Rating Rationale
April 17, 2018 | 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 reflects CRISIL's assessment that ICICI Lombard's financial strength in meeting policyholder obligations is very high. This is driven by strategic importance to, and the continued support from, ICICI Bank Ltd (ICICI Bank, rated 'CRISIL AAA/Stable'), and the company's established market position as the leading private sector general insurance company, healthy capitalisation, 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 policy, 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 strong support ICICI Lombard receives from ICICI Bank, in addition to assessment of the company's 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
Strengths
* 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. Strong managerial support is reflected in the significant representation of ICICI Bank's directors on ICICI Lombard's board, and the bank's strong 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. After the listing of ICICI Lombard in September, 2017 also, ICICI Bank continues to maintain majority stake in ICICI Lombard at 55.9%. 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 in CRISIL's 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, and has a long established track record of more than 15 years. It had a market share of 8.7% based on gross direct premium during the nine months through December, 2017. For the same period, motor, health, and crop segments accounted for 76% of gross direct premium. Growth in the crop segment was robust in fiscal 2017, fueled by the changes in business dynamics brought about by Pradhan Mantri Fasal Bima Yojana. Further, during nine months through December, 2017, the share of retail health segment in the overall business mix has increased. The company's market position is expected to remain strong. However, ability to sustain growth momentum amid intense competition will remain a key monitorable.
 
* Healthy capitalisation
Capitalisation is healthy, reflected in large networth of Rs 4329 crore, comfortable solvency ratio of 2.21 times, and a balance of Rs 927 crore in its fair value change account as of December 2017. Capitalisation continues to remain 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
99.99% of the company's debt investments were in sovereign securities or corporate debt instruments rated 'AA' or better as on December 31, 2017. In addition, its liquidity is comfortable, backed by a large proportion of liquid investments. Government securities (G-secs), both state and central, accounted for 32.2% of its debt portfolio at carrying value. At carrying value, equity investments account for 18.4% of its investment book. ICICI Lombard's investment quality is expected to remain strong bolstered by its prudent investment policy.
 
* 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 clients by providing them risk mitigation solutions. ICICI Lombard continues to focus on process innovations to improve customer servicing and improve efficiency. The company has integrated its systems and processes with those of its distribution partners in 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 significantly above the regulator-specified minimum over the medium term, supported by healthy capital position (including un-booked appreciation in its investment portfolio), prudent risk management processes, and expectation of timely capital infusion from ICICI Bank if needed. The solvency ratio was 2.21 times as on December 31, 2017, well above the regulatory required minimum solvency ratio of 1.5 times. Over the next five years, ICICI Lombard projects its solvency ratio to be substantially higher than the regulatory requirement. ICICI Bank is also supportive of ICICI Lombard having a solvency ratio comfortably above regulatory requirements. The un-booked appreciation in the investment portfolio provides additional comfort to the solvency ratio. The cushion in the solvency ratio over the regulator-specified minimum is 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.
 
Weakness
* Modest albeit improving underwriting performance
Combined ratio continues to remain modest at 100.4% for the nine months through December 2017. However, the underwriting performance has witnessed considerable improvement from 106.2% in the corresponding period previous fiscal. The improvement is also broad based with all the major segments such as motor own damage, health, fire and marine reflecting a downward trend in combined ratio. However, combined ratio of motor third party segment continues to remain substantially above 100%. The company's overall combined ratio, nevertheless, is better than the industry average. Moreover, financial position is supported by substantial investment income (Rs 1209 crore1 in the 9 months through December 2017 against Rs 1045 crore in the corresponding period of the previous fiscal2.
Outlook: Stable

CRISIL believes ICICI Lombard will remain a subsidiary of ICICI Bank, and will continue to receive strong financial, managerial, and branding support from ICICI Bank, 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 asset 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 below majority ownership 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 bank in the country, holds 55.9% stake in the company as of December 31, 2017. ICICI Lombard had a market share of 8.7% and a branch network of 250 branches as of December 31, 2017.
 
Net profit for fiscal 2017 and for 9 months ended December, 2017 was Rs 702 crore and Rs 650 crore, against Rs 507 crore and Rs 522 crore for fiscal 2016 and 9 months through December, 2016, respectively. During the first nine months of fiscal 2018, the company underwrote a gross direct premium of Rs 9431 crore as compared to Rs 8059 crore of gross direct underwritten during the corresponding period of the previous fiscal.

1Investment income net of interest and issuance expenses on subordinated debt was Rs 1176 crore for nine months ended December, 2017 
2Investment income net of interest and issuance expenses on subordinated debt was Rs 1029 crore for nine months ended December, 2016

Key Financial Indicators
As on / for the period ended March 31   2017 2016
Gross premium written Rs. Cr. 10961 8296
Profit after tax Rs. Cr. 702 507
Combined ratio % 103.9 106.9
Solvency ratio times 2.10 1.82

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 Size
(Rs. Crore)		 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 2018 (History) 2017  2016  2015  Start of 2015
Instrument Type Quantum Rating Date Rating Date Rating Date Rating Date Rating Rating
Subordinated Debt  LT  485  CRISIL AAA/Stable    No Rating Change    No Rating Change  07-04-16  CRISIL AAA/Stable    --  -- 
Table reflects instances where rating is changed or freshly assigned. 'No Rating Change' implies that there was no rating change under the release.
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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