Detailed Rationale

CRISIL Ratings has reaffirmed its ‘CCR AAA/Stable’ corporate credit rating on Kotak Mahindra Life Insurance Company Limited (Kotak Life).

 

The rating continues to reflect the comfortable capital position of Kotak Life with high cushion in solvency margin, and its balanced mix of products and sourcing channels. The rating also factors in the strong support provided by Kotak Mahindra Bank Ltd (Kotak Mahindra Bank; ‘CRISIL AAA/CRISIL AA+/FAAA/Stable/CRISIL A1+’), driven by the 100% ownership of Kotak Life by the Kotak group and the shared brand. The strong linkage implies a moral obligation on Kotak Mahindra Bank to offer need-based support to Kotak Life, which is a key subsidiary, facilitating access to the insurance sector. Furthermore, given that life insurance is a vital channel for public savings and hence, a very sensitive sector, success or failure of the life insurance arm can have wide implications for the brand image of Kotak Mahindra Bank.

 

The rating also factors in the established market position of Kotak Life as one of the top 10 private life insurers (in terms of market share), and benefits it derives from access to the wide branch network of the Kotak group. Further, the rating also factors in adequate capital position maintained by the company. These rating strengths are partially offset by likely exposure to challenges in sustaining profitability amidst the rising competition.

 

In terms of business performance, overall gross premiums for Kotak Life rose 23.4% on-year to Rs 7,686 crore in the first nine months of fiscal 2022 from Rs 6,230 crore. Kotak Life has maintained a fairly balanced product mix with PAR (participating) products at 27.0%, non-PAR (non-participating) products at 43.8%, and ULIPs (unit-linked insurance plans) products at 29.2% in the nine months through fiscal 2022. In terms of Persistency ratio, there has been a decline in 13th month persistency ratio to 82.2% in nine months fiscal 22 as compared to 89.6% in fiscal 2021 due to lower growth in the renewal business. However, the 13th month persistency has remained above 80% consistently during the last eight years. The 61st month persistency ratio stood at 51.5% in nine months fiscal 22 vis-à-vis 58% in fiscal 2021.

 

The high severity of the second wave of Covid-19 in the first quarter of fiscal 2022 resulted in a significant increase in death claims. As a result, the company reported loss in Q1 fiscal 22 owing to higher covid related death claims and extra mortality reserves created by the company to cover future claims. Nevertheless, as things settled down, pace of death claims also slowed down incrementally during Q3 fiscal 22. The death claims which stood at Rs 817 crore during Q2 fiscal 2022, came down to Rs 453 crore in Q3 fiscal 2022. The impact of the same was also visible on overall profitability; company reported a profit of Rs 180 crore for nine months ended fiscal 2022. Additionally, the company reinsures mortality risk with financially strong reinsurers, with optimum retention of guaranteed premiums bases. It undertakes resilience tests on its balance sheet and the impact on the solvency margin. During the first nine months fiscal 2022, the company reinsured around 2% of its gross premiums. It maintained strong solvency ratio of 266% (or 2.66 times) as on December 31, 2021, against required solvency ratio of 150%.

Analytical Approach

For arriving at the ratings, CRISIL Ratings has assessed the standalone financial and business risk profiles of Kotak Life, and has factored in the company's strategic importance to, and expectation of support from, its parent, Kotak Mahindra Bank.

Key Rating Drivers & Detailed Description

Strengths:

• Strategic importance to, and expectation of strong support from, Kotak Mahindra Bank and the Kotak group

Kotak Life derives significant capital, managerial and operational support from Kotak Mahindra Bank. Kotak Life can raise capital whenever needed, as its parent is committed to and capable of offering such support. Presently, the Kotak group owns full stake in Kotak Life through Kotak Mahindra Bank (77%), Kotak Mahindra Capital Ltd (12.42%) and Kotak Mahindra Prime Ltd (10.58%). Kotak Mahindra Bank extends managerial support to Kotak Life. Mr Uday Kotak is non-executive chairman on the board of Kotak Life. Mr Dipak Gupta, joint managing director of Kotak Mahindra Bank, is non-executive director on the board of Kotak Life. Further, Mr. Gaurang Shah who is non-executive director on the board of asset management, insurance and international business entities which are the wholly owned subsidiaries of Kotak Mahindra Bank Ltd.

 

Kotak Mahindra Bank has provided Kotak Life with access to its branch network and customers for selling insurance products. Kotak Life also has access to the group’s large employee database to facilitate sale of insurance products.

 

• Established market position among top private life insurers

Kotak Life will likely maintain its position as a top player among private life insurers. However, its market share (in terms of new business premium) among private life insurers declined to 5.3% in fiscal 2022 from 5.6% in fiscal 2021. The overall market share (in terms of gross premium) in the life insurance industry remained low at 1.8% in the nine months of fiscal 2022. Kotak Life registered a growth of 17% in fiscal 2022 compared with 13% by the overall life insurance industry in new business premium. The company maintained a balanced product mix with PAR products at 27.0%, non-PAR products at 43.8% and ULIPs at 29.2%. Strong brand image and direct access to the large customer base of Kotak Mahindra Bank provide critical support. Furthermore, high savings rate, low insurance penetration and other supportive macro factors should drive growth.

 

• Adequate capital position

Kotak Life is well capitalised, as reflected in solvency margin maintained around 3.0 times for over five years (2.9 times in fiscal 2021) with slight decline to 2.7 times in the first nine months of fiscal 2022 owing to increased Covid-related death claims because of the severity of the second wave of the pandemic. As a result, the company reported loss in Q1 fiscal 22 owing to higher covid related death claims and extra mortality reserves created by the company to cover future claims. Nevertheless, as things settled down, pace of death claims also slowed down incrementally during Q3 fiscal 22. The death claims which stood at Rs 817 crore during Q2 fiscal 2022, came down to Rs 453 crore in Q3 fiscal 2022. The impact of the same was also visible on overall profitability; company reported a profit of Rs 180 crore for nine months ended fiscal 2022.  The solvency margin has remained healthy driven by internal accrual, with no capital infusion by shareholders over the past decade. Absolute networth was Rs 4,122 crore as on December 31, 2021 (Rs 4,045 crore as on March 31, 2021). The Kotak Mahindra Group holds 100% of the equity shareholding in Kotak Life.

 

Kotak Life reported embedded value of Rs 9,869 crore as on March 31, 2021 (Rs 8,388 crore a year earlier). This represents the actual capital position as it includes the profits the company is likely to make from the business it has currently underwritten. Steady increase in internal accrual helps maintain strong capital position while achieving healthy business growth.

 

• Strong focus on enhancing distribution network and efficiency:

Kotak Life has been focusing on enhancing its distribution network, as the management strongly believes insurance products cannot be sold only through the online channel. That said, over 95% of customer onboarding is done digitally through the company’s Genie mobile application. The company has a healthy network of over 1.27 lakh agents (individuals, corporates and brokers), which the management plans to enhance. Bancassurance accounted for 34% of the new business premium in the nine months of fiscal 2022 and the company enjoys a direct tie-up with Kotak Mahindra Bank, which accounts for around 90% of the bancassurance business. Apart from Kotak Bank,The company has also tied up with South Indian Bank and a few small finance banks.

 

Weakness:

• Increasing competition

Intense competition from other private life insurers continues to exert pressure on profitability. Also, with the Life Insurance Corporation of India dominating the insurance industry, newer players have to constantly undertake product innovation to attract and retain customers. Kotak Life will also have to manage the returns expectation of policy holders. CRISIL Ratings believes ability to generate underwriting profits and manage the investment portfolio so as to maximise returns will determine profitability of insurers over the long term.

Liquidity: Strong

Kotak Life has maintained strong liquidity, in relation to its scale of business. Apart from adequate reserves against anticipated claims, the liquidity position is supported by a highly liquid investment portfolio. As on December 31, 2021, government securities (G-secs) formed 79.6% of debt investments. Apart from G-Secs, majority of the portfolio comprises investments in AA or above rated securities. As on December 31, 2021, investments in government (G-Secs and state) and ‘AAA’-rated securities (within non-ULIP portfolio) constituted 99.8% of the portfolio (around Rs 28,267 crore out of Rs 28,321 crore). Assurance of constant support from the parent enhances flexibility to raise funds whenever required.

Outlook: Stable

CRISIL Ratings believes Kotak Life will continue to receive strong financial and operational support from Kotak Mahindra Bank and benefit from the parent’s distribution channel.

Rating Sensitivity factors

Strategic importance to the Kotak group, ensuring strong financial and operational support from Kotak Mahindra Bank, and access to the vast distribution channel

 

Downward factors:

• Revision in rating on the parent, Kotak Mahindra Bank, resulting in similar action on Kotak Life
• Reduction in proportion of shareholding of Kotak Mahindra Bank to below 51%
• Reduction in the solvency margin to below 1.6x

About the Company

Kotak Life was formed as a joint venture between the Kotak group (Kotak Mahindra Bank being majority shareholder) and Old Mutual Fund PLC. The company commenced operations in 2001. During fiscal 2018, Kotak Mahindra Bank entered into a share purchase agreement dated April 27, 2017, to purchase the entire 26% equity stake held by Old Mutual PLC in the erstwhile Kotak Mahindra Old Mutual Life Insurance Ltd. The transaction was completed on October 13, 2017.

 

The Kotak group now holds 100% of the equity shareholding in Kotak Life. 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. Over the years, Kotak Life has gradually increased branches and presently, almost all the bank branches of Kotak Mahindra Bank are covered under this channel. The company benefits from the expertise of the Kotak group in the wealth management space. Insurance products of Kotak Life are cross sold to several high-networth individual customers of Kotak Mahindra Bank. The company has a balanced product mix and is constantly trying to increase share of the non-Par business in its overall portfolio.

Key Financial Indicators

As on / for the period		Nine months of fiscal 2022	Fiscal 2021	Fiscal 2020	Fiscal 2019
Gross direct premium	Rs crore	7,686	11,100	10,340	8168
Networth	Rs crore	4,122	4,045	3,353	2745
Profit after tax	Rs crore	180	692	608	507
13th month persistency	%	82.2	89.6	84.9	87.3
61st month persistency	%	51.5	58.0	59.7	60.4
Solvency margin	Times	2.66	2.9	2.9	3.02

 

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
NA	NA	NA	NA	NA	NA	NA	NA