HDFC ERGO General Insurance Company Limited

Name of the Instrument/Facility Amount Rating Action

In Rs. Crore (September 2016)
Subordinated Debt Programme 350.00 [ICRA]AAA (stable) Assigned
Claims Paying Ability - iAAA Reaffirmed

ICRA has assigned a rating of [ICRA]AAA (pronounced as ICRA triple A) to the Rs. 350 crore subordinated
debt programme of HDFC ERGO General Insurance Company Limited (HDFC ERGO). The outlook on the
rating is stable. ICRA has also reaffirmed the highest claims paying ability rating of iAAA to the company.
The ratings take into account the parentage of HDFC ERGO with a majority stake (50.73% as on June 30,
2016) being held by HDFC Limited (HDFC; rated [ICRA]AAA with a stable outlook and [ICRA]A1+) and ERGO
(primary insurance entity of Munich RE, rated Aa3 by Moody’s Investors Service) holding 48.74% share as on
June 30, 2016. The presence of a shared brand name strengthens ICRA’s belief that HDFC ERGO will receive
capital support from its parent companies as and when the need arises. While subordinated debt instruments
cannot be serviced if regulatory solvency requirements are breached, ICRA takes note of the company’s
current solvency indicators, its policy as well as track record of adhering to the same. ICRA further expects that
given the standing of HDFC in the Indian capital markets, there is a strong onus on HDFC to ensure that HDFC
ERGO meets all its required regulatory requirements (on a continual basis) for timely and adequately servicing
of the rated subordinate debt. The company receives considerable operational and technical support from
HDFC and ERGO. The entity also has access to the large branch network of HDFC (and its group/associate
companies) which enables it to reach lower tier cities at a low cost. Going forward, achieving scale and size
without cost over-runs, building and maintaining the quality of its book and achieving healthy claims settlement
ratios will be critical in maintaining the rating profile of the company.

HDFC ERGO continues to maintain its position as one of the country’s largest private sector general insurers
with a market share1 of about 3.3% in Q1FY2017 (3.7% in FY2016) and ranks fourth in the private sector as on
June 30, 2016. Motor (comprising 33%2 for Q1FY2017), health (comprising 22%2 for Q1FY2017) and personal
accident (comprising 13%2 for Q1FY2017) are the key segments the company operates in. The company
sources most (36% of total premium in Q1FY2017) of its business from corporate agents and draws significant
support from its bancassurance channel to drive growth of its loan-linked health insurance, personal accident
and property insurance policies. Other major distribution channels for the company include brokers (33% as on
June 30, 2016), individual agents (15%), direct business (15%) and others (1%).

During FY2016, for second consecutive year, HDFC ERGO reported a low gross direct premium (GDP) growth
(of 6.2% YoY while the overall general insurance industry grew at 13.8%1). The slow growth was on account of
few portfolio adjustments (made in FY2015 and FY2016) that helped the company to contain the loss ratios
(claims ratio stood at 72.82% in FY2016 compared to 78.72% in FY2015). Consequently, the motor (11.7%
YoY growth in FY2016) and health (14.1% YoY growth in FY2016) segment had seen relatively lower growth
compared to industry. In the health segment, the company has been selective in underwriting group business
while increasing its focus on the retail health portfolio. The management believes that the portfolio adjustment
initiative has run its course and expects to grow at a higher rate than the overall industry FY2017 onwards.

The company’s net retention ratio (at around 56.2% in FY2016 vis-à-vis 55.9% in FY2015) is among the lowest
in the industry. Leveraging its deep networks, the company is able to utilize reinsurance contracts to reduce
risk levels to match its balance sheet strength. On account of the strong growth expectations from the weather
insurance segment (mainly due to Pradhan Mantri Fasal Bima Yojana), ICRA expects retention ratio to remain
at current levels, going forward.

The gross claims paid by the company rose by around 27% YoY to Rs. 2125.8 crore in FY2016 from Rs.
1675.80 crore in FY2015, primarily due to claims from the Chennai floods. Nevertheless, the impact on the net
claims was limited as the company had adequate catastrophe cover. During FY2016, the company’s
management expense ratio3 increased (to 53.61% for FY2016 from 47.87% in FY2015), which was however

1
As per gross direct premium written (GDPW); does not consider ECGC and AIC premium collections
2
As a proportion of total GDPW written during the period
3
Ratio of management expense to net written premium
cushioned by the higher commission earned on the ceded portfolio (-7.90% in FY2016 compared to -5.44% in
FY2015) and lower claims ratio (72.82% in FY2016 compared to 78.72% in FY2015). Consequently, the
combined ratio for the company declined to 105.26% in FY2016 from 108.33% in FY2015. Adequate cushion
from investment income (increased to Rs. 360.30 crore in FY2016 from Rs. 316.33 crore in FY2015) enabled
the company to report a PAT of Rs. 151 crore (PAT of Rs. 104 crore in FY2015) and an RoE of 14.1% (RoE of
10.4% in FY2015) in FY2016.

During FY2016, the company’s investment book grew by 9.2% YoY to Rs. 4113.1 crore as on March 2016 and
to Rs. 4370.6 crore as on June 30, 2016. Most of the investments are in government securities (35% 4 as on
June 30, 2016) followed by higher-rated corporate bonds (46%). The exposure in equity on its investment book
stood at 3% which is comfortably within the limit prescribed by IRDAI.

During H1FY2017, the parent companies infused Rs. 551 crore into HDFC ERGO to aid the merger with L&T
General Insurance Company Limited. The company plans to issue subordinated debt (of Rs. 350 crore) is
expected to facilitate its business growth targets for the next couple of years while maintaining solvency well
above the regulatory requirements. As on June 30, 2016, the solvency ratio for the company stood at 1.9.

Company Profile
HDFC ERGO General Insurance Company Limited (HDFC ERGO) is a joint venture between HDFC Limited,
India’s premier housing finance institution (rated [ICRA]AAA with stable outlook; holding 50.73% stake as on
June 30, 2016) and ERGO International AG, the primary insurance entity of Munich Re group (holding 48.74%
as on June 30, 2016 with balance being held by employees of HDFC ERGO). The company offers a complete
range of general insurance products ranging from motor, health, travel, home and personal accident in the
retail space and customized products like property, marine and liability insurance in the corporate space. HDFC
ERGO has been expanding its presence across the country with 108 branch offices as on June 30, 2016.

In existence for over 30 years and with a presence in banking, insurance and asset management, the HDFC
group is an important part of the Indian financial services market. ERGO is present in more than 30 countries
and concentrates on Europe and Asia. ERGO is one of the major insurance groups in Europe and in its home
market of Germany, ERGO ranks among the leading companies in its industry across all segments.

Recent Results
In FY2016, HDFC ERGO reported Gross Direct Premium Written (GDPW) of Rs. 3379.55 crore and a net profit
of Rs. 151.37 crore as compared with a GDPW of Rs. 3182.21 crore and PAT of Rs. 104.00 crore in FY2015.
As on March 31, 2016, the company’s reported networth stood at Rs. 1069.93 5 crore and a solvency ratio of
1.67.

In Q1FY2017, the company reported a net profit of Rs. 37.99 crore with GDPW of Rs. 882.66 crore.

September 2016
For further details please contact:
Analyst Contacts:
Mr. Karthik Srinivasan (Tel No +91 22 6114 3444)
[email protected]

Mr. Mohit Gupta (Tel no. +91-22-6114 3449)

[email protected]

Mr. Saurabh Dhole (Tel no. +91-22-6114 3427)

[email protected]

Relationship Contacts:
Mr. L. Shivakumar, (Tel. No. +91 22 6114 3406)
[email protected]

4
Includes investments classified under “other approved securities”
5
Excluding fair value change
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