Detailed Rationale

CRISIL Ratings has reaffirmed its 'CRISIL AAA/Stable' rating on Rs 35 crore subordinated debt issue (also called a hybrid instrument) of ICICI Lombard General Insurance Company Limited (ICICI Lombard).

 

CRISIL Ratings has also withdrawn its ‘CRISIL AAA/Stable’ rating on Rs 220 crore subordinated debt issue. The company has exercised the called option on this instrument on August 23, 2022 and the instrument has been redeemed. This withdrawal is in line with CRISIL Ratings’ withdrawal policy.

 

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 8.1%, ICICI Lombard remains the largest private general insurer in the industry and the second-largest general insurer at an overall level as on March 31, 2022. 

 

In fiscal 2022, the company underwrote Rs 17,977 crore as gross direct premium income, which includes the effect of scheme of arrangement with Bharti Axa General Insurance Company Ltd (Bharti Axa). For the first quarter of fiscal 2023, the company underwrote a premium of Rs 5,370 crore.

 

The company’s financial risk profile remains supported by the company’s healthy capitalization reflected in a comfortable solvency ratio of 2.61 times as on June 30, 2022. Overall profitability has remained supported by income from investment, evidenced by a net profit of Rs 1,271 crore for fiscal 2022 driven by an investment income of Rs 3,000 crore for the period.

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 Ratings 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 promoter 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 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 48.03%.in the company.

 

Even post dilution of ICICI Bank’s stake in ICICI Lombard by virtue of scheme of arrangement with Bharti Axa coming into effect, CRISIL Ratings understands the stance of support (both financial and Board oversight) provided by ICICI Bank to ICICI Lombard remains unchanged. ICICI Bank remains to be the single largest shareholder in ICICI Lombard. 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 8.1% based on gross direct premiums written during fiscal 2022, ICICI Lombard has retained its leadership among private general insurers in India and, remains the second largest non-life insurer in the country. During fiscal 2022, ICICI Lombard underwrote a total direct premium of Rs 17,977 crore  (including the effect of scheme of arrangement with Bharti Axa). Gross premiums for Q1 2023, the entity wrote gross premiums of Rs 5,370 crore. In terms of premium mix across segments, motor insurance remains the largest contributor accounting for 33.2% of the gross premiums underwritten by the merged entity during Q1 2023. Health and Personal Accident, with a share of 27.8% in gross premiums, is the second largest segment for the company, followed by fire which forms 21.3% of the overall premiums.

 

• 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 9,472 crore, a comfortable solvency ratio of 2.61 times, and unrealized gain on equity portfolio at Rs. 103.7 crore as on June 30, 2022. 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, 2022. 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 48.5% of its debt portfolio at amortized costs whereas equity investments at cost - accounted for close to 12.0% of its investment book. The share of liquid mutual funds stood at 2.3% as on June 30, 2022.

 

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

ICICI Lombard reported an underwriting deficit of Rs 1,304 crore for fiscal 2022 which translated to a combined ratio of 108.8%. During this period, claims ratio increased to 75.1% from 67.8% for the previous fiscal – on account of surged Covid related claims incurred.

 

However, with correction in Covid instances and frequency, the loss ratio has corrected in Q1 2023 to 72.1% as compared to 91.2% for the corresponding quarter of the previous fiscal. Overall combined ratio has also improved to 104.1% from 122.3%   over this period – corresponding to an underwriting loss of Rs 190 crore as compared to Rs 532 crore.

 

Profit for fiscal 2022 stood at Rs 1,271 crore, supported by an investment income of Rs 3,000 crore. While underwriting performance of the company is expected to improve in the long run, overall profitability will remain driven by income from investments.

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) (48.5%) based on cost and liquid mutual funds (2.3%). 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

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 48.03% stake in the company as of June 30, 2022. ICICI Lombard (by virtue of its scheme of arrangement with Bharti Axa) had a pro-forma market share of 8.1% and a branch network of over 285 branches as of June 30, 2022.

Key Financial Indicators

As on/For the period ended March 31	Unit	2022	2021	2020
		Merged	Merged (pro-forma)	Standalone
Gross direct premium/Gross premium written	Rs crore	17,977	17,504	13,313
Profit after tax	Rs crore	1271	1593	1194
Combined ratio	%	108.8	101.2	100.4
Solvency margin	Times	2.46	2.68	2.17

 

Any other information: Not applicable

Annexure - Details of Instrument(s)

ISIN	Name of instrument	Date of Allotment	Coupon Rate (%)	Maturity Date	Issue Size (Rs Cr)	Complexity Level	Rating Assigned with Outlook
INE513L08024^	Subordinated debt	30-Apr-19	10.5%	29-Apr-29	35	Complex	CRISIL AAA/Stable

^These instruments were issued by erstwhile Bharti Axa and post implementation of the scheme of arrangement which has come into effect from September 8, 2021, these instruments have been transferred to ICICI Lombard and, the outstanding ISINs against each of these may be subject to change post reissuance.

 

Annexure - Details of Rating Withdrawn

ISIN	Name of instrument	Date of Allotment	Coupon Rate (%)	Maturity Date	Issue Size (Rs.Cr)	Complexity Level
INE513L08016^	Subordinated debt	23-Aug-17	8.98%	23-Aug-27	220	Complex

^These instruments were issued by erstwhile Bharti Axa and post implementation of the scheme of arrangement which has come into effect from September 8, 2021, these instruments have been transferred to ICICI Lombard and, the outstanding ISINs against each of these may be subject to change post reissuance.