A PRESENTATION ON

A STUDY ON CREDIT RATING BY A.M BEST COMPANY WITH

SPECIAL REFERENCE TO THE NEW INDIA ASSURANCE
COMPANY LIMITED

Presented by
Lipika Sarkar
MBA GM 19/13

CONTENTS

INTRODUCTION
Credit rating - The process of assigning a symbol with specific
reference to the instrument being rated, that acts as an indicator of the
current opinion on relative capability on the issuer to service its debt
obligation in a timely fashion.
Credit Rating is important since individuals and corporations with poor
Credit Rating will have difficulty finding financing, and will most
likely have to pay more due to the risk of default.
Credit rating motivates savers to invest in industry and trade Credit
rating provides maintenance of investors confidence, since default
shatter the confidence of investors in corporate instruments.
Sectors where Credit Rating Plays a Vital Role:
Commercial Banks , Mutual Funds , Investment Banks , Leasing
Companies , Insurance Companies , Bonds & Securitization etc
3

THE COMPANY
New India Assurance Co Ltd, is a 100 % Govt owned multinational general
insurance company operating in 27 countries and headquartered at Mumbai,
India. The New India Assurance Co Ltd, global business crossed Rs.16000
Cr. founded by Sir Dorabji Tata in 1919.
The New India Assurance Co Ltd is the only direct insurer in India rated A(Excellent Stable outlook) by A.M. Best. "CRISIL has reaffirmed its
' AAA/STABLE ' rating.
A.M. Best is a U.S.-based rating agency headquartered in Oldwick, New
Jersey, that focuses on the insurance industry. Both the U.S. Securities and
Exchange Commission and the National Association of Insurance
Commissioners have designated the company as a Nationally Recognized
Statistical Rating Organization (NRSRO) in the United States.
The first rating agency, the Credit Rating Information Services of India
Ltd.(CRISIL), was started inn 1988.
4

REVIEW OF LITERATURE
Duggal (1992) tried to find out the relevance of credit rating in the
Indian context and the extent of awareness about the concept of credit
rating and the rating agencies in India.
Shankar et al. (1992) tried to evaluate the operations of CRISIL which
include the methodology of rating, rating process, rating symbols, etc.
The authors found that there were certain shortcomings in the working of
CRISIL.
Patnaik and Narayan (1993) explained the mechanism of credit rating
in India and the procedure adopted by credit rating agencies, viz. CRISIL
and ICRA to rate the instruments.
Sarkar (1994) studied different guidelines regarding credit rating in
India and gave certain suggestions for improvement of credit services in
India.
5

REVIEW OF LITERATURE
Upadhye (2005), in her study, concentrated on an overview of credit
rating system in India. The paper explained the various factors being
taken into consideration by rating agencies which include past
performance, profit turnover, cash flow and fund flow, nature of
competition, etc. and various types of ratings being done by ICRA
Bhattacharyya (2009), in her paper, evaluated the issuer rating system
in India with special reference to ICRAs issuer rating model
Bheemanagauda and Madegowda (2010) made an attempt to evaluate
the performance of credit rating agencies in India including CRISIL,
ICRA, CARE and FITCH.

OBJECTIVE
PRIMARY OBJECTIVE :
1.To study the credit rating policies and procedures of A.M Best
Company and CRISIL.
2.To analyze the financial variables of The New India Assurance
Company Limited, Guwahati.
SECONDARY OBJECTIVES :
1.To compare and analyze the financial performance for the past five
years (2009-10 to 2013-14)
2.To provide suggestions for improving the overall financial
performance of the company.
3.To understand the significance of credit rating.
4.To find out the challenges faced by the rating agencies.
NEED OF THE STUDY :
The study helps to reflects the financial position and strengths or
weakness of the company . Every insurance sector needs to view their
credit rating and financial performance analysis.
7

Rating Process by A.M Best Company(Europe). :

RATING SYMBOL OF A.M BEST COMPANY

The ratings scale includes six "Secure" ratings:
A++, A+ (Superior)
A, A- (Excellent)
B++, B+ (Good)
The scale also includes ten ratings for companies deemed
"Vulnerable":
B, B- (Fair)
C++, C+ (Marginal)
C, C- (Weak)
D (Poor)
E (Under Regulatory Supervision)
F (In Liquidation)
S (Rating Suspended)

10

RATING SYMBOL OF CRISIL

Remarks

Debentur
e

Fixed
deposit

Structure Shortd
term
obligation instrumen
ts

Highest
safety

AAA

FAAA

AAA(So)

P1=very
strong
safety

High safety AA

FAA

AA(So)

P2=very
safety

Adequate
safety

FA

A(So)

P3=adequa
te safety

Moderate
safety

BBB

------

BBB(So)

P4=minima
l safety

Inadequate BB
safety

FB

BB(So)

P5=default

High risk

FC

B(So)

Substantial
risk

-----

C(So)

In dafault

FD

D(So)

11

SEBI GUIDELINES FOR RATING

The credit rating agencies cannot rate a security issued by its
promoters.
If the debt issues is more than Rs.100crores, dual rating must
compulsorily involve public and rights issue.
The company should provide correct information to the rating
agencies.
The net worth of rating agencies has been fixed at Rs.5crore.
The rating agencies can choose their own methodology of
operation.
No chairman, director or employee of the promoters shall be a
director, chairman or employee of the rating committee.

12

RATINGS ARE BASED ON FOLLOWING VARIABLES

USED BY A.M. BEST COMPANY AND CRISIL
Economy Analysis: Economic indicators
Business Analysis:
prospects of the industry
competitive factors affecting the industry
market position in the industry
Financial Analysis:
Adequacy of cash flow
Financial flexibility
Profitability
Management Analysis:
Study of track record of management
Capacity to overcome adverse situations
Strategies
Personnel policies
Performance of group companies
13

RESEARCH METHODOLOGY
Secondary sources of data.
Sources of data from the annual reports of the
company from the year 2009-10 to 2013- 14.
Tools used for analysis
a) Ratio analysis
b) Comparative analysis of profit and loss account ,
balance sheet.
c) Cash flow statement analysis.

14

ANALYSIS OF DATA
20132014

20122013

20112012

20102011

2009-2010

9.01
1.55
83.16
12.63

8.21
0.25
78.16
10.90

2.04
1.78
85.77
2.54

5.86
5.79
81.29
5.92

6.74
5.98
92.21
5.44

B .SOLVENCY OF FINANCIAL RATIOS

1. CURRENT RATIO
2.DEBT EQUITY RATIO
3.DEBT TO TOTAL FUNDS RATIO
4.EQUITY TO TOTAL FUNDS

95.25
518.5
142.5
0.13

93.21
546.5
158.3
0.15

98.35
614.3
189.5
0.14

26.49
656.0
379.6
0.55

26.64
763.9
580.0
0.77

C.TURNOVER RATIO
1.WORKING CAPITAL TURNOVER RATIO
2.CAPITAL TURNOVER RATIO
3.FIXED ASSET TURNOVER RATIO

0.14
3.42
0.67

0.10
3.29
0.67

0.39
3.11
0.56

0.24
2.52
0.45

0.22
2.29
0.37

12944174 1011222
9

1561653

4113664

3592740

27471754 2428450
2
03
343120
686240

2317649
28
1029360

2847822
44
1372480

23071943
3
945789

PARTICULARS
A.PROFITABILITY RATIOS
1 .NET PROFIT RATIO
2.OPERATING PROFIT RATIO
3 .LIQUID ASSET TO LIABILITIES RATIO
4.RETURN ON EQUITY OR RETURN ON
NET WORTH

PROFIT AND LOSS ACCOUNT

PROFIT BEFORE TAX
BALANCE SHEET
1.SOURCES OF FUNDS
2.EXPENDITURE

15

ANALYSIS OF DATA
Year

Gross
Premium
(in India)

Gross
Premium
(Outside
India)

Net Premium
(Global)

Net Profit
(Global)

Total Assets
(Global)

Net Worth
(Global)

2013-2014

11540.06

2763.79

12078.18

1088.96

53010.85

8621.30

2012-2013

10037.96

2466.63

10274.17

843.66

45670.40

7737.36

2011-2012

8542.86

1531.01

8771.21

179.31

42162.74

7057.61

2010-2011

7097.14

1128.37

7192.23

-421.56

39621.27

6890.47

2009-2010

6042.51

1056.63

6002.66

404.69

36832.91

7430.21

2008-2009

5508.82

946.96

5500.31

224.16

26931.58

7328.00

2007-2008

5276.91

874.55

4914.28

1401.13

31944.14

6972.80

2006-2007

5017.20

919.58

4751.76

1459.95

27444.57

5972.55

2005-2006

4791.49

884.05

4342.66

716.38

27025.58

4706.87

2004-2005

4210.81

892.35

3895.11

402.23

19827.19

4161.69

2003-2004

4045.68

875.79

3634.94

590.21

17510.44

3735.22

2002-2003

3921.24

891.55

3516.43

255.81

12984.75

3404.00

2001-2002

3512.33

685.73

3068.23

142.00

12273.02

3189.39

2000-2001

3041.17

451.88

2671.48

173.54

8292.00

3067.39

1999-2000

2979.53

327.00

2477.45

287.29

7664.71

2859.86

1998-1999

2729.48

288.16

2186.92

375.00

6727.72

2524.23

1997-1998

2433.73

254.04

1945.00

470.94

6071.67

1462.52
16

PERFORMANCE OF THE NEW INDIA ASSURANCE CO.LTD.

FINDINGS
It is found that ratings are assigned based on certain expectations and
assumptions about variables i,e.,net profit , return on equity , capital
turnover , Fixed asset ,current ratio that impact the issuers performance.
Rating agencies use their best professional judgment on these factors
while assigning the rating. However, these variables can change
significantly over a relatively short time-frame, especially in emerging
markets, causing the rated entities performance to deviate materially
from expectations.
It is also found that companies has maintained good profit level
through ratio analysis and comparative analysis. This is a clear
indication of overall operation is efficient. It means the effective
utilization of working capital.

RECOMMENDATIONS
At present, large non-banking finance companies registered with the RBI
are required to be compulsorily rated.
Rating of equity has been left out so it must need to be brought as it
forms a major share in the public borrowing of companies.
Insurance companies in India need to be very keen on going through a
credit rating exercise.
Other public sector undertakings also need credit rating services as they
have to raise funds through commercial borrowing.
Rating agencies are required to promote multiple rating, under which
certain issues are rated by at least two rating agencies.
Lastly, the rating methodology adopted must be thorough and transparent.

19

CONCLUSIONS
In the study of credit rating of A.M.Best Company with reference to The
New India Assurance Company Limited , it is clear that the companys
financial performance is satisfactory. The company has stable growth and it
shows a greater efficiency in all the areas it works.
If the company utilizes its working capital then the company can go
heights which it wanted to achieve.
The overlook for the credit rating appears positive . But the industry has
to continuously strive to improve the professional capabilities and sustain
its credibility.
The suggestions provided through the study will help the company to
improve the operational performance efficiently.

20

BIBLIOGRAPHY
"Understanding the A.M. Best Insurance Rating System". Skyles
Insurance Agency. Retrieved 25 February 2015.
Roy C. Smith and Ingo Walter (2012) Rating Agencies: Is There an
Agency Issue?, Retrieved from
http://www1.worldbank.org/finance/assets/images/Rating_Agencies.
pdf on 05/06/15
Websites:
www.google.com
www.newindia.co.in
www.managementparadise.com
www.icraindia.com
www.crisil.com
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