Key Rating Drivers & Detailed Description
Strengths:
- Strategic importance to, and expectation of high-quality support from the parent companies
HDFC ERGO is strategically important to its holding companies, HDFC Bank Ltd and ERGO International AG (the primary insurance entity of Munich Reinsurance group) and derives significant managerial and funding support from them. Strong commitment of HDFC Bank is reflected through its representation on HDFC ERGO’s board, and its strong involvement in HDFC ERGO’s functioning. ERGO International AG also has two non-executives directors on HDFC ERGO’s board and provides technical support, if needed. Both the parents have also demonstrated timely financial support, whenever needed. HDFC ERGO also benefits from common branding with HDFC Bank, which is the largest private sector bank in India with a strong retail presence, solid brand image, established franchise, and large customer base. CRISIL Ratings believes that both parent companies will continue to support HDFC ERGO’s growth plans and will contribute to any incremental capital requirement whenever needed.
HDFC ERGO’s strategic importance to HDFC Bank is underpinned by the former’s strong market position and expectation of gradual improvement in its underwriting profitability over the medium term. Furthermore, HDFC ERGO being the general insurance arm of HDFC group makes it a key element of the latter’s suit of financial service offerings. The strategic importance of HDFC ERGO to HDFC Bank is also reflective in the support extended by the latter in the inorganic expansion of the subsidiary through acquisition of HDFC ERGO Health Insurance Company Ltd (HEHI; erstwhile Apollo Munich Health Insurance Company Ltd).
- Established market position in the Indian general insurance sector
HDFC ERGO, having been in operations for more than two decades now, has a strong market position with a market share of 6.5% based on the gross direct premium written during fiscal 2023 – which makes it the second largest private general insurer and, fourth largest at an overall level. The company’s gross direct premium for fiscal 2023 was Rs 16,636 crore which marks a rise of 23% over gross premiums written in the preceding fiscal. For Q1 FY24, the year-on-year growth in gross premiums was 11%.
In the last 3-5 years, the company has expanded inorganically which has strengthened its market position within key insurance segments like motor and health. After its reverse merger with HDFC General (erstwhile L&T General Insurance Company Ltd), HDFC ERGO’s position in the motor segment was bolstered by the established distribution network of the former. And subsequently, post amalgamation of HEHI with HDFC ERGO, HDFC ERGO’s agency channel has widened which would benefit its market position in the health insurance segment in the long run. In terms of portfolio mix, health, motor, fire and crop have remained the key focus areas. Based on the gross direct premiums for fiscal 2023, the share of health insurance stood at 30.6% as against its share of below 20% prior to amalgamation with HEHI. Motor, as the second largest segment, formed 27.9% of the total premiums followed by fire, which accounted for 10.3% and has emerged as one of the key segments after a favourable revision in rates w.e.f January 2020 which has catalysed growth in this segment across the sector. The share of crop segment was 20.2% in the total premiums written during the fiscal.
HDFC ERGO also has a strong distribution network supported by its association with the HDFC group, and channel relations acquired through inorganic routes. For FY2023 nearly 14% of business is sourced by corporate agents as against 10% for most other large players in the industry. This reduces dependency on brokers and direct mode of origination.
CRISIL Ratings believes that HDFC ERGO shall sustain its market position in due course supported by its diversified portfolio and distribution network. However, its ability to sustain the momentum in growth, apart from the inorganic expansion that it undertakes, amid intense competition will remain a key rating sensitivity factor.
- Robust risk management practices and sound investment quality
HDFC ERGO has institutionalized a comprehensive risk management framework to identify, assess and monitor risks. Apart from insurance risk, the risk management framework also addresses strategic risks, operational risks, investment risks and information and cyber security risks. The company undertakes only those businesses where risks can be measured quantitatively. Moreover, a large proportion of the exposure is reinsured, thereby limiting the risk on books. The company also has a diversified panel of reinsurers, all rated ‘BBB+’ or above on international rating scale. The company, on average, retains 50-55% of its business, which is significantly lower than peers.
These practices have enabled the company to maintain adequate level of cushion in available solvency margin over and above the economic capital requirement and, have also ensured lesser volatility in the solvency margin of the company over the years, as compared to that exhibited by its peers. Over the medium term, the company’s robust risk management practices are expected support the sustenance in its operating performance.
HDFC ERGO also has a sound investment portfolio quality supported by its prudent investment policy and stringent regulations. As on March 31, 2023, 99.8% of its debt investments are in securities rated ‘AA’ or higher or are sovereign securities. In addition, liquidity is comfortable, with a large proportion of liquid investments. Government securities (G-secs) accounted for 42% (central and state) of its investment portfolio based on book value on March 31, 2023. The company’s conservative investment philosophy is also depicted by its low exposure of less than 8% to equity investments and, the steady state stance of maintaining equity exposure within 10%.
Capitalisation, in relation to the nature and scale of the company’s operations, remains comfortable. On June 30, 2023, the company had a reported networth of Rs 3,852 crore (excluding amalgamation reserves) and a solvency ratio of 1.85 times. Apart from its reported metrics, capital position of HDFC ERGO is backed by expectation of timely capital infusion from the parent entities, if needed, as demonstrated in the past.
CRISIL Ratings believes HDFC ERGO’s capital position will remain adequate, supported by opportune financial support from its parents and steady internal accruals. The company is also expected to sustain the cushion over and above regulatory solvency requirement at current levels, on an on-going basis.
Weaknesses:
- Modest underwriting performance with overall earnings profile remaining supported by investment income.
HDFC ERGO’s underwriting performance, despite gradual improvement over the years, remains modest. For fiscal 2023, the company reported a combined ratio of 103.3% as compared to 107.5% for the previous fiscal. In terms of underwriting performance, the company incurred a claims ratio of 79.9% during fiscal 2023 as against a claims ratio of 84.0% for the previous fiscal and expense ratio remained stable at 23.4%. The improvement of loss ratio for the fiscal was attributed to significant reduction of Covid-19 claims following the second pandemic wave.
Underwriting deficit for fiscal 2023 was Rs 462 crore as compared to Rs 568 crore for the previous fiscal. For fiscal 2021 and 2022, Covid-19 claims were on the higher side which resulted in an elevated claims ratio especially after the second wave in fiscal 2022. However, as the Covid instances have tailed out – claims ratio is expected to correct in the near term. For Q1 2024, claims ratio stood at 81.6% as against 80.1% for the corresponding quarter of the previous fiscal, expense ratio improved to 26.5% to 27.0%, respectively for the same period.
Overall profitability remains supported by income from investments. For fiscal 2023, the impact of modest underwriting performance was offset by a gross investment income of Rs 1,413 crore, resulting in a net profit of Rs 653 crore. For Q1 2024, as well, a stable investment income of Rs 412 crore and an underwriting deficit of Rs 123 crore, resulted in a net profit of Rs 200 crore for the period.
The adequacy of reserving done by the company against potential Covid-19 claims which are incurred but not reported or are partially reported, will remain a monitorable.