 22 6114 3414 +91 22 6114 3428 [email protected] parvathy.s@icraindia. com

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

MEDIA AND PUBLIC RELATIONS CONTACT

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

7

ICRA Limited

Corporate Office Building No. 8, 2nd Floor, Tower A; DLF Cyber City, Phase II; Gurgaon 122 002 Tel: +91 124 4545300 Email: [email protected] Website: www.icra.in

Registered Office 1105, Kailash Building, 11th Floor; 26 Kasturba Gandhi Marg; New Delhi 110001 Tel: +91 11 23357940-50

Branches

Mumbai + (91 22) 24331046/53/62/74/86/87 Chennai + (91 44) 2434 0043/9659/8080, 2433 0724/ 3293/3294, Kolkata + (91 33) 2287 8839 /2287 6617/ 2283 1411/ 2280 0008, Bangalore + (91 80) 2559 7401/4049 Ahmedabad + (91 79) 2658 4924/5049/2008 Hyderabad + (91 40) 2373 5061/7251 Pune + (91 20) 2556 0194/ 6606 9999

© Copyright, 2019 ICRA Limited. All Rights Reserved.

Contents may be used freely with due acknowledgement to ICRA.

ICRA ratings should not be treated as recommendation to buy, sell or hold the rated debt instruments. ICRA ratings are subject to a process of surveillance, which may lead to revision in ratings. An ICRA rating is a symbolic indicator of ICRA’s current opinion on the relative capability of the issuer concerned to timely service debts and obligations, with reference to the instrument rated. Please visit our website www.icra.in or contact any ICRA office for the latest information on ICRA ratings outstanding. All information contained herein has been obtained by ICRA from sources believed by it to be accurate and reliable, including the rated issuer. ICRA however has not conducted any audit of the rated issuer or of the information provided by it. While reasonable care has been taken to ensure that the information herein is true, such information is provided ‘as is’ without any warranty of any kind, and ICRA in particular, makes no representation or warranty, express or implied, as to the accuracy, timeliness or completeness of any such information. Also, ICRA or any of its group companies may have provided services other than rating to the issuer rated. All information contained herein must be construed solely as statements of opinion, and ICRA shall not be liable for any losses incurred by users from any use of this publication or its contents 8