Detailed Rationale

CRISIL Ratings has assigned its 'CRISIL AAA/Stable' rating to the subordinated debt issue (also called a hybrid instrument) of ICICI Lombard General Insurance Company Ltd (ICICI Lombard).

 

The rating centrally factors in ICICI Lombard's strategic importance to, and expectation of the continued support from, ICICI Bank Ltd (ICICI Bank, rated 'CRISIL AAA/CRISIL AA+/Stable'). The rating also reflects the company's leadership position among private sector general insurance companies, its healthy capitalization with expected sustenance in high cushion in solvency ratio over regulatory minimum and, sound investment quality. These strengths are partially offset by modest albeit improving underwriting performance.

 

With a market share of 7%, ICICI Lombard remains the largest private general insurer in the industry and the fourth-largest general insurer at an overall level as on March 31, 2021.

 

In August, 2020, the Boards of ICICI Lombard and Bharti AXA General Insurance Company (Bharti AXA) had announced their approval for demerger of non-life insurance business of Bharti AXA into ICICI Lombard. This scheme of arrangement (scheme) was underway for a year and was finally approved by Insurance Regulatory and Development Authority of India (IRADI) on September 3, 2021.

 

After including the effect of this scheme with Bharti Axa General Insurance Company Ltd (Bharti Axa), the resultant entity had a pro-forma market share of 8.6% which makes it the second largest general insurer in the industry based on gross direct premiums written during fiscal 2021.

 

In fiscal 2021, the company underwrote Rs 14,003 crore as gross direct premiums, indicating annual growth of 5.2% over the past year which is at par with the industrial growth for the same period. Pro-forma gross premiums underwritten during fiscal 2021, on a merged basis, were Rs 17,504 crore. At industry level, slowdown after the first wave of the Covid-19 pandemic was most evident in the motor segment, which constitutes over one-third of the overall sectoral premium. This portfolio declined by 1.5% during fiscal 2021. ICICI Lombard, at a standalone level, also registered a muted growth of 1.9% in the motor premiums. For the same period, premiums from health segment were also lower by 5% as compared to those of last year. This slowdown across key segments was partly offset by a robust growth of 39% in the fire segment.

 

In fiscal 2021, on a standalone basis, the company incurred about Rs 339 crore of claims including IBNR, as coverage for Covid-19. These Covid-19 claims incurred by the company were against their standard Covid products as well as the traditional medi-claim policies. However, claims for non-Covid illnesses and casualties and other accidents, were lower because of restricted public activity and vehicular traffic. Claims ratio, excluding and including the effect of the scheme on a proforma basis, for fiscal 2021 was 68.6% and 67.8%, respectively and of these, ~5% were Covid-19 claims.

 

Subsequent to the second wave, which witnessed higher severity and frequency of casualties, and with penetration of health insurance having increased in the past year, total Covid-19 claims reported and honoured in the first quarter of fiscal 2022 were almost equivalent to the Covid-19 claims incurred in fiscal 2021. As against Rs 7,832 crore of Covid-19 claims settled by the non-life insurance industry in fiscal 2021, claims incurred in the first quarter of fiscal 2022 amounted to Rs 7,768 crore. The company had incurred Rs 602 crore worth of Covid-19 claims (including IBNR) in the first quarter of fiscal 2022, which accounted for 24.4% of the total claims incurred by the company during the quarter. This resulted in the overall claims ratio for Q1 2022, excluding and including the scheme effect, of 91.2% and 88.7%, respectively. Accredited to this surge in Covid-19 claims, the company reported an underwriting deficit of Rs 508 crore and 595 crore for Q1 2022, on a standalone and pro-forma merged basis, respectively as against a standalone underwriting surplus of Rs 38 crore for Q1 2021. Overall profit for Q1 2022 stood at Rs 232 crore on a pro-forma basis for the merged entity as against Rs 398 crore of standalone profit reported for the corresponding quarter of the previous fiscal.

 

Considering the elevated loss ratio with higher coverage of Covid-19 products, an upward revision in prices may be in order so as to adequately factor in the increased risks. Alternatively, the prices for regular indemnity products in the health segment may also increase in the long term based on the trend in loss ratio for the segment.

 

In fiscal 2022, growth in industry’s new business premiums for larger segments such as motor insurance may remain subdued as revival in sales volumes in the automobile sector will be gradual once the lockdowns across states are lifted. Renewal premiums for the retail segment may decline on account of job losses and pay cuts. For the health segment, which is the second-largest after motor insurance, CRISIL Ratings believes growth prospects are strong on account of increased awareness and demand for multiple covers. In a scenario where pricing of Covid-19 policies is revised upwards, growth in this segment will be higher than that of the past fiscal. However, with the increasing ticket size of Covid-19 claims, the impact of actual losses borne by the insurers after the second wave on their underwriting performance and capital and solvency position remains to be seen.

Analytical Approach

CRISIL Ratings has first assessed the corporate credit rating (CCR) of ICICI Lombard (including the effect of the scheme of arrangement with Bharti Axa), which is an indication of the company's ability to meet policyholders' obligations. For arriving at the CCR, CRISIL has factored in the support ICICI Lombard receives from ICICI Bank, in addition to assessment of the company's standalone business, financial, and management risk profiles. The subordinated debt instrument is then assessed for additional risk factors to determine whether its rating should be the same as, or lower than, the CCR. The extent of cushion that ICICI Lombard intends to maintain over and above the regulatory stipulation on a steady state basis is taken into consideration. ICICI Bank's stance to support ICICI Lombard in maintaining a solvency ratio comfortably above the regulatory requirement has also been factored into the rating.

Key Rating Drivers & Detailed Description

Strengths:

* Support from parent and majority owner, ICICI Bank Ltd is expected to continue over due course

ICICI Lombard's strategic importance to ICICI Bank is underpinned by the former's leadership position among private sector general insurance companies. Furthermore, ICICI Lombard being the general insurance arm of ICICI Bank makes it a key element of the latter's bouquet of financial service offerings. ICICI Lombard benefits from common branding with its parent, which is one of the large private sector banks in India with a strong retail and corporate presence, established franchise, and large customer base. The company also derives managerial and funding support from ICICI Bank, the former is reflected in the representation of ICICI Bank's directors on ICICI Lombard's board, and the bank's high involvement in the latter's functioning. ICICI Bank has demonstrated track record of extending capital support to ICICI Lombard whenever needed and such support is expected to continue. Even after the listing of ICICI Lombard in September 2017, ICICI Bank has maintained majority stake in ICICI Lombard and currently holds 51.87% in the subsidiary.

 

As a consideration for its scheme of arrangement with Bharti AXA which was underway since August 2020, shareholders of Bharti AXA - Bharti General Ventures Pvt Ltd (Bharti) and Societe Beaujon (AXA) were allotted fresh 35.7 million shares of the resulting entity - ICICI Lombard in a ratio of 51:49 leading to a dilution in the stake of ICICI Bank in the subsidiary. Resultantly, the stake held by ICICI Bank in ICICI Lombard has reduced from 51.9% to 48.1% as of September 8, 2021. However, even post divestment of stake, CRISIL Ratings understands that there will be no change in stance of support (both financial and Board oversight) provided by ICICI Bank to ICICI Lombard. ICICI Bank remains to be the single largest shareholder in ICICI Lombard and retains Board control. Further, CRISIL Ratings believes that ICICI Bank will continue to consolidate ICICI Lombard fully within its financial reporting due to management control.  Any further, significant reduction in shareholding of ICICI Bank in, or a material change in strategic importance of, ICICI Lombard, will be a key rating sensitivity factor.

 

* Sustenance in leadership position among private general insurers

With a market share of 7.0% based on gross direct premiums written during fiscal 2021, ICICI Lombard has retained its leadership among private general insurers in India and, remains the fourth largest non-life insurer in the country. Including the effect of the scheme with Bharti Axa, the resultant entity – ICICI Lombard – had a pro-forma market share of over 8.6% based on gross premiums for fiscal 2021 and ranked as the second largest general insurer in the industry. During fiscal 2021, ICICI Lombard underwrote a total direct premium of Rs 14,003 crore at a standalone level – which marks an annual growth of 5.2% over last year which is at par with industrial growth over the same period. Gross premiums for the merged entity stood at Rs 17,504 crore on a proforma basis and almost one-fifth of this was contributed by Bharti Axa. In Q1 2022, the merged entity wrote gross premiums of Rs 4,267 crore on a proforma basis.

 

In terms of premium mix across segments on a proforma basis, motor insurance remains the largest contributor accounting for 33% of the gross premiums underwritten by the merged entity during Q1 2022. Fire, with a share of 25% in gross premiums, has overtaken health insurance to become the second largest segment. This robust growth in the fire segment was witnessed across players in the industry and was driven by a favourable revision in rates w.e.f January 2020. Health, driven by increased awareness post Covid-19 outbreak, sustained its growth momentum and accounted for 23% of the gross premiums of the merged entity for Q1 2022. By virtue of this scheme coming into effect, the share of crop insurance in the total premium portfolio of merged entity, is also expected to increase to ~5-6% from nil.

 

After the merger, apart from the immediate benefit of increased market share – ICICI Lombard would also have access to a larger, wider channel base and its benefits to scale will materialize in the long run.

 

* Healthy capitalization and expected sustenance of high cushion in solvency ratio over regulatory stipulation

Capitalisation, at a standalone level, remains healthy reflected in a large networth of Rs 7,592 crore, a comfortable solvency ratio of 2.76 times, and unrealized gain on equity portfolio at Rs. 772 crore as as on June 30, 2021. On the same date, the merged entity had a pro-forma networth of Rs 9,868 crore, a comfortable solvency ratio of 2.57 times and, a balance of Rs 776 crore in the fair value change account.

 

Apart from its healthy internal accruals generated over the years, ICICI Lombard’s capital position is also supported by timely capital infusion from ICICI Bank, in times of need, as demonstrated in the past.

 

The company’s solvency position has remained strong over the years – reflected in the high margin it maintains over regulatory stipulation of 1.5 times. Over the medium term, ICICI Lombard's solvency ratio is expected to remain comfortably above than the regulatory requirement and the parent - ICICI Bank is also supportive of this stance. In a scenario where loss ratio rises to beyond expectation due to Covid claims, there could be momentary variation in solvency ratio and the same remains a key monitorable.

The cushion in the solvency ratio over the regulator-specified minimum will remain a rating sensitivity factor, given the likelihood of default in debt servicing on the subordinated debt instrument if the ratio falls below the stipulated minimum.

 

* Sound quality of the investment portfolio

100% of the company's debt investments were in sovereign securities or corporate debt instruments rated 'AA' or better as on June 30, 2021. In addition, the company’s liquidity is comfortable, backed by a large proportion of liquid investments. Government securities (G-secs), both state and central, accounted for 41% of its debt portfolio at amortized costs whereas equity investments at market value - accounted for close to 14% of its investment book. The share of liquid mutual funds stood at 2.4% as on June 30, 2021. The quality of ICICI Lombard's investment portfolio is expected to remain strong supported by its prudent investment policy in addition to stringent regulatory guidelines.

 

Weakness:

* Modest, though gradually improving, underwriting performance

At a standalone level, ICICI Lombard reported an underwriting deficit of Rs 192 crore for fiscal 2021 which translated to a combined ratio of 99.8%. During this period, claims ratio declined to 68.6% from 72.9% for the previous fiscal – on account of lower non-Covid related claims incurred. For the merged entity, underwriting deficit for the year was Rs 406 crore corresponding to a combined ratio of 101.2% - which is in line with CRISIL Ratings’ earlier expectation for the resultant entity. 

 

During fiscal 2021, the total Covid-19 claims (including IBNR) incurred by the company on a standalone basis were Rs 339 crore. These Covid-19 claims incurred by the company were against its standard Corona products as well as its traditional medi-claim policyholders. However, claims for non-Covid illnesses and casualties and other accidents, were lower because of restricted public activity and vehicular traffic.

 

Subsequent to the second wave, which witnessed higher severity and frequency of casualties, and with penetration of health insurance having increased in the past year, total Covid-19 claims reported and honoured in the first quarter of fiscal 2022 were almost equivalent to the Covid-19 claims incurred in fiscal 2021. As against Rs 7,832 crore of Covid-19 claims settled by the non-life insurance industry in fiscal 2021, claims incurred in the first quarter of fiscal 2022 amounted to Rs 7,768 crore. ICICI Lombard, on a standalone basis, has incurred Rs 602 crore worth of Covid-19 claims in the first quarter of fiscal 2022, which accounted for 24.4% of the total claims incurred by the company during the quarter. Of this, Rs 384 crore worth of claims have been indemnified whereas, balance are carried as IBNR. While the instances of Covid-19 claims have been declining since June 2021, 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. With increased exposure to crop segment post implementation of the arrangement scheme, the ability of the company to maintain underwriting performance within this segment also remains critical.

Liquidity: Superior

ICICI Lombard's liquidity position is comfortable, with a substantial base of highly liquid investments in the form of ' G-Secs (both Central and State government securities) (41%) based on carrying value and liquid mutual funds (2.5%). Additionally, the company maintains adequate reserving for claims outstanding at all points in time. Apart from these, the company has various other routes to avail short term funding if needed. In terms of reserving against claims liability, the company has maintained a buffer (surplus) of ~2 – 7 % over claims incurred in any accident year since fiscal 2011.

Outlook: Stable

ICICI Lombard is expected to remain a critical subsidiary of ICICI Bank, and will continue to receive strong financial, managerial, and branding support from it, both on an ongoing basis and in the event of distress. ICICI Lombard is expected to maintain comfortable cushion in its solvency ratio, and remain a major player in the Indian general insurance industry, backed by healthy capitalization and sound investment quality. However, like most general insurance companies, it is yet to demonstrate ability to generate consistent underwriting profits.

Rating Sensitivity Factors

Downward Factors

• Downward revision in the rating or outlook on the parent – ICICI Bank will lead to a commensurate change in the rating or outlook of ICICI Lombard
• A substantial decline in cushion in solvency ratio such that it falls to and remains below 1.7 times or if underwriting performance deteriorates significantly - impacting the company's overall profitability and capitalisation.
• A significant reduction in the extent of ICICI Bank's ownership in or in the strategic importance of, ICICI Lombard to the bank.

About the Company

ICICI Lombard is one of India's largest private sector general insurance companies based on gross direct premium. Its parent - ICICI Bank, which is one of the largest private sector banks in the country, holds 48.1% stake in the company as of September 23, 2021. ICICI Lombard (by virtue of its scheme of arrangement with Bharti Axa) had a pro-forma market share of 9.4% and a branch network of over 276 branches as of June 30, 2021.

Any other information: Not applicable