SINGAPORE--(BUSINESS WIRE)--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 (United). 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.
Ratings are communicated to rated entities prior to publication. Unless stated otherwise, the ratings were not amended subsequent to that communication.
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