Rating Rationale
May 30, 2020 | Mumbai
CRISIL assigns its 'CCR AAA/Stable' to Kotak Mahindra Life Insurance Company Limited; Financial Strength Rating of 'AAA/Stable' withdrawn
 
Rating Action
Corporate Credit Rating CCR AAA/Stable (Assigned)
Financial Strength Rating AAA/Stable (Withdrawn)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has assigned Corporate Credit Rating of 'CCR AAA/Stable' to Kotak Mahindra Life Insurance Company Limited (Kotak Life) and simultaneously withdrawn its Financial Strength Rating (FSR) of 'AAA/Stable' for Kotak Life.
 
In line with SEBI notification dated May 30, 2018, a financial strength rating can no longer be offered or evaluated by a credit rating agency. CRISIL now assesses the corporate credit rating of the insurer which reflects the insurer's ability to honour all debt obligations as well as policyholder obligations.
 
The rating continues to be driven by Kotak life's comfortable capital position with high cushion in solvency margin, and its balanced mix in products and sourcing channels. The rating also continues to factors in strong support that Kotak Life gets from Kotak Mahindra Bank (rated 'CRISIL AAA/CRISIL AA+/FAAA/Stable/CRISIL A1+'). Kotak Life has strong linkage with Kotak Mahindra Bank driven by 100% ownership (Kotak group collectively owns 100% stake in Kotak life) and shared name. The strong linkage induces the moral obligation on Kotak Mahindra Bank's part to support Kotak Life in the event of need. Kotak Mahindra Bank's presence in the insurance sector is through Kotak Life, which is, therefore, one of the critical subsidiary. Furthermore, Kotak Mahindra Bank's commitment to Kotak Life is ensured by the fact that life insurance also handles public savings and is a very sensitive sector, and the success or failure of the bank's life insurance arm can have wide implications for Kotak Mahindra Bank's brand image.
 
The rating also factors in Kotak Life's position as among the top 10 private life insurers (in terms of market share) and the benefits that it derives from accessing the wide branch network of the Kotak group to sell its insurance products. Further, the rating also factors in adequate capital position that Kotak Life has been maintaining. These rating strengths are partially offset by the challenges that Kotak Life is expected to face in sustaining its profitability due to rising competition.
 
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 for paying the renewal premiums due until March 2020 across all life insurance policies till May 31, 2020. Also for renewal premiums due in month of April 2020, an additional grace period of one month has been announced by IRDAI. Furthermore, the restrictions on physical movements imposed by the government during the different phases of lockdown has also affected the growth in new business for the life insurance industry.
 
In light of the above, CRISIL believes the growth in gross premiums for first quarter of fiscal 2021 could be relatively moderate driven by extension given by IRDAI in paying premiums. However, once the extension period is over, inflow of deferred premiums will result in traction thereafter. Further, due to present pandemic situation, the demand for life insurance products is expected to increase over near term which in-turn is expected to result in new business growth for the industry.   
 
In terms of the business performance, the overall gross premiums for Kotak Life has grown by around 27% to Rs 10,340 crore during fiscal 2020 as against Rs 8168 crore during fiscal 2019. Kotak Life has maintained fairly balanced product mix within individual new business premiums; PAR (participating) products at 40.5%, Non-PAR (non-participating) products at 39%and ULIPs (Unit-linked) products at 20.5%in fiscal 2020. In terms of persistency ratios, Kotak Life's persistency ratio (13 month) has improved to 87.8% during nine months in fiscal 2020 from 86.8% during corresponding period of fiscal 2019. The 13th month persistency has remained above 80% consistently during last 6 years. The 61st month persistency ratio was at 61.7% during nine months of fiscal 2020 vis-a-vis 62.5% during nine months of fiscal 2019.

Analytical Approach

For arriving at the ratings, CRISIL has assessed the standalone financial and business risk profiles of Kotak Life. The company's strategic importance to, and expectation of providing the necessary support from, its parent, Kotak Mahindra Bank Ltd (Kotak group collectively owns 100% stake in Kotak life) has also been factored.

Key Rating Drivers & Detailed Description
Strengths
* Strategic importance to, and expectation of strong support parent, Kotak Mahindra Bank and Kotak Group
Kotak Life derives significant capital, managerial and operational support from its parent, Kotak Mahindra Bank. Kotak Life has the financial flexibility to raise capital whenever necessary, as its parent is committed to and capable of, infusing capital into Kotak Life. Presently, Kotak group collective owns 100% stake in Kotak Life (Kotak Mahindra Bank owns 77% stake, Kotak Mahindra Capital Ltd owns 12% and Kotak Mahindra Prime Ltd owns 11%). Kotak Mahindra Bank also extends managerial support to Kotak life. Mr Uday Kotak is non-executive chairman on the board of Kotak Life. Apart from him, Mr Dipak Gupta who is joint MD of Kotak Mahindra Bank, holds position of non-executive director on the board of Kotak Life. Further, Mr Gaurang Shah who is President ' Asset Management, Insurance and International Business Kotak Mahindra Bank Ltd, is responsible for overseeing the operations of Kotak Life.
 
In addition, Kotak Mahindra Bank has demonstrated operational support to Kotak Life by letting the subsidiary access the Kotak Bank's network of branches and customers for selling insurance products. Also, Kotak Life has access to the group's large employee strength to sell insurance products.
 
* Expected to remain among the top players within private life insurers
Kotak life is expected to maintain its market position as one of the top player within life insurance industry. The market share of Kotak life (in new business premiums) has improved to 5.5% in fiscal 2019 from 4.3% in fiscal 2014 within private insurers. The overall market share (in terms gross premiums), nevertheless, remains low at 1.6%. Balanced product mix has been maintained and the focus of the company is to maintain the same. Kotak Life has maintained fairly balanced product mix within individual new business premiums; PAR (participating) products at 40.5%, Non-PAR (non-participating) products at 39%and ULIPs (Unit-linked) products at 20.5%in fiscal 2020. Strong brand image and direct access to large customer base of Kotak Mahindra Bank, provides critical support to the business growth of Kotak Life. Furthermore, high savings rate in economy, low insurance penetration and other supportive macro factors expected to drive growth.
 
* Adequate capital position
Kotak life maintains adequate capital position post growing business by around 27%. The comfortable capital adequacy position is reflected in the solvency margin of around 3.0 times for more than 5 years. Kotak life's absolute net worth stood at Rs 2856 crore as on December 31, 2019 (Rs 2745 crore as on March 31, 2019). Kotak Mahindra Group now holds 100% of the equity shareholding in Kotak Mahindra Life Insurance Company Limited. Despite there has been no capital infusion in the company during last 9 years, the solvency margin has been maintained at above 3x.
 
Kotak life reported embedded value of Rs 8,388 crore as on March 31, 2020 (Rs 7,306 crore as on March 31, 2019). The embedded value is representation of actual capital position since it includes the future profits that company is expected to receive from the business it has underwritten today. The steady increase in internal accruals enables the company to maintain capital position while achieving healthy business growth.
 
* Strong focus on enhancing the distribution and efficiency
Kotak life has been focusing on enhancing its distribution strength since the management strongly believes that insurance is product cannot be sold entirely online. The company has good agency network of more than 1,00,000 agents (individual, corporate and brokers). The management proposes to focus more on enhancing individual agent network since they believe mis-selling can be controlled within in this channel.  For bancassurance, the company enjoys direct tie-up with parent i.e. Kotak Mahindra Bank. Around 90% of the bancassuarance business comes from Kotak Bank. The incentive structure of Kotak bank employees has also been modified to make cross selling a key objective which augurs well for the company. Apart from Kotak Bank, the company has tie-up with South Indian Bank, and couple of small finance banks.
 
Weakness
* Increasing competition may result in additional challenges
The life insurance industry has attracted many private players. With increasing competition, the company may face challenges in maintaining its profitability. Further, given the life insurance market in India continues to remain dominated by LIC, the newer players have to continuously keep on innovating newer products to attract customers. Additionally, the company will also have to manage the returns expectation of policy holders. CRISIL overall believes that the company's ability to generate underwriting profit and manage its investment portfolio to earn adequate returns will determine its profitability over the long term.
Liquidity Superior

Kotak life's liquidity profile, in relation to its scale of business, has remained superior. Apart from adequate reserving against anticipated claims, the liquidity position is supported by a highly liquid investment portfolio. As on December 31, 2019, government securities (G-secs) formed 76.7% of the debt investment portfolio. Apart from G-Sec, majority of the portfolio is investment in AA or above rated securities. As on December 31, 2019, investments within central government (G-Secs & state) and AAA rated securities (within non-ULIP portfolio) stood at around 98% of the overall portfolio i.e. around Rs 18,541 crore out of total portfolio of Rs 18,899 crore. More so, given the constant support from the parent, flexibility to raise funds whenever required remains high.

Outlook: Stable
CRISIL believes that Kotak Life will continue to receive strong financial and operational support from Kotak Mahindra Bank over the long term. Also, Kotak Life will continue to benefit from the Kotak Mahindra Bank's distribution channel.
 

Rating Sensitivity factors
Kotak Life will remain strategically important to the Kotak group, and thus, continue to receive strong financial and operational support from Kotak Mahindra Bank, and also benefit from the bank's distribution channel.

Downward Factors:
* Revision in rating of the parent Kotak Mahindra Bank, resulting in similar action on Kotak Life
* Reduction in the proportion of shareholding of Kotak Mahindra Bank to below 51%
* Reduction in the solvency margin to below 1.6x
About the Company

Kotak Life, began as a joint venture between Kotak Group (Kotak Mahindra Bank being majority shareholder) and Old Mutual Fund PLC. The company commenced operations in the year 2001. During fiscal 2018, Kotak Mahindra Bank Limited entered into a share purchase agreement dated April 27, 2017 with Old Mutual PLC to purchase the entire 26% equity stake (132,675,452 number of shares) held by Old Mutual PLC in erstwhile known as Kotak Mahindra Old Mutual Life Insurance Limited. The transaction was completed on October 13, 2017. Kotak Mahindra Group now holds 100% of the equity shareholding in Kotak Mahindra Life Insurance Company Limited. The company is uniquely positioned to tap the vast potential of the Indian life insurance sector by harnessing the vast branch network of Kotak Mahindra Bank. Also, the company benefits from the expertise that Kotak group has within wealth management business. Many of the HNI customers of Kotak Bank are used for cross-selling the insurance products of Kotak Life. Over the years, Kotak Life has gradually increased the coverage of branches and presently, almost all the bank branches of Kotak Mahindra Bank are covered under this channel. The company has a balanced product mix. The company is also constantly trying to increase share of Non-Par business in its overall portfolio.

Key Financial Indicators
As on / for the period   Dec 19 Dec 18 2019 2018
Gross direct premium Rs. Cr.  6380 4660  8168  6599
Networth Rs. Cr. 2856 2331 2745 2238
Profit after tax Rs. Cr. 111 93 507 413
13th month persistency % 87.8 86.8 87.3  85.7
61st month persistency % 61.7 62.5 60.4  61.9
Solvency margin Times 3.04 3.10 3.02 3.05

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
NA NA NA NA NA 0 NA
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
-  CCR  0.00  CCR AAA/Stable    --    --    --    --  -- 
Financial Strength Rating  LT  0.00  Withdrawn     25-10-19  AAA/Stable  29-10-18  AAA/Stable    --  -- 
All amounts are in Rs.Cr.
Links to related criteria
Rating Criteria for Life Insurance Companies
Criteria for Notching up Stand Alone Ratings of Companies based on Parent Support

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