Rating Rationale
April 11, 2019 | Mumbai
ICICI Lombard General Insurance Company Limited
Rating Reaffirmed 
Rating Action
Rs.485 Crore Subordinated Debt CRISIL AAA/Stable (Reaffirmed)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has reaffirmed its 'CRISIL AAA/Stable' rating on the subordinated debt issue (also called a hybrid instrument) of ICICI Lombard General Insurance Company Limited (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 established market position as the leading private sector general insurance company, its healthy capitalization, sound investment quality, and robust systems and processes. These strengths are partially offset by modest, albeit improving underwriting performance.

The rating is also driven by ICICI Lombard's intent, and CRISIL's expectation that the company will maintain very high cushion in solvency ratio above the regulator-specified minimum. The extent of surplus in solvency is a critical determinant of the insurer's ability to service subordinated debt. This is because these instruments carry additional risks owing to restrictions on their servicing if solvency ratio falls below the regulator-specified minimum, and because servicing them in the event of loss or inadequate profit requires the regulator's approval.

Analytical Approach

CRISIL has first assessed the financial strength of ICICI Lombard, which is an indication of the company's ability to meet policyholders' obligations. For arriving at the financial strength, 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 financial strength. 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
*Strategic importance to, and strong support from, ICICI Bank
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. The company derives significant managerial and funding support from ICICI Bank, the former is reflected in the significant 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 to the extent of 55.9% up till December 31, 2018.

ICICI Lombard also 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. Reduction in ownership by ICICI Bank below majority holding, or any change in CRISIL's ratings on ICICI Bank or its opinion on ICICI Lombard's strategic importance to ICICI Bank, will be rating sensitivity factors.

* Leadership position among private general insurers
ICICI Lombard is India's largest private general insurer with a market share of 8.9% based on gross direct premium during nine months through December 2018. The company has a long, established track record of more than 15 years and has sustained its leadership position among private players in many corporate segments. Of the total gross direct premium of Rs. 11,003 crore for nine months through December 2018, 41.8% was from the motor insurance segment followed by 19.3% from crop segment and another 18.4% from health and personal accident business. Within the motor segment, the mix between two wheeler, commercial vehicle and private car has remained broadly unchanged. However, in the health segment, the company has started to grow its group health portfolio which was a relatively smaller book earlier; retail health remains a key focus area. The focus on retail products and higher penetration into tier III and IV cities is expected to benefit the company over the medium to long term. Meanwhile, the company's market position is expected to remain strong; however, its ability to sustain growth momentum amid intense competition will remain a key monitorable.

* Healthy capitalisation
Capitalisation is healthy, reflected in large networth of Rs 5,090 crore, comfortable solvency ratio of 2.12 times, and un-booked appreciation of Rs 309 crore in its equity investment portfolio as of December 2018. Capitalisation remains supported by healthy internal accruals generated by the company and timely support from ICICI Bank, if needed, as demonstrated in the past.

* Sound investment quality
100% of the company's debt investments were in sovereign securities or corporate debt instruments rated 'AA' or better as on December 31, 2018. In addition, its liquidity is comfortable, backed by a large proportion of liquid investments. Government securities (G-secs), both state and central, accounted for approximately 31% of its debt portfolio by market value. Equity investments account for 9.7% of its investment book as on December 31, 2018.

ICICI Lombard's investment quality is expected to remain strong supported by its prudent investment policy in addition to stringent regulatory guidelines.

* Robust systems and processes
Through extensive use of technology, ICICI Lombard has automated most of its processes to reduce turnaround time, and improve operating efficiency. The company has invested significantly in technology to enhance analytical capabilities. This not only helps it develop a better understanding of risks, but also strengthens engagement with distribution channels and clients by providing them risk mitigation solutions. ICICI Lombard continues to focus on process innovations to improve customer servicing and efficiency. The company has integrated its systems and processes with those of its distribution partners for small-ticket products to manage volumes while keeping operating expenses low.

* Expectation of high level of cushion in solvency over regulatory stipulation
ICICI Lombard's solvency ratio is expected to remain well above the regulator-specified minimum over the medium term, supported by healthy capital position (including unbooked appreciation in its investment portfolio), prudent risk management processes, and expectation of timely capital support from ICICI Bank, if needed. The solvency ratio was 2.12 times as on December 31, 2018, well above the stipulated solvency ratio of 1.5 times. Over the next five years, ICICI Lombard's solvency ratio is expected to be comfortably higher than the regulatory requirement. ICICI Bank also remains supportive of this stance.

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.

* Modest, albeit improving, underwriting performance
Combined ratio, though modest, has improved to 98.7% during nine months ended December 2018, from 100.4% for the corresponding period of the previous fiscal. While claims ratio over this period has remained broadly stable at about 77%, the expense ratio (including net commission) declined to 22.1% from 24.1%. While this improvement is broad based with all the major segments such as motor own damage, health, fire and marine reflecting a downward trend in combined ratio over the last two fiscals, improvement during nine months ended December 2018 was driven by motor segment particularly. While the combined ratio for ICICI Lombard is better than most peers, scope of further improvement in underwriting performance remains.

Liquidity is comfortable with 31% of the investment portfolio being constituted of highly liquid G-Secs (both Central and State government securities) as on December 31, 2018. The company also had a cash and bank balances of Rs 280 crore as on December 31, 2018.

Outlook: Stable

CRISIL believes ICICI Lombard will 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 high cushion in its solvency ratio, and remain a major player in the Indian general insurance industry, backed by healthy capitalisation, sound investment quality, and robust systems and processes. However, like most general insurance companies, it is yet to demonstrate ability to generate consistent underwriting profits.
The outlook may be revised to 'Negative' if the cushion in solvency ratio declines substantially, or if underwriting losses increase significantly. A revision in outlook on ICICI Bank's rating could lead to a similar revision in the rating outlook on ICICI Lombard's subordinated debt. A reduction in the extent of ICICI Bank's ownership to below majority or in the strategic importance of ICICI Lombard to the bank may also result in a revision in the outlook to 'Negative'. 

About the Company

ICICI Lombard is India's largest private sector general insurance company. Its parent - ICICI Bank, which is one of the largest private sector banks in the country, holds 55.9% stake in the company as of December 31, 2018. ICICI Lombard had a market share of 8.9% and a branch network of about 263 branches as of December 31, 2018.

Key Financial Indicators
As on/For the period ended March 31 Unit 2018 2017
Gross direct premium/Gross premium written Rs crore 12,357 10,725
Profit after tax Rs crore 862 702
Combined ratio % 100.2 103.9
Solvency margin Times 2.05 2.10
Adjusted solvency margin Times 2.39 2.48

As on/For the period ended December 31, Unit 2018 2017
Gross direct premium/Gross premium written Rs crore 11,003 9,431
Profit after tax Rs crore 822 650
Combined ratio % 98.7 100.4
Solvency margin Times 2.12 2.21
Adjusted solvency margin Times 2.25 2.68

Any other information: Not applicable

Note on complexity levels of the rated instrument:
CRISIL complexity levels are assigned to various types of financial instruments. The CRISIL complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL complexity levels for instruments that they consider for investment. Users may also call the Customer Service Helpdesk with queries on specific instruments.
Annexure - Details of Instrument(s)
ISIN Name of instrument Date of Allotment Coupon
Rate (%)
Maturity Date Issue
(Rs Cr)
Rating Assigned with Outlook
INE765G08012 Subordinated debt 28-Jul-16 8.25% 28-Jul-26* 485 CRISIL AAA/Stable
*ICICI Lombard has a call option exercisable 5 years after the date of allotment
Annexure - Rating History for last 3 Years
  Current 2019 (History) 2018  2017  2016  Start of 2016
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Subordinated Debt  LT  485.00
CRISIL AAA/Stable      17-04-18  CRISIL AAA/Stable  14-07-17  CRISIL AAA/Stable  07-04-16  CRISIL AAA/Stable  -- 
                26-04-17  CRISIL AAA/Stable       
All amounts are in Rs.Cr.
Links to related criteria
Rating Criteria for General Insurance Companies
CRISILs criteria for Hybrid Issuances of General Insurance Companies
Criteria for Notching up Stand Alone Ratings of Companies based on Parent Support

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