Rating Rationale
April 17, 2020 | 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.

Gross Direct Premium (GDP) of the Company stood at Rs. 10,132 crores for nine months ended December 31, 2019. Market share of the company stood at 7.1% for the nine months ended December 31, 2019. This share however, has declined from 8.9% for the corresponding period of the previous fiscal ' driven by the cautious call taken by the company to reduce its exposure to crop insurance which formed almost 16.9% of its gross direct premium portfolio until March 31, 2019.Excluding crop segment, GDP of the Company increased to Rs. 10,058 crores for nine months ended December 31, 2019, compared to Rs. 8,883 crores in corresponding previous fiscal, registering a growth of 13.2%.

Of Rs 10,132 crores of GDP during the first nine months of fiscal 2020, motor and health remained to be the largest segments - constituting 49.8% and 20.9%, respectively. Combined ratio stood at 100.5% for the nine months of fiscal 2020 compared to 98.7% for corresponding period of previous fiscal - primarily on account of moderation in underwriting within the motor segment and losses which arose from catastrophic events. The company made an underwriting loss of Rs 76 crores during the nine months ended December 31, 2019 as against an underwriting deficit of Rs. 120 crores for the corresponding previous fiscal. With investment income having remained steady, the company's overall profitability remains above average. Healthy accruals over the years have strengthened the company's capital position ' which, at a net worth of Rs. 5,852 crores as on December 31, 2019 ' was adequate in relation to the company's scale and nature of operations.

The rating is also driven by ICICI Lombard's intent, and CRISIL's expectation that the company will maintain comfortable margin in solvency ratio above the regulator-specified minimum. The company has maintained a solvency ratio of above 2 times over the last many quarters. 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.

In the aftermath of covid-19 break-out, a number of regulatory relaxations have been extended to the policyholders. Insurance Regulatory Development Authority of India (IRDAI) announced an extension in renewal of Health & Motor Third Party (TP) premium payments till May 15, 2020. Commensurately premium hike in motor third-party insurance has also been deferred.
 
In light of the above relaxations, CRISIL believes the growth in GDP for the last quarter of fiscal 2020 and first quarter of fiscal 2021 could be relatively moderate ' driven by deferment in renewal premiums for the industry. However, once the extension period is over ' inflow of deferred renewal premiums will result in traction thereafter.
 
The growth in new business premium could remain muted for a longer stretch of fiscal 2021 for larger segments like motor insurance driven by the expectation that revival in new sales volumes in the auto sector will happen only at a gradual pace once the lockdown is lifted. For the health segment ' which is the second largest after motor, opportunities for growth may emerge in the medium term driven by increased market awareness and demand for indemnity product in this space.
 
CRISIL expects claims ratio for the industry to rise marginally in the first half of fiscal 2021 ' particularly for health and travel insurance segments.

As the situation around the severity and longevity of covid-19 continues to evolve, the impact of it on the company's premium growth and underwriting performance will be a key monitorable.

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
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 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 to the extent of 55.86% up till December 31, 2019.
 
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
Despite a decline in market share during nine months through December 2019 owing to a strategic call, ICICI Lombard has retained its market position as one among the top private general insurers within the country. As the company took a cautious approach to curtail exposure to crop insurance business in light of its constraining impact on the overall underwriting performance, ICICI Lombard registered a de-growth of 6.7% (CRISIL annualized) for the nine months ended December 31, 2019. Excluding the crop segment, the company registered a growth of 13.2% for the nine months ended December 31, 2019 which was in line with the industry growth.  The company has a long, established track record of close to two decades and has been a leading player among private players in general insurance sector. Of the total gross direct premium of Rs 10,132 crore for nine months ended December 31, 2019, 49.8% was from the motor insurance segment followed by 20.9% from health business.

Within the motor segment, private cars at 55.9% formed the largest portion, followed by two wheelers which comprised 29.5% and commercial vehicle at 14.6%. However, in the health segment, the company has started to expand into retail indemnity & benefit segments and group health segment by taking relatively smaller exposures. The focus on retail products and higher penetration into tier II and III cities is expected to benefit the company over the medium to long term. In the month of March 2020, the company has launched a cover for covid-19. Meanwhile, the company's market position is expected to remain strong however, its ability to sustain growth momentum' especially in the aftermath of covid-19 when business volumes across sectors are expected to remain muted - will remain a key monitorable.
 
* Healthy capitalisation
Capitalisation remains healthy, reflected in large networth of Rs 5,852 crore, comfortable solvency ratio of 2.18 times, and unrealized gain on equity portfolio at Rs. 193 crores as at December 31, 2019. 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, 2019. In addition, its liquidity is comfortable, backed by a large proportion of liquid investments. Government securities (G-secs), both state and central, accounted for 31% of its debt portfolio at amortized costs whereas equity investments at market value - accounted for close to 11% of its investment book. The share of liquid mutual funds stood at 4% as of December 31, 2019. Beyond that, there are other liquid-able securities available.

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.
 
* 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, prudent risk management processes, and expectation of timely capital support from ICICI Bank, if needed. The solvency ratio was 2.18 times as on December 31, 2019, well above the stipulated solvency ratio of 1.5 times.

Over the next three years, ICICI Lombard's solvency ratio is expected to be comfortably higher than the regulatory requirement, ICICI Bank also remains supportive of this stance. If the business disruption owing to covid-19 out-break is prolonged, 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.
 
Weakness
* Modest albeit improving underwriting performance
The company made an underwriting loss of Rs 76 crores during period ended December 31, 2019 as against an underwriting loss of Rs. 120 crores for the corresponding previous fiscal. Combined ratio stood at 100.5% during nine months ended December 31, 2019, slightly moderated from 98.7% for the corresponding period of previous fiscal. While claims ratio declined to 73.8% from 76.6%, expense ratio over this period has increased to 26.7% from 22.1% over the same period ' driven by long tenured motor policies. While the combined ratio for ICICI Lombard is better than most peers, scope of further improvement in underwriting performance remains. Moreover, financial position is supported by investment income of Rs. 1,471 crore for nine months ended December 31, 2019, which continues to drive the company's overall profitability.
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) (31%) based on carrying value and liquid mutual funds (4%). 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.

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 comfortable 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.

Rating Sensitivity Factors
Downward Factors
* 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 downward revision in outlook on ICICI Bank's rating or reduction in the extent of ICICI Bank's ownership to below majority or in the strategic importance of ICICI Lombard to the bank.

About the Company

ICICI Lombard among 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 55.86% stake in the company as of December 31, 2019. ICICI Lombard had a market share of 7.1% and a branch network of over 271 branches as of December 31, 2019.

Key Financial Indicators
As on/For the period ended March 31 Unit 2019 2018 2017
Gross direct premium/Gross premium written Rs crore 14,488 12,357 10,725
Profit after tax Rs crore 1,049 862 702
Combined ratio % 98.5 100.2 103.9
Solvency margin Times 2.24 2.05 2.10
 
Key Financial Indicators
As on/For the period ended December 31, Unit 2019 2018 2017
Gross direct premium/Gross premium written Rs crore 10,132 11,003 9,431
Profit after tax Rs crore 912 822 650
Combined ratio % 100.5 98.7 100.4
Solvency margin Times 2.18 2.12 2.21

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 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 2020 (History) 2019  2018  2017  Start of 2017
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Subordinated Debt  LT  485.00
16-04-20 
CRISIL AAA/Stable      11-04-19  CRISIL AAA/Stable  17-04-18  CRISIL AAA/Stable  14-07-17  CRISIL AAA/Stable  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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