*A PRESENTATION ONA STUDY ON CREDIT RATING BY A.M BEST COMPANY WITH SPECIAL REFERENCE TO THE NEW INDIA ASSURANCE COMPANY LIMITED Presented by Lipika SarkarMBA GM 19/13

*INTRODUCTIONCredit 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

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New India Assurance Co Ltd, is a100 %Govt owned multinational general insurance company operating in27 countriesand headquartered at Mumbai, India. The New India Assurance Co Ltd, global business crossedRs.16000 Cr.founded bySir Dorabji Tata in 1919.

The New India Assurance Co Ltd is the only direct insurer in India rated A-(Excellent Stable outlook) byA.M. Best. "CRISIL has reaffirmed its 'AAA/STABLE' rating.

A.M. Bestis a U.S.-basedrating agencyheadquartered inOldwick,New Jersey, that focuses on theinsuranceindustry. Both theU.S. Securities and Exchange Commissionand theNational Association of Insurance Commissionershave designated the company as aNationally 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.

THE COMPANY

*REVIEW OF LITERATUREDuggal (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.

*REVIEW OF LITERATUREUpadhye (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.

*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.OBJECTIVE

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

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*RATING SYMBOL OF A.M BEST COMPANYThe 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)

*RATING SYMBOL OF CRISIL

RemarksDebentureFixed depositStructured obligationShort-term instrumentsHighest safetyAAAFAAAAAA(So)P1=very strong safetyHigh safetyAAFAAAA(So)P2=very safetyAdequate safetyAFAA(So)P3=adequate safetyModerate safetyBBB------BBB(So)P4=minimal safetyInadequate safetyBBFBBB(So)P5=defaultHigh riskBFCB(So)Substantial riskC-----C(So)In dafaultDFDD(So)

*SEBI GUIDELINES FOR RATINGThe 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.

*RATINGS ARE BASED ON FOLLOWING VARIABLES USED BY A.M. BEST COMPANY AND CRISILEconomy Analysis: Economic indicatorsBusiness Analysis: prospects of the industry competitive factors affecting the industrymarket position in the industryFinancial Analysis: Adequacy of cash flow Financial flexibilityProfitabilityManagement Analysis:Study of track record of managementCapacity to overcome adverse situationsStrategiesPersonnel policiesPerformance of group companies

*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.

*ANALYSIS OF DATA

PARTICULARS2013-20142012-20132011-20122010-20112009-2010A.PROFITABILITY RATIOS 1 .NET PROFIT RATIO 2.OPERATING PROFIT RATIO 3 .LIQUID ASSET TO LIABILITIES RATIO 4.RETURN ON EQUITY OR RETURN ON NET WORTH9.011.5583.1612.638.210.2578.1610.902.041.7885.772.545.865.7981.295.926.745.9892.215.44B .SOLVENCY OF FINANCIAL RATIOS 1. CURRENT RATIO 2.DEBT EQUITY RATIO 3.DEBT TO TOTAL FUNDS RATIO 4.EQUITY TO TOTAL FUNDS95.25518.5142.50.1393.21546.5158.30.1598.35614.3189.50.1426.49656.0379.60.5526.64763.9580.00.77C.TURNOVER RATIO1.WORKING CAPITAL TURNOVER RATIO2.CAPITAL TURNOVER RATIO3.FIXED ASSET TURNOVER RATIO0.143.420.670.103.290.670.393.110.560.242.520.450.222.290.37PROFIT AND LOSS ACCOUNT PROFIT BEFORE TAX1294417410112229156165341136643592740BALANCE SHEET1.SOURCES OF FUNDS2.EXPENDITURE27471754234312024284500368624023176492810293602847822441372480230719433945789

*ANALYSIS OF DATA

YearGross Premium (in India)Gross Premium (Outside India)Net Premium (Global)Net Profit (Global)Total Assets (Global)Net Worth (Global)2013-201411540.062763.7912078.181088.9653010.858621.302012-201310037.962466.6310274.17843.6645670.407737.362011-20128542.861531.018771.21179.3142162.747057.612010-20117097.141128.377192.23-421.5639621.276890.472009-20106042.511056.636002.66404.6936832.917430.212008-20095508.82946.965500.31224.1626931.587328.002007-20085276.91874.554914.281401.1331944.146972.802006-20075017.20919.584751.761459.9527444.575972.552005-20064791.49884.054342.66716.3827025.584706.872004-20054210.81892.353895.11402.2319827.194161.692003-20044045.68875.793634.94590.2117510.443735.222002-20033921.24891.553516.43255.8112984.753404.002001-20023512.33685.733068.23142.0012273.023189.392000-20013041.17451.882671.48173.548292.003067.391999-20002979.53327.002477.45287.297664.712859.861998-19992729.48288.162186.92375.006727.722524.231997-19982433.73254.041945.00470.946071.671462.52

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.

*RECOMMENDATIONSAt 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.

*CONCLUSIONSIn 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.

*BIBLIOGRAPHY"Understanding the A.M. Best Insurance Rating System". Skyles Insurance Agency. Retrieved25 February2015.

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.comwww.newindia.co.inwww.managementparadise.comwww.icraindia.comwww.crisil.com

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