ICICI Lombard General Insurance Company Ltd Management Discussions.

I. Macro economic envoirnment and NonLife Insurance industry developments

The domestic economic activity including private consumption and investment was impacted by the COVID-19 induced lockdown during the first quarter of fiscal year 2021. The agriculture sector remained resilient and witnessed least impacted on account of the lockdown. The economy started to recover during second quarter of fiscal year 2021 after the un-lock began in the month of June 2020. During the second half of fiscal 2021 the rebound in the economy was stronger than expected inspite of the COVID-19 induced slump.

GST collection for the fiscal 2021 stood at ? 11.4 trillion1 posting a contraction of 6.9% over the collections of ? 12.20 trillion during the previous fiscal. After a severe contraction during the first half of fiscal 2021 due to COVID-19 pandemic GST collections posted a strong rebound in the second half of fiscal 2021. The rebound in the GST collection is attributable to the pent up demand as well as strong rebound in the economic activity.

Indias real gross domestic product (GDP) has contracted by 7.32 per cent for the fiscal year 2021 as compared to 4.0%2 growth in fiscal year 2020. Outlook for rural demand and agriculture remains positive while urban demand has been gaining strength on the back of normalisation of economic activity and should get a fillip with the ongoing vaccination drive. The Union Budget 2021-22 has increased allocation to capital expenditure and expanded production linked incentive (PLI) scheme providing strong support to investment and exports. However, second wave of COVID 19 has impacted several states and economic recovery is expected to get impacted. On the back of this RBI has projected real GDP growth of 9.5%3 for the fiscal year 2022. Similarly, CRISIL has revised Indias GDP growth to 9.5%4 for the fiscal 2022 from previous forecast of 11.0%4.

On account of the pandemic all the countries across the globe resorted to a massive fiscal as well as monetary stimulus. There is strong uptick in the household savings across the economies and there are early signs of rising global consumtion demand. Commodity prices, logistics costs, and crude oil prices have posted a steep increase. The inflation trajectory needs to be seen in the context of all these factors along with progress of southwest monsoon.

Due to expectation of rebound in the economic activity and easy financing conditions globally, the benchmark indices BSE Sensex and Nifty increased by 68.0%5 and 70.9%5 respectively in fiscal 2021.

Non-Life Insurance Industry developments

(A) Regulatory developments:

The Indian non-life insurance industry has come a long way over last two decades since the industry was opened for private sector participation in fiscal 2000. Liberalisation was the first big change in the sector. Subsequently, in fiscal 2008, the industry witnessed another major change when most of the segments were de-tariffed.

Fiscal 2021 saw a spate of regulatory changes, which, inter-alia, included the following:

Launch of standardised health insurance policy called "Arogya Sanjeevani Policy" w.e.f. April 01, 2020 wherein the authority allowed insurers to determine the price on compliance with prescribed norms. Initially under the policy, sum assured allowed was between ? 1 lakh to ? 5 lakh. Further the authority vide circular dated July 7, 2020 allowed the insurers to issue policies with sum assured less than ? 1 lakh and greater than ? 5 lakh (in multiples of ?50,000). On March 18, 2021, the Authority enhanced coverage under standard health product "Arogya Sanjeevani Policy", wherein insurers shall mandatorily offer the sum insured between Rs. 50,000/- to Rs.10,00,000/- w.e.f 1st May, 2021 or earlier.

 

1 Ministry of Finance Department of Revenue monthly press release on GST collection

 

2 Mininstry of Statistics and Programme Implementation - Provisional Estimate released on May 31, 2021

 

3 Resere Bank of India Monetary Policy Statement dated June 04, 2021

 

4 CRISIL press release dated June 07, 2021 titled Pinpricked growth

 

5 Bombay Stock Exchange and National Stock Exchange

The Authority allowed General and Health Insurers to offer both indemnity and benefit based short term health insurance policies for Covid-19. It also prescribed a standard benefit-based health policy and a retail standard health policy under the nomenclature - Covid Rakshak Policy (Benefit) and Corona Kavach Policy (Indemnity) respectively. While Corona Kavach Policy was mandated to be offered on or before July 10, 2020, insurers were encouraged to offer Corona Rakshak Policy by July 10, 2020.

Post a Supreme Court order in August 2018, IRDAI had mandated long term motor Third Party (TP) covers for Private Car (PC) / Two Wheeler (2W) for 3/5 years respectively, effective September 01, 2018. Subsequently, IRDAI had allowed insurers to offer long term motor Own Damage (OD) covers with following options.

• Bundled cover - 1 year OD with 3/5 year TP
• Long term package - 3/5 year OD with 3/5 year TP
• Standalone TP over- 0 year OD with 3/5 years TP

IRDAI has now withdrawn the option of long-term package effective from August 01, 2020, which means customers cannot avail own damage covers on long term basis.

On September 4, 2020 the Authority issued guidelines on wellness and preventive features wherein insurers may offer reward points to customers meeting set criteria. These features can be offered as an add-on or optional cover thus enabling insurers to promote wellness offerings like discount on increase in sum insured, discount on OPD services, redeemable vouchers on health supplements or gym memberships etc. This is also expected to expand scope for the insurers providing wellness and value-added offerings to their customers.

The Authority had issued the guidelines with Standard terms & conditions - in order to make available standard travel insurance, personal accident and named indemnity based Vector Borne products with common coverage and policy wordings across the industry.

The Authority also issued guidelines on certain standard products that shall be mandatorily offered by general insurers carrying out Fire and allied perils insurance business w.e.f. April 1, 2021. The standard products include- Bharat Griha Raksha meant for home building and home content, Bharat Sookhshma Udyam Surakhsha meant for enterprise with total value at risk upto ?5 crores, Bharat Lagu Udyam Suraksha meant for enterprise with total value of risk from ? 5 crores to ? 50 crores.

In the context of Covid-19 pandemic vide circular dated April 24, 2020, stipulated "Prudent management of financial resources, in view of the emerging market conditions and to conserve capital with the insurance companies. Through this circular the Authority had urged Board of insurers to critically examine their capital availability and solvency margin as required in the financial year 2020-21 and devise strategies to ensure that they have adequate capital and resources available with them. In line with this, the Authority also adviced insurers to take conscious call to refrain from dividend payout from profits and rationalize the expenses of management pertaining to the financial year ended March 31, 2020. The Authority decided to withdraw this circular on February 25, 2021 thereby enabling insurance companies to declare dividend for Fiscal 2021.

In Union Budget for FY2022 government announced increase in FDI limit for the insurance sector from 49% to 74%. The Insurance (Amendment) Bill, 2021, to this effect was passed by Parliament in March 2021 that amended the Insurance Act, 1938. The ammendment is expected to provide capital to smaller players and thus increase competitive intensity in the sector marginally.

The Authority has not issued a revision in the prevailing rates for Motor Third-Party Liability Insurance Cover for Fiscal 2021.

(A) Financial performance:

The non-life insurance industry registered growth of 5.2%6 in fiscal 2021. The industry has grown at a CAGR of approximately 16.1% since fiscal 2001.

Despite this, non-life insurance penetration in India continues to be around 0.9%7 of Gross Domestic Product against world average of 2.3%6 and given Indias demographic dividend, the sector is poised to reach newer heights in the coming years.

The private multi product players contribute to approximately 49.3% of the market for fiscal 2021.

Market share of Industry Players

The industry growth is driven by growth in Fire, Engineering, Retail Health and Group Health insurance segments. Fire, Engineering, Retail Health and Group Health grew by approximately 28.1%, 13.0%, 28.3% and 8.5% in fiscal 2021.

II. Discussion on Financial Performance and Analysis of Financial Statements

a. Overview of our business

We are one of the largest8 private-sector non-life insurer in India based on gross direct premium income in fiscal 2021. We offer our customers a comprehensive and well-diversified range of products, including fire, motor, health, travel and personal accident, marine, engineering and liability insurance, through multiple distribution channels.

For fiscal 2021, we issued 21.7 million policies and covered 53.3 million lives and our gross direct premium income was ? 140.03 billion, translating into a market share8 of 7.0% among all non-life insurers in India and 14.3% among private-sector non-life insurers in India. Our key distribution channels are direct sales, individual agents, corporate agents - banks, other corporate agents, Motor Insurance Service Providers (MISPs), brokers and digital, through which we service our individual, corporate, government and rural customers.

We have maintained leadership position among the private sector non-life insurers in India across motor own damage, fire, engineering, liability and marine segments in fiscal 2021. Our GDPI market share in motor own damage segment improved to 14.1% in fiscal 2021 from 13.9% in fiscal 2020. The company witnessed accretion in market share across all the commercial lines such as Fire, Engineering, Marine Cargo and Liability.

As at March 31, 2021, we had ? 308.92 billion in total investment assets with an investment leverage (net of borrowings) of 4.09x. Our investment policy is designed with the objective of capital preservation and achieving superior total returns within identified risk parameters. Our philosophy of generating superior risk adjusted returns along with protection of captital has resulted in a total portfolio return of 12.2%9. Equities made up of 14.5% of our total investment assets, by carrying value, as at March 31, 2021. Since fiscal 2004, our listed equity portfolio has returned an annualised total return of 25.1%, as compared to an annualised return of 16.4% on the benchmark S&P10 NIFTY index.

b. Competitive Strengths

Our strategic objective is to build a sustainable organization that remains relevant to the agenda of our stakeholders. We believe in providing value to our clients, while creating growth opportunities for our employees and generating profitable returns for our investors.

The following competitive strengths which contribute to our success and positioned us well for future growth:

Consistent Market Leadership and profitable growth: Our industry leadership has been reinforced by our comprehensive and diverse portfolio of insurance products that we continuously adapt to evolving needs of customers and changing indu ry dynamics. We have maintained leadership position among private sector non-life insurers in India across motor own damage, fire, engineering, liability and marine segments in fiscal 2021.

Diverse product line with multi-channel distribution network: We continue to offer products and solutions that address the untapped and evolving needs of customers and we have established ourselves as a reliable one-stop insurer for diverse customer requirements.

Further, we have been expanding our distribution network so as to increase penetration in tier 3 and tier 4 cities. Our Virtual offices network stood at 840 as on March 31, 2021. Our individual agents (including POS Agents) increased to 59,545 as on March 31, 2021.

Excellance in Customer Service and Technology:

Our customer-centric approach to delivering value focuses on providing convenience and customised solutions. The number of policies written stood at 21.7 million for fiscal 2021. We have been at the forefront of leveraging technology in the Indian non-life insurance industry. We leverage technologies such as Artificial Intelligence, Machine Learning, Advanced analytics, Internet of Things etc. from issuance of policies to settlement of claims and fraud detection. Our investment in capability building is focussed on building a culture of data-enabled decision making and enabling its employees to deliver customer-centric solutions. As on March 31, 2021 the headcount of the company was 10,236.

Robust risk selection and management framework: We take a holistic approach to risk management, which includes a data-driven risk selection framework, conservative reserving and quality reinsurance. The company has historically witnessed lower proportion of losses from catastrophic events than overall market share. As per IRDAI guidelines, non-life insurers in India are not allowed to discount their reserves. We test our reserves regularly based on claim experience, claim inflation and other factors. We have been disclosing aggregate reserving triangles as part of our annual reports since fiscal 2016. When it comes to investment management, the company has tighter internal exposure norms as against regulatory limits. The company has invested in high proportion of Debt portfolio and has 86.1% in sovereign and AAA11 rated securities as on March 31, 2021. All the Bonds and Debentures are AA rated & above. The company has zero instance of default in Debt portfolio since inception.

Strong investment returns on diversified portfolio:

Our total investments assets increased to ? 308.92 billion as on March 31, 2021 with an investment leverage of 4.09x. We have achieved a realised return on total portfolio of 7.8% for fiscal 2021.

c. Strategy and Future Outlook

In fiscal 2021, the company continued to focus on its strategic priorities of sustainable profitability with diversification of product portfolio. With regards to improving profitability, the company focused on prudent risk selection whilst leveraging on technology and distribution network. The company maintained a strong capital position with the solvency ratio well above the minimum regulatory requirement.

Going forward, the company will continue to focus on underwriting profitable segments while maintaining cautious approach in underwriting lumpy tender driven segments. Through its customer-centric approach and digital initiatives, the company is geared to remain customers preferred choice. The core strategy of the company for the ensuing fiscals will be to strive for increase in return on equity without compromising profitability and sustaining combined ratio at optimal levels.

d. Basis of preparation and presentation of our financial statements

The financial statements have been prepared and presented on a going concern basis in accordance with Generally Accepted Accounting Principles followed in India under the historical cost convention, unless otherwise specifically stated, on the accrual basis of accounting, and comply with the applicable accounting standards specified in section 133 of the Companies Act, 2013 read with Companies (Accounting Standards) Amendment Rules, 2016 dated March 30, 2016 to the extent applicable , and in accordance with the provisions of the Insurance Act, 1938, Insurance Laws (Amendment) Act, 2015 (to the extent notified), Insurance Regulatory and Development Authority of India Act, 1999, the Insurance Regulatory and Development Authority of India (Preparation of Financial Statements and Auditors Report of Insurance Companies Regulations), 2002 (‘the Regulations) and orders / directions prescribed by the Insurance Regulatory and Development Authority of India (the "IRDAI") in this behalf, the provisions of the Companies Act, 2013 (to the extent applicable) (the "Act") in the manner so required and current practices prevailing within the insurance industry in India.

The management evaluates, all recently issued or revised accounting pronouncements, on an ongoing basis. The Financial Statements are presented in Indian rupees rounded off to the nearest thousand.

i. Revenue Account and Profit and Loss Account

The revenue account contains income and expenses relating to policyholders, and the surplus or deficit generated in this account is appropriated to the profit and loss account every fiscal.

The statement below summarises the Revenue account.

(Rs. billion)
Particulars Fiscal 2020 Fiscal 2021
Premium earned (net) 94.04 100.14
Income from Investments (net) 15.43 16.64
Contribution from shareholders funds towards excess EOM* 0.75 4.36
Other income 0.32 0.47
Total (A) 110.54 121.61
Claims Incurred (net) 68.52 68.71
Commission paid (net) 3.64 6.01
Operating expenses related to insurance business 22.94 27.34
Total (B) 95.10 102.06
Operating Profit/ (Loss) (C) = (A)-(B) 15.44 19.55

*Basis IRDAI circular dated May 20, 2019

The profit and loss account contain the income and expenses pertaining to shareholders.

The statement below summarises the Profit and Loss account.

(Rs. billion)

Particulars Fiscal 2020 Fiscal 2021
Operating profit / (loss) 15.44 19.55
Income from investments (net) 4.64 5.05
Other income 0.16 0.12
Total (A) 20.24 24.72
Provision (other than taxation) 1.68 (0.56)
Other expenses 1.59 5.74
Total (B) 3.27 5.19
Profit before tax 16.97 19.54
Provision for taxation 5.03 4.81
Profit after tax 11.94 14.73

Premium earned (net) (NEP)

(Rs. billion)
Particulars Fiscal 2020 Fiscal 2021
Premium from direct business written - net of GST or service tax (GDPI) 133.13 140.03
Premium on reinsurance accepted 2.79 3.17
Gross Written Premium (GWP) 135.92 143.20
Less: Premium on reinsurance ceded 39.52 36.35
Net Written Premium (NWP) 96.40 106.85
Less: Adjustment for change in reserve for unexpired risks 2.36 6.71
Premium earned (net) (NEP) 94.04 100.14

Premium from direct business written-net of GST or service tax, which we refer to as GDPI, is the total premium received by us before taking into account reinsurance assumed and ceded. This is calculated net of GST or service tax on such premiums.

Our GDPI grew to ? 140.03 billion for fiscal 2021 from ? 133.13 billion for fiscal 2020, a growth of 5.2%. The increase in GDPI were primarily due to motor and commercial segments such as fire, engineering, aviation and liability.

The increase in our GDPI from motor segment during the fiscal can be attributed to change in product mix within sub-segments of motor and increased volume of policies, this was inspite of the slowdown witnessed in new vehicle sales growth due to Covid-19 induced lockdown in the first half of Fiscal 2021. The composition of private car, two wheeler and commercial vehicle within motor segment was 56.3%, 27.3% and 16.4% respectively in fiscal 2021 as against 56.7%, 28.5% and 14.8% respectively in fiscal 2020. Fiscal 2021 continued to witness relatively slower growth on the benefit health insurance segment in view of muted loan disbursements by NonBanking Financial Companies (NBFCs) and Housing Finance Companies (HFCs). During the fiscal there was also an impact in the growth of benefit health insurance segment owing to ICICI Bank decision to not sell credit linked health policies since Q3 FY 202021 as their focus was on building their core business. However health remains one of the preferred segments for the company and we continue to invest in building agency network and value driven partnerships to strengthen growth under this segment. Travel segment was largely impacted due to restricted mobility during Covid -19 lockdown. Individual, Group -Others, Group - Employer-Employee and Mass contributed to 26.7%, 23.3%, 50.0%, and 0.0% respectively of Health, & Personal Accident GDPI for fiscal 2021 and 23.6%, 38.8%, 37.5%, and 0.1% respectively for fiscal 2020. The company witnessed market share accretion across all the commercial lines such as Fire, Engineering, Marine Cargo and Liability. The growth in GDPI under the Fire segment was primarily owing to the rate hike in certain occupancies w.e.f. January 1, 2020. Going forward the growth is expected to be normalised due to base effect.

The Company continued to take a cautious approach in underwriting lumpy tender driven businesses viz. crop/weather and mass health segments during the fiscal. The contribution of crop/weather segment to overall GDPI of the company remained negligible. Further the company did not win any new crop tender during FY2021.

Premium on reinsurance accepted is the premium received by us due to risks that we reinsure, which we also refer to as "reinsurance inward". Premium on reinsurance accepted stood at ? 3.17 billion for fiscal 2021 from 2.79 billion for fiscal 2020, growth of 13.6%. Fire, motor OD, engineering and health segments primarily contributed to premium on reinsurance accepted.

Consequently, our GWP stood at ? 143.20 billion for fiscal 2021 as compared to ? 135.92 billion for fiscal 2020, growth of 5.4% Premium on reinsurance ceded is the premium in relation to the risk that we cede to our reinsurers. In the case of non-proportional reinsurance, like risk, excess-of-loss or catastrophic excess-of-loss, this amount is the premium that we pay to our reinsurers. In the case of proportional reinsurance, this amount is calculated based on the premium we receive for insuring a particular risk and the proportion of such risk ceded to our reinsurers.

The premium on reinsurance ceded stood at ? 36.35 billion for fiscal 2021 from ? 39.52 billion for fiscal 2020 , a de-growth of 8.0%. This was primarily due to increase in retention under the Motor OD segment coupled with decrease in the GWP of the Health Benefit segment due to muted loan disbursement and the decision taken by ICICI Bank since Q3 FY 202021 to not sell benefit health insurance segment during the fiscal.

Consequently, our NWP increased to ? 106.85 billion for fiscal 2021 from ? 96.40 billion for fiscal 2020, registering a growth of 10.8%

Our NEP increased to ? 100.14 billion for fiscal 2021 from ? 94.04 billion for fiscal 2020 , an increase of 6.5%. The increase was primarily due to increase in NEP from motor, health and fire segments.

Our segmental NEP is shown in the table below:

(Rs. billion)
Particulars Fiscal 2020 Fiscal 2021
Motor:
Motor - Own Damage 31.01 32.29
Motor - Third Party 30.19 29.43
Motor - Total 61.20 61.72
Health Insurance 18.30 21.25
Crop / Weather 0.02 0.07
Marine:
Marine - Cargo 2.53 2.58
Marine - Other than Cargo 0.04 0.02
Marine - Total 2.57 2.60
Personal Accident 4.32 4.36
Fire 2.74 4.81
Engineering 1.01 1.16
Aviation 0.18 0.21
Workmens Compensation 0.56 0.63
Public / Product Liability 0.20 0.16
Credit Insurance 0.03 0.02
Others 2.91 3.15
Total 94.04 100.14

Our NEP from motor segment increased to ? 61.72 billion for fiscal 2021 from ? 61.20 billion for fiscal 2020 , an increase of 0.9%. The increase in NEP is primarily due to increase in retention under motor OD segment.

Our NEP from health and personal accident insurance increased to ? 25.61 billion for fiscal 2021 from ? 22.62 billion for fiscal 2020, an increase of 13.2%. The increase in NEP is primarily due to growth in GDPI in indemnity health insurance segment.

Our NEP from marine segment grew to ? 2.60 billion for fiscal 2021 from ? 2.57 billion for fiscal 2020, an increase of 1.1%. This growth was largely contributed by marine cargo segment.

Our NEP from fire segment grew to ? 4.81 billion for fiscal 2021 from ? 2.74 billion for fiscal 2020, an increase of 75.9%. This growth was largely due to rate hike in certain occupancies wef January 1, 2020 coupled with increased retention under this segment.

Income from investments (net) (revenue account)

Income from investments (net) (revenue account) consists of net profit on sale and redemption of investments and gross interest, dividend and rent received from our investment assets. The table below summarises the Income from investments (revenue account).

(Rs. billion)

Particulars Fiscal 2020 Fiscal 2021
Net Profit on sale and redemption of investments 2.45 2.23
Interest, Dividend and Rent - Gross 12.98 14.41
Income from investments (net)
(revenue account) 15.43 16.64

Income from investments (revenue account) increased to ? 16.64 billion for fiscal 2021 from ? 15.43 billion for fiscal 2020, an increase of 7.9%. The increase in gross interest, dividend and rent (revenue account) to ? 14.41 billion in fiscal 2021 from ? 12.98 billion in fiscal 2020 was due to increase in total investment assets attributable to the revenue account. The increase in total investment assets was primarily due to improved cash inflows from efficiency in operations and realised investment income.

Other income (revenue account)

Other income (revenue account) consists of foreign exchange gain or loss, investment income from the pools, contribution from Shareholder Funds towards excess Expenses of Management (EOM) and miscellaneous income. The table below summarises the Other income (revenue account).

(Rs. billion)
Particulars Fiscal 2020 Fiscal 2021
Foreign exchange gain / (loss) 0.03 0.01
Investment income from pools (terrorism & nuclear) 0.25 0.31
Contribution from Shareholders Funds towards excess EOM* 0.75 4.36
Miscellaneous income 0.04 1 0.15
Other income (revenue account) 1.07 4.83

*Basis IRDAI circular dated May 20, 2019

Other income (revenue account) stood at ? 4.83 billion for fiscal 2021 as compared to ? 1.07 billion for fiscal 2020. For fiscal 2021, there was a foreign exchange gain of ? 0.01 billion as compared to foreign exchange gain of ? 0.03 billion for fiscal 2020. Additionally, the investment income from pools (terrorism and nuclear) was ? 0.31 billion for fiscal 2021 as compared to ? 0.25 billion for fiscal 2020. The Contribution from Shareholders Funds in excess of expenses of management were ? 4.36 billion as compared to ? 0.75 billion in fiscal 2020. The miscellaneous income stood at ? 0.15 billion for fiscal 2021 as compared to ? 0.04 billion for fiscal 2020.

Claims Incurred (net)

Claims incurred (net) are the total claims incurred by us during a given period, both paid and outstanding including IBNR/IBNER reserves, net of claims recovered from reinsurance ceded. Under guidance issued by the IRDAI, IBNR and IBNER reserves, which also constitute claims outstanding, are not discounted. The statement below summarises the Claims Incurred (net).

Particulars Fiscal 2020 Fiscal 2021
Claims paid - Direct 73.39 83.91
Claims paid on reinsurance accepted 1.41 1.53
Gross claims paid 74.80 85.44
Less: Claims recovered from reinsurance ceded 23.51 30.12
Net Claims paid 51.29 55.32
Add: Increase / (decrease) in claims outstanding (net) 17.23 13.39
Claims incurred (net) 68.52 68.71

Claims incurred (net) increased to ? 68.71 billion for fiscal 2021 from ? 68.52 billion for fiscal 2020, an increase of 0.3%. There was an improvement in our overall loss ratio to 68.6% for fiscal 2021 from 72.9% for fiscal 2020. Net claims paid increased to ? 55.32 billion for fiscal 2021 from ? 51.29 billion for fiscal 2020. The decrease in claims outstanding (net) to ? 13.39 billion in fiscal 2021 from ? 17.23 billion in fiscal 2020 is mainly on account of reduced claim intimation under the Motor segment which can be attriburted to restricted mobility during the pandemic.

The table below gives the segmental loss ratios:

Particulars Fiscal 2020 Fiscal 2021
Motor:
Motor - Own Damage 68.9% 62.2%
Motor - Third Party 84.4% 69.7%
Motor - Total 76.5% 65.8%
Health Insurance 80.5% 89.0%
Crop / Weather 110.6% 111.2%
Marine:
Marine - Cargo 67.2% 82.0%
Marine - Other than Cargo -69.8% 233.8%
Marine - Total 65.3% 83.3%
Personal Accident 24.9% 24.2%
Fire 64.0% 63.7%
Engineering 40.7% 57.7%
Aviation 79.4% 91.6%
Workmens Competition 59.6% 64.6%
Public / Product Liability 82.5% 60.0%
Credit Insurance 91.8% 123.2%
Others 46.1% 45.4%
Total 72.9% 68.6%

The overall loss ratio improved to 68.6% in fiscal 2021 from 72.9% in fiscal 2020. The loss ratio of Motor declined to 65.8% in fiscal 2021 from 76.5% in fiscal 2020, due to reduced frequency of claim intimation due to COVID-19 induced lockdown during first half of fiscal 2021. Further the Health loss ratio has worsened to 89.0% from 80.5% primarily due to increase in Covid related claims during fiscal 2021.

Commission paid (net)

Commission paid (net) comprises of Commission paid - Direct, Commission paid on reinsurance accepted deducted by commission received from reinsurance ceded.

Commission on reinsurance ceded refers to the commissions on reinsurance arrangements received by us. This commission is generally computed as a percentage of the premium on reinsurance ceded. In the case of certain proportional reinsurance contracts where the premium rates are defined, the difference between the premium we receive for insuring a particular risk and the premium rate so defined in the reinsurance contract is considered as commission on reinsurance ceded.

(Rs. billion)
Particulars Fiscal 2020 Fiscal 2021
Commission paid - Direct 12.47 12.83
Commission paid on reinsurance accepted 0.35 0.40
Gross Commission paid 12.82 13.23
Less: Commission received from reinsurance ceded 9.18 7.22
Commission paid (net) 3.64 6.01

Commission paid - Direct increased to ? 12.83 billion for fiscal 2021 from ? 12.47 billion for fiscal 2020, an increase of 2.9%. The increase was due to increase in commercial line of business such as fire, engineering etc.

Commission paid on reinsurance accepted increased to ? 0.40 billion for fiscal 2021 as compared to ? 0.35 billion for fiscal 2020, an increase of 14.2%. The increase is primarily due to higher commission pay-out on premium on reinsurance accepted under fire and Motor OD segment.

Commission received from reinsurance ceded decreased to ? 7.22 billion for fiscal 2021 from ? 9.18 billion for fiscal 2020 primarily due to increase in Motor OD retention leading to lower premiums ceded to reinsurers & consequently reduced commission received from reinsurance. Further due to COVID-19 induced lockdown lower disbursement of loans by HFC and NBFC impacting the business on the health benefit side leading to lower premiums ceded to reinsurers & consequently has reduced commission received from reinsurance. The decrease can also be attributed to reduction in premium of the health benefit segment due to ICICI Bank not selling credit linked health policies.

Operating expenses related to insurance business

Operating expenses related to insurance business includes employees remuneration, rents, rates and taxes, advertisement, sales promotion, business support service and others.

During the fiscal 2021 the companys focus remained on accelerating its opex investments towards delivering excellence in technology, innovation, building people capabilities and value partnerships. Resultantly, Operating expenses related to insurance business increased to ? 27.34 billion for fiscal 2021 from ? 22.94 billion for fiscal 2020, an increase of 19.2%. The increase was driven by employee remuneration & welfare benefits, fixed costs in the form of depreciation and other operating expenses on account of legal and professional charges, advertisement and sales & promotion expenses.

Operating profit

Based on the above, operating profit increased to ? 19.55 billion for fiscal 2021 from ? 15.44 billion for fiscal 2020, an increase of 26.6%. Fire insurance contributed 12.1% and 6.2%, marine insurance contributed -0.5% and 2.3%, and miscellaneous insurance (including motor insurance, health insurance and other lines of insurance) contributed 88.4% and 91.5% of our operating profit for fiscal 2021 and fiscal 2020, respectively. The increase in operating profit is largely driven by improvement in loss ratios across certain lines of business.

Income from investments (net) (profit and loss account)

Income from investments (profit and loss account) consists of interest, dividend and rent, and net profit on the sale and redemption of investments. The table below summarises the Income from investments (profit and loss account).

(Rs. billion)
Particulars Fiscal 2020 Fiscal 2021
Net profit on sale and redemption of investments 0.75 0.68
Interest, Dividend and Rent - Gross 3.89 4.36
Income from investments (net) (profit and loss account) 4.64 5.04

Income from investments (profit and loss account) increased to ? 5.04 billion for fiscal 2021 from ? 4.64 billion for fiscal 2020, an increase of 8.6%. The increase in gross interest, dividend and rent (profit and loss account) to ? 4.36 billion for fiscal 2021 from ? 3.89 billion for fiscal 2020 was primarily due to an increase in total investment assets attributable to the profit and loss account.

Other income (profit and loss account)

Other income (profit and loss account) consists of interest income on tax refund, profit on sale/discard of fixed assets and recovery of bad debts written off.

(Rs. billion)
Particulars Fiscal 2020 Fiscal 2021
Interest income on tax refund 0.15 0.12
Profit on sale/dicard of fixed assets 0.00 0.00
Recovery of bad debts written off - -
Other income
(profit and loss account) 0.15 0.12

Other income (profit and loss account) decreased to ? 0.12 billion for fiscal 2021 from ? 0.15 billion for fiscal 2020, a decrease of 15.0%. Also, interest income on tax refund decreased to ? 0.12 billion for fiscal 2021 as against ? 0.15 billion for fiscal 2020.

Provisions (other than taxation)

Provisions (other than taxation) consists of provisions for diminution in the value of investments, doubtful debts, future recoverable under reinsurance contracts, and other provisions.

Particulars Fiscal 2020 Fiscal 2021
For dimunition in the value of investments 1.20 (0.67)
For doubtful debts 0.47 1 0.11
For future recoverable under reinsurance contracts - -
Others -
Provision other than taxation (profit and loss account) 1.67 (0.56)

Provisions (other than taxation) decreased to ? (0.56) billion for fiscal 2021 from ? 1.67 billion for fiscal 2020 mainly on account of reversal of impairment of investment on equity assets. The company during fiscal 2020 had created an impairment provision of ? 1.20 billion and during fiscal 2021 reversal of previously assessed impairment of ? 0.70 billion was undertaken as the underlying securities were sold and the resultant losses were recognized. To this effect the company reversed impairment on investment in equity assets of ? 0.67 billion in fiscal 2021

Other expenses (profit and loss account)

Other expenses consist of expenses other than those related to insurance business, which include certain employees remuneration and other expenses, managerial remuneration, directors fees and CSR expenditure, charges on issuance of the Debentures, expenses related to investment property and operating expenses borne by shareholders. Other expenses also covers, bad debts written off, loss on sale/discard of fixed assets and penalty.

Other expenses increased to ? 5.74 billion for fiscal 2021 from ? 1.59 billion for fiscal 2020, an increase of 262.1%. Other expenses for fiscal 2021 includes CSR expenditure, loss on sale of fixed assets and penalty. Other expenses in fiscal 2021 included ? 4.36 billion debited in profit and loss account being excess of IRDAI prescribed segmental limits pertaining to the health retail segment, Motor and Miscellaneous retail segments that are required to be borne by shareholders in accordance with the IRDAI (Expenses of Management of Insurers transacting General or Health Insurance Business) Regulations, 2016.

Profit

As a result of the above, profit before tax increased to ? 19.54 billion for fiscal 2021 from ? 16.97 billion for fiscal 2020, an increase of 15.1%.

Provision for taxation decreased to ? 4.80 billion for fiscal 2021 from ? 5.03 billion for fiscal 2020, a decrease of 4.4%.

Profit after tax increased to ? 14.73 billion for fiscal 2021 from ? 11.94 billion for fiscal 2020, an increase of 23.4%.

ii. Financial Position: Balance Sheet

The following table sets forth, at the dates indicated, our summary balance sheet, which is based on our financial statements.

(Rs. billion)

Particulars At March 31, 2020 At March 31, 2021
Share Capital 4.54 4.55
Reserves and Surpluses 56.80 69.81
Share application money - pending allotment 0.00 0.00
Total Equity 61.34 74.36
Current liabilities 249.80 240.99
Provisions 58.73 65.97
Fair value change account (4.29) 6.81
Borrowings 4.85 4.85
Total liabilities 309.09 318.62
Total equity and liabilities 370.43 392.98
Total investments 263.27 308.92
Fixed assets:
- Cost / gross block 11.77 12.25
- Net block 6.77 6.27
Deferred tax asset 3.06 3.50
Cash and bank balances 0.33 2.28
Advances and other assets 97.00 72.01
Total Assets 370.43 392.98

Total assets increased to ? 392.98 billion at March 31, 2021 from ? 370.43 billion at March 31, 2020, an increase of 6.1%. This increase was primarily due to an increase in total investments assets to ? 308.92 billion for fiscal 2021 from ? 263.27 billion for fiscal 2020. This increase in total investments assets was contributed by higher inflows from efficiency in operations and realized investment incomes. Advances and other assets decreased to ? 72.01 billion at March 31, 2021 from ? 97.00 billion at March 31, 2020, a decrease of 25.8%. The outstanding premium (net of provision for doubtful debts) decreased to ? 9.78 billion at March 31, 2021 from ? 17.56 billion at March 31, 2020 , a decrease of 94.4%. This decrease was mainly on account of reduction in receivables from government on Crop insurance segment. Advance tax paid and taxes deducted at source (net of provision for tax) were NIL for fiscal 2021 as against ? 1.37 billion for fiscal 2020 primarily due to lower effective tax rate resulting from change in Income Tax Regulations.

Total liabilities increased to ? 318.62 billion at March 31, 2021 from ? 309.09 billion at March 31, 2020, an increase of 3.1%. This was primarily due to increase in premiums received in advance of ? 32.40 billion as at March 31, 2021 from ? 30.51 billion as at March 31, 2020, on account of long-term motor policies wherein the premium is received upfront and would get recognized in the future years. Further in the claim outstanding (gross) increased to ? 182.85 billion as at March 31, 2021 from ? 180.07 billion as at March 31, 2020.

Fair value change account-Shareholder funds increased to ? 1.63 billion at March 31, 2021 from ? (0.95) billion at March 31, 2020, an increase of 272.0%. This increase was primarily due to the increase in the market value of our equity portfolio compared to its cost price. Fair value change-Policyholder funds increased to ? 5.17 billion at March 31, 2021 from ? (3.34) billion at March 31, 2020, an increase of 255.0%. This increase was primarily due to the increase in the market value of our equity portfolio compared to its cost price.

Investments - Shareholders increased to ? 74.36 billion at March 31, 2021 from ? 58.60 billion at March 31, 2020, an increase of 26.9%.

Investments-Policyholders increased to ? 234.57 billion at March 31, 2021 from ? 204.67 billion at March 31, 2020, an increase of 14.6%. This increase was primarily due to an overall increase in the investment book size.

Further, regulatory changes prescribed by IRDAI affecting the notional allocation of investments into Shareholder and Policyholder funds based on the ratio of their respective liabilities and assets also contributed to an increase in the Policyholders fund ratio.

iii. Liquidity and Capital Resources

The following table sets forth, for the periods indicated, a summary of cash flows from our restated summary statement of receipts and payments account.

(Rs. billion)
Particulars Fiscal 2020 Fiscal 2021
Net cash flow from (used in) operating activities (A) 34.33 17.74
Net cash flow from (used in) investing activities (B) (33.82) (13.67)
Net cash flow from (used in) financing activities (C) (4.20) (2.12)
Net increase / (decrease) in cash and cash equivalents (A)+(B)+(C) (3.69) 1.95
Cash & Cash equivalents at the beginning of the year 4.02 0.33
Cash & Cash equivalents at the end of the year 0.33 2.28

Cash flows from operating activities

Net cash flows from operating activities decreased to ? 17.74 billion for fiscal 2021 from ? 34.33 billion for fiscal 2020. This decrease was primarily due to decrease in premiums received from policyholders and an increase in the payment of claims, commissions and taxes.

Cash flows from investing activities

Net cash flows (used in) investing activities decreased to ? (13.67) billion for fiscal 2021 from ? (33.82) billion for fiscal 2020. This was primarily due to decrease in net investments in money market instruments and liquid mutual funds, mainly from funds generated from operating activities.

Cash flows from financing activities

Net cash flows (used in) financing activities decreased to ? (2.12) billion for fiscal 2021 from ? (4.20) billion for fiscal 2020. This was primarily due to payment of interim dividend for fiscal 2021

iv. Contingent Liabilities

The Statement of contingent liabilities is provided below.

(Rs. billion)
Particulars Fiscal 2020 Fiscal 2021
Partly paid-up investments - -
Claims other than those under policies, not acknowledged as debt
Underwriting commitments outstanding NA
NA
Guarantees given by or on behalf of the Company
Statutory demands / liabilities in dispute, not provided for (Note 1 &2) 4.57 8.31
Reinsurance obligations to the extent not provided for in accounts - -
Others 0.05 0.05

Note 1: The Company has disputed the demand raised by Income Tax Authorities of ? 0.29 billion, the appeals of which are pending before the appropriate Authorities. This excludes Income Tax demand related to Assessment Year 2003-04, 2005-06, 2006-07 & 2008-09 in respect of which the Company has received favorable appellate order, which is pending for effect to be given by the Assessing Authority

Note 2: Includes disputed refund / demand (including interest and penalty) of ? 8.02 billion for year ended March 31, 2021 from ? 4.28 billion for the year ended March 31, 2020 from Service Tax Authorities / Goods & Service Tax Authorities / Jammu and Kashmir Sales Tax, the appeals of which are pending before the appropriate Authorities. Further, ? 0.17 billion has been paid at the time of filing CESTAT appeal as per the provisions of the Finance Act, 1994.

v. Borrowings

As of March 31, 2021, we had long term borrowings of ? 4.85 billion, total net worth of ? 74.35 billion and a total debt to net worth ratio of 0.07 times.

Disclosure of key changes in financial indicators:

Pursuant to SEBI (Listing Obligations and Disclosure Requirements) (Amendment) Regulations, 2018, w.e.f. 01 April 2019, following details have been provided:

(a) Details of significant changes (i.e. change of 25% or more as compared to the immediately previous financial year) in the key financial ratios, alongwith detailed explanations thereof:

Sr. No. Ratio FY 2020 FY 2021 Change (FY2020 vs FY2021) Reasons, if any
1 Gross Direct Premium Growth Rate -8% 5% 164% Refer Note 1
2 Gross Direct Premium to Net Worth Ratio 2.17 1.88 -13% Not Applicable
3 Growth rate of Net Worth 15% 21% 39% Refer Note 2
4 Net Retention Ratio 71% 75% 5% Not Applicable
5 Net Commission Ratio 4% 6% 49% Refer Note 3
6 Expenses of Management to Gross Direct Premium Ratio 27% 29% 8% Not Applicable
7 Expenses of Management to Net Written Premium Ratio 37% 38% 2% Not Applicable
8 Net Incurred Claims to Net Earned Premium 73% 69% -6% Not Applicable
9 Combined Ratio 100% 100% -1% Not Applicable
10 Technical Reserves to Net Premium Ratio 2.47 2.32 -6% Not Applicable
11 Underwriting balance ratio (0.01) (0.02) 71% Refer Note 4
12 Operating profit ratio 16% 19% 18% Not Applicable
13 Liquid Assets to Liabilities Ratio 12% 13% 9% Not Applicable
14 Net Earnings Ratio 13% 15% 16% Not Applicable
15 Solvency Ratio 2.17 2.90 34% Refer Note 5

Note 1: Gross Direct Premium growth is derived by growth in GDPI in comparison with the previous year. The growth of 5.2% in fiscal 2021 was in line with the industry growth

Note 2: Growth Rate of Networth is derived by growth in Networth in comparison with previous year. The growth of 21.2% can be primarily attributed to increase in PAT by 23.4% during the fiscal 2021.

Note 3: Net Commission ratio is derived by dividing Commission paid (net) by NWP. Commission paid (net) comprises of Commission paid - Direct, Commission paid on reinsurance accepted less commission received from reinsurance ceded. Commission paid - Direct increased to ? 12.83 billion for fiscal 2021 from ? 12.47 billion for fiscal 2020, an increase of 2.9%. The increase was due to increase in commercial line of business such as fire, engineering etc.

Note 4: Underwriting balance ratio is derived by dividing the underwriting result (Underwriting result = NEP - Net Claims Incurred - Net Commission Paid - Operating expenses related to insurance business) by NEP. The underwriting result for fiscal 2021 has decreased as compared to the fiscal 2020. This was due to impact of Covd-19 on overall performance including slower than normal growth in the topline resulting in lower NEP. This coupled with increase in operating expenses such as employee remuneration & welfare benefits, fixed costs in the form of depreciation and other operating expenses on account of legal and professional charges, advertisement and sales & promotion expenses led to decrease in the underwriting balance ratio as compared to the previous year. However there was an improvement in loss ratio to 68.6% for fiscal 2021 from 72.9% for fiscal 2020.

Note 5: Solvency Ratio is derived by required solvency margin by IRDAI divided by available solvency margin. The solvency ratio increased due to increase in available solvency margin during the fiscal 2021 and a strong capital position

(b) Details of change in Return on Net Worth as compared to the immediately previous financial year alongwith detailed explanation thereof:

Return on Net Worth (RONW) is computed dividing the PAT by Net Worth (Share Capital + Reserves & Surpluses + Share application money received pending allotment). RONW stood at 19.8% for fiscal 2021 from 19.5% for fiscal 2020. The increase in RONW was largely driven by increase of 23.4% in PAT for fiscal 2021.

III. Internal control systems and their adequacy

The internal controls of the Company are commensurate with the business requirements, its scale of operation and applicable statutes to ensure orderly and efficient conduct of business. These controls have been designed to provide a reasonable assurance with regard to maintaining proper accounting controls, safeguarding of resources, prevention and detection of frauds and errors, ensuring, operating effectiveness, reliability of financial reporting and compliance with applicable regulations. In addition, internal audits are undertaken to review significant operational areas regularly. The audit reports submitted by internal auditors are reviewed by audit committee and corrective actions are initiated to strengthen the controls and enhance the effectiveness of the existing systems. Statutory and Internal auditors are also invited to the Audit Committee meetings to ascertain their views on the adequacy of internal control systems.

The management believes that strengthening of internal controls is a continuous process and it will therefore continue its efforts to keep pace with changing business needs and environment.

IV. Covid-19 Impact on Internal Control over Financial Reporting

The COVID-19 pandemic outbreak has had far reaching impact on several critical risk areas of the business. The Company, on assessment of the associated risks, commenced preparation for risk mitigation at the beginning of March 2020. The Company activated the Crisis Management Team (CMT) that has been regularly reviewing the developing situation to calibrate the companys response. The CMT conceptualized and formulated the business continuity plans for the Company prioritizing the dual objectives of employee safety and delivering customer commitments. The Company also undertook a comprehensive risk assessment activity to evaluate the impact of COVID-19 on all the key risk areas of the Companys Enterprise Risk Management framework namely credit risk, market risk, underwriting risk, operational risk and strategic risk (including therein reputation risk). From an entity level risk evaluation perspective, the Company believes that the risks arising out of the pandemic are presently at manageable levels for the organization. Processes and controls followed to prepare the financials were also found to hold good and no new financial reporting risks were observed on account of COVID- 19.The Company is closely watching the developing situation for appropriate risk mitigation and management.