United India withdraws AM Best rating, secures US$144m

The deterioration of India’s three public-sector insurers continues, with United India the latest to withdraw its AM Best credit rating.

An announcement from the rating agency came at the same time as it downgraded the company’s financial strength and long-term issuer credit ratings, noting that its future is now largely dependent on confirmation of the level of government support it will receive.

“The ratings reflect the company’s balance sheet strength, which AM Best categorises as weak, marginal operating performance, neutral business profile and marginal enterprise risk management,” said analyst Chris Lim in the report.

India’s government has said that will inject Rs10.8 billion (US$144 million) of cash into the company in the near term, but it has yet provide full details of the support package.

Unrated

To be fair, the company has little need for a credit rating given its lack of appeal to investors, though it does have one outstanding bond — a Rs9 billion 10-year deal issued in 2018 (with a call option in 2023) that was intended to help improve its solvency ratio, which at the time was just below the regulatory minimum of 1.5.

Government officials might want to look at how that cash infusion has affected United India’s fortunes, as the company’s subsequent financial statements show that its solvency ratio has continued falling. It is now down to just 0.94.

The only reason it can continue to service the bond is because the regulator has given it an exemption to rules that prohibit coupon payments when an insurer’s solvency ratio is below the regulatory minimum. Withdrawing from AM Best’s rating process might at least save some money and spare United India executives from more bad news.

“With mounting underwriting losses and eroding solvency they would have sensed what they are in for,” said one source in India. “Mark-to-market investment losses and a deteriorating combined ratio are adding to their woes.”

Performance

Indeed, the company reported a combined ratio of 139.8% for the first half of the 2020 fiscal year, with the decline in underwriting performance largely attributable to very high claims in the group health, marine and fire segments, as well as additional claims reserves for third-party motor business.

This resulted in underwriting losses of Rs25 billion and a net loss of Rs10.9 billion, though this number does not reflect the investment performance since the start of the pandemic.

Given this history, it’s difficult to see how the government will get value for money from a capital injection. But it is also not surprising that government officials do not want to put India’s second-largest general insurer into runoff. United India has been in business since 1938 and has a market share of around 8.8%, underwriting a total gross premium of Rs164 billion in 2019.

Moving on

Having scrapped the three-way merger between United Insurance and public-sector peers National Insurance and Oriental Insurance, government officials are now focusing on the life insurance side with the initial public offering of Life Insurance Corporation (LIC) of India, which is expected to launch in the first half of 2021. Potential financial advisers took part in a virtual beauty parade in July and should be appointed soon.

While this is a deal that has more chance of getting to market than the general insurer merger, it is not much more compelling. LIC is the dominant player in the sector, but it has been slowly losing market share during the past few years to private-sector competitors such as SBI Life, HDFC Life and ICICI Prudential Life.

Compared to these private competitors it has a much lower solvency ratio, much higher combined ratio and a very low underwriting margin. With three much better listed insurers that are already available to buy, the investment case for LIC is weak.

The government also has a poor track record of managing listed companies. ONGC is at a 14-year low, Coal India has halved in value during the past two years and the share prices of most of the public-sector banks are in long-term decline. But with a potential IPO size of Rs1 trillion for a 10% stake, the government has a clear incentive in getting the deal done — and preferably in this fiscal year.

Unfortunately, with the government retaining complete control of the company, it’s unlikely that the IPO will have any effect on how the company is run. Meanwhile, the government is still grappling to contain the spread of Covid-19 which is starting to have a growing influence on the performance of the economy. India has bee the worst hit country in Asia by the crisis.

Source: Insurance Asia News

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