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).

 

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 of 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 9.9%, ICICI Lombard remains the largest private general insurer in the industry and the second-largest general insurer at an overall level based on gross direct premium income  in Q1 2024.

 

In fiscal 2023, the company underwrote Rs 21,025 crore as gross direct premium income, marking an annual growth of 17.0% over the past year as against a growth of 16.4% in industry gross direct premium income over the same period. For the first quarter of fiscal 2024, the company underwrote gross direct premiums Rs 6,387 crore, registering a year-on-year growth of 18.9%.

 

The company’s financial risk profile remains supported by the company’s healthy capitalization reflected in a comfortable solvency ratio of 2.51 times as on March 31, 2023 and 2.53 times as on June 30, 2023. Overall profitability has remained supported by income from investment, evidenced by a net profit of Rs 1,729 crore for fiscal 2023 alongside an investment income of Rs 3,053 crore for the period. For Q1 2024, the company reported a net profit of Rs 390 crore.

Analytical Approach

CRISIL Ratings has first assessed the corporate credit rating (CCR) of ICICI Lombard, 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 48.01% in the company. In May 2023, the bank informed the exchanges that it will increase its stake in the insurance company in multiple tranches. Thereafter, it received regulatory approvals from the Reserve Bank of India (RBI) and the IRDAI (Insurance Regulatory and Development Authority of India) to increase its ownership stake in ICICI Lombard up to an additional 4%. This approval of IRDAI is valid up to August 31, 2024.

 

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 8.2% based on gross direct premium income during fiscal 2023, 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 2023, ICICI Lombard underwrote a total gross direct premium income of Rs 21,025 crore whereas for Q1 2024, gross direct premiums income was Rs 6,387 crore registering growth of 18.9% Y-o-Y. In terms of gross direct premium income mix across segments as on June 30, 2023, Motor segment continues to be the largest contributor to total premium at 29.4% (33.2% as on June 30, 2022). Health segment saw increase in overall share to 28.5% (24.1% as on June 30, 2022), is the second largest segment for the company, followed by fire which forms 19.7% (21.3% as on June 30, 2022) of the overall premiums.

 

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

Capitalisation remains healthy reflected in a large networth of Rs 10,778 crore, a comfortable solvency ratio of 2.53 times, and unrealized gain on equity portfolio at Rs. 668.4 crore as on June 30, 2023. Apart from its healthy internal accruals generated over the years, ICICI Lombard’s capital position has also been 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.

 

CRISIL Ratings also takes note of the Goods and Services tax show-cause notice received by a few general insurance companies in August 2023, including ICICI Lombard. For ICICI Lombard, the alleged tax demand pertaining to this notice is Rs 273.4 crore. The matter is under adjudication and developments pertaining to the same will continue to be monitored closely. Nonetheless, CRISIL notes that, this obligation, if and when required to be honored, is not expected to materially impact the solvency ratio of the company.

 

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, 2023. 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 52% of its debt portfolio at amortized costs whereas equity investments at cost - accounted for close to 9.4% of its investment book. The share of liquid mutual funds stood at 1% as on June 30, 2023.

 

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 890 crore for fiscal 2023 which translated to a combined ratio of 104.5%. In terms of underwriting performance, the company incurred a claims ratio of 72.4% during fiscal 2023 as against a claims ratio of 75.1% for the previous fiscal and expense ratio improved marginally to 32.1% for fiscal 2023 from 33.8% for the previous fiscal. For Q1 2024, claims ratio stood at 74.1% as against 72.1% for the corresponding quarter of the previous fiscal, expense ratio stood at 29.7% to 32.1%, respectively for the same period.

 

Profit for fiscal 2023 stood at Rs 1,729 crore which constituted an investment income of Rs 3,053 crore. While underwriting performance of the company is expected to improve in the long run, overall profitability will be aided 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) (52%) based on cost and liquid mutual funds (1%). 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 Insurance

ICICI Lombard is India's largest private sector general insurance company based on gross direct premium. The Company offers a comprehensive range of products through multiple distribution channels, including motor, health, crop, fire, personal accident, marine, engineering, and liability insurance. ICICI Lombard had 305 branches and 12,865 employees, as on March 31, 2023

 

Its parent - ICICI Bank, which is one of the largest private sector banks in the country, holds 48.01% stake in the company as of June 30, 2023. ICICI Bank has received regulatory approval to increase its ownership stake in ICICI Lombard General Insurance up to an additional 4% and intends to increase its stake in the insurance company in multiple tranches by August 31,2024.

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.