HONG KONG--()--A.M. Best Co. has revised the outlook to positive from stable and affirmed the financial strength rating of B++ (Good) and issuer credit rating of “bbb+” of United India Insurance Company Limited (United India) (India).
“Risk Management and the Rating Process for Insurance Companies.”
The ratings reflect United India’s solid risk-adjusted capitalization, improved underwriting performance and strong business profile in the Indian non-life insurance market.
United India’s risk-based capitalization, as measured by Best’s Capital Adequacy Ratio (BCAR), remained solid in fiscal year 2011-12, despite the lower capital and surplus balance attributed to the deteriorating local investment market. The company’s capitalization level is expected to be adequate to support its forecasted business growth in the near term.
Underwriting performance has improved in fiscal year 2011-12, as evidenced by the lower loss ratio and expense ratio in the year. A substantial premium rate increase in motor third party liability insurance helped to bring down the loss ratio of the motor line. Better claim experience has also been observed in the other major portfolio--health--after United India took various initiatives in claims management. The expense ratio also came down in fiscal year 2011-12, with higher employee productivity and a larger premium base. Overall, the company’s combined ratio was lowered by 16.5% from its peak of 133.4% in fiscal year 2010-11.
United India continued to demonstrate a strong top line growth in fiscal year 2011-12, in spite of the intense market competition. It has gradually increased its market share in the past five years and has become the second-largest non-life insurer in India in term of premiums written.
Offsetting these positive rating factors are the poor performance of the Indian Motor Third Party Insurance Pool (IMTPIP) and the company’s high equity exposure.
The additional reserve liability required by IRDA for the IMTPIP is a major reason for the unfavorable underwriting results of United India in the last two years. The reserve liability will continue to impose negative impacts on United India’s operating results as the company will recognize the deferred additional provisions in the next two years. A new pool, the Indian Motor Third Party Declined Risk Insurance Pool, was established with the intention of allowing insurers to manage their risks more efficiently and turn around the loss-making situation of the old pool. A.M. Best remains cautious and will closely monitor the performance of the new pool.
Although United India’s equity exposure is gradually decreasing, it still had 40% of its investment portfolio held in equities on a market value basis as at 31 March 2012. Future deterioration of the Indian investment market would have direct negative impact on United India’s capitalization level through the fair value change account.
Future positive rating actions could occur if United India is able to further improve its underwriting performance while maintaining its solid risk-based capitalization. Conversely, downward rating actions could occur if there is a significant deterioration in the company’s operating results or a material decline in its risk-based capitalization.
The methodology used in determining these ratings is Best’s Credit Rating Methodology, which provides a comprehensive explanation of A.M. Best’s rating process and contains the different rating criteria employed in the rating process. Key criteria utilized include: “Understanding Universal BCAR”; “Catastrophe Analysis in A.M. Best Ratings”; “Evaluating Country Risk” and “Risk Management and the Rating Process for Insurance Companies.” Best’s Credit Rating Methodology can be found at www.ambest.com/ratings/methodology.
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