Detailed Rationale

CRISIL Ratings has reaffirmed its ‘CRISIL AA+/Stable’ rating on the subordinated debt issuance (also known as hybrid instrument) of Aditya Birla Sun Life Insurance Company Limited (ABSLI).

 

The rating continues to centrally factor in the expectation that ABSLI will maintain a sufficient level of cushion in its solvency ratio over and above regulatory stipulation, primarily backed by the company’s adequate capitalization, and further aided by strong support from its majority owner, Aditya Birla Capital Limited (ABCL, rated ‘CRISIL A1+’). ABCL is also supportive of ABSLI’s stance of maintaining a high level of cushion in its solvency ratio above the regulatory requirement.

 

The rating is driven by ABSLI’s strategic importance to, and expectation of support, if required, from its parent, ABCL both on an ongoing basis and in the event of distress. ABSLI’s established market position within life insurance industry, its sound investment portfolio and adequate capital position, are also centrally factored into the rating. These rating strengths are partially offset by high reliance on direct channel for sourcing business, moderate profitability metrics and, inherent challenges that the company shall face with respect to growth and improving its profitability amidst rising competition.

 

ABSLI's strong linkage with ABCL is evidenced by the latter’s majority ownership in (currently holds 50.9%), and a shared brand name with, the former. The foreign promoter – Sun Life Financial Inc, Canada, has also been supportive to ABSLI. The strong linkage implies a moral obligation on ABCL to support ABSLI in the event of exigency. ABCL’s presence in the life insurance sector is through ABSLI, exentuates the formers product suite, thereby making ABLSI critical for the group. Additionally, there is adequate board representation and oversight by ABCL, in ABSLI.

 

ABSLI is the eighth largest private life insurer in the country with a market share of about 1.5% (based on total premium income for the nine months of fiscal 2022) and, has been among the top players in the industry for many years now. During fiscal 2022, the company’s total premium (new business and renewals) grew at a healthy 24% as compared to 22% for the previous fiscal and 7% for fiscal 2020. This growth was observed both in new business premiums (24% growth over last year) and renewal business premiums (24% growth over last year). The company continues to benefit from its extensive industry expertise which it has acquired over its operational history of two decades.

 

The rating also takes into account the company’s adequate capital position and buffer in its solvency ratio over the regulatory stipulation. ABSLI has maintained an average solvency ratio of about 1.9 times over the last 3 fiscals, and this metric stood at 1.88 times on March 31, 2022. On a steady state basis, CRISIL Ratings expects ABSLI to maintain adequate buffer in its solvency ratio over the regulatory requirement of 1.5 times. The rating is also supported by the sound quality of investment portfolio which is driven by stringent regulatory norms.

 

The above mentioned strengths are partially offset by company’s high reliance on direct channels for sourcing, moderate earnings profile and inherent susceptibility to growth and profitability challenges – amidst intense competition.

Analytical Approach

CRISIL Ratings has first arrived at the corporate credit rating of ABSLI, which is an indication of the company’s ability to meet policyholders’ obligations. For this, CRISIL Ratings has factored in the support ABSLI receives from its parent companies, in addition to the assessment of business, financial, and management risk profiles of ABSLI. The subordinated debt instrument is then tested for additional risk factors to determine whether its rating should be same as, or lower than, the corporate credit rating. The extent of cushion that ABSLI intends to maintain -- over and above the regulatory stipulation -- on an ongoing basis, is taken into consideration to arrive at the rating on subordinated debt instrument. The stance of ABCL and ABG Group on the level of cushion ABSLI would maintain in solvency ratio has also been factored in.

Key Rating Drivers & Detailed Description

Strengths:

Strategic importance to, and expectation of strong support from, parent ABCL

ABSLI is strategically important to ABCL from which it derives significant managerial, funding and branding support. This is reflected in representation of the directors of the parent on the company’s board (also, both ABSLI and ABCL have the same chairman) and high involvement of the parent in ABSLI’s functioning. At the time of its inception, ABSLI received Rs 967 crore as capital from ABCL and since then, the company’s networth has been supported by its internal accretions. At 51.0%, parent is expected to retain majority stake in the company. Strategic importance to ABCL is underpinned by the established market position of ABSLI among private sector life insurance companies and expectation of gradual improvement in market share and overall profitability over the medium term. Furthermore, being the life insurance arm of the parent, the company sells a variety of customised policies to the clients of ABCL and the ABG, which makes it a key element of the latter's bouquet of financial service offerings.

 

Adequate capitalisation and sufficient cushion in solvency over regulatory minimum

Capitalisation has been adequate in relation to the nature and scale of business. On March 31, 2022, net worth was Rs 2502 crore (excluding the balance in fair value change account) which, apart from the financial support from parent companies, has been backed by the internal accrual of the company.

 

Average solvency ratio has been over 1.9 times over the last 6-8 fiscals and is likely to be above 1.70 times on a steady state basis, which aligns with the stance of ABCL. On March 31, 2022, ABSLI had a solvency ratio of 1.88 times, which includes the subordinated debt that was issued by the company last year.

 

Considering that the current product portfolio of the company is focused on the traditional term products where the policyholders’ risks are limited, the quantum of capital required and maintained by ABSLI has been higher. However, as it migrates towards a more balanced product mix across ULIPs (unit-linked insurance plans) and traditional products, capital requirement is not expected to increase materially alongside growth. Even in a stress case scenario comprising concurrent shocks to both equity prices and bond yields, the solvency ratio is expected to stay above the minimum level of 150%.

 

Established market position in the Indian Life Insurance Sector as the eighth largest private player, ability to grow at par with peers remains a monitorable.

Since its inception in fiscal 2000, ABSLI has been among the top 10 life insurers in the country. Until fiscal 2016, the company had a market share of about 1.8% which made it the fifth-largest private life insurer in the country. However, for the following years until fiscal 2020, growth was subdued.

 

In terms of business strategy, the company started migrating from a highly ULIP-focused book in 2016 to traditional products. The revised product strategy comprising over 40% share of non-par segment took 2-3 years to stabilize when the company’s growth remained muted at 3-7%, against an industry growth of 10-14% over the same period. Upon attaining stability, the company grew at a robust 27% in fiscal 2019. However, this momentum was disrupted by the pandemic in fiscal 2020 when the annual growth in premium declined to 7%. Thereafter, driven by favorable demand prospects and revision in pricing of term products, the company’s gross premiums grew by 22% and 24% for fiscal 2021 and 2022, respectively. Basis its market share of 2.8% in terms of annual premium equivalent (APE) and 1.8% for new business premium, at gross premium level ABSLI was the eighth-largest private life insurer for fiscal 2022.

 

Sound investment portfolio supported by stringent regulations

The company follows a strict investment policy, in addition to the regulations prescribed by the Insurance Regulatory and Development Authority. As on March 31, 2022, 37.8% of the total investments was in G-Secs (majorly in Central G-Secs). Of the debt securities, 99% were rated AA and above. The company has made provisions for the sub-standard and non-performing assets on its books and does not anticipate any further material provisioning requirement as of now. Equity investments form less than 26% of the investment book and are mostly in blue chips.

 

Weakness:

High reliance on direct sourcing channel as an avenue for sourcing business

While ABSLI has been attempting to diversify its distribution base, it still relies majorly on the proprietary channel (direct and individual agency) that contributed 68% to the total new business premium (individual and group) during nine months ended December 31, 2021. Of this, the share of new business premium sourced from individual agency channel was 16% whereas contribution from direct channel stood at 52% for nine months ended December 31, 2021. The share of proprietary channel in the total premium, however, has declined gradually from 92.0% in fiscal 2016. Bancassurance, from 3% in fiscal 2016, has emerged to become the second largest contributor of new business premium (individual and group) written during nine months ended December 31, 2021 with 25% share. As the company continues to strengthen its bancassurance channel, the share of business from this avenue is expected to grow and will lead to economies of scale.

 

Moderate profitability metrics

Operating expenses, though improving, have been higher than most peers owing to greater dependence on direct distribution channel for sourcing business. Another factor to higher operating expenses is a relatively lower share of renewal premium in the total premium earned during any fiscal. For new business premium, operating expense ratio of the company has remained within 27-35%, whereas for overall premiums the ratio has been 13-16% in the last 3-4 fiscals. Resultantly, earnings profile has been modest. With shift of focus from ULIPs to traditional products fiscal 2016 onwards, investment income from ULIPs – which contributed significantly to the overall accrual – also declined sharply and has remained low since. There has been revival fiscal 2021 onwards, but the ability of the company to sustain income from investments at this level remains to be seen. Apart from investment income, net premium income was also almost static over the last few fiscals given the revision in business strategy. However, with stablisation – the net premium income has also increased over fiscal 2021 and 2022. Pre-tax returns (on average total assets) have remained around 0.3% and returns on networth, below 10% for the last three fiscals. However, Gross Value of New Business (VNB) margins have been comfortable at about 35% to 40%, indicating greater potential of new business written. For fiscal 2022, In anticipation of rise in term product prices, ability to improve returns alongside growth and competition remains key.

 

Ability to sustain competitive position and profitability amidst changing regulatory environment and growing competition remains to be seen

The regulatory changes in unit-linked products in 2010 and traditional products in 2013, though beneficial, had a far-reaching impact on the product design, marketing strategy, and profitability of all the players, including ABSLI. Moreover, with the entry of many new players over the past decade, competition has increased multifold. Top 2-3 players have had the early mover advantage and captured a larger market share whereas others are continuously focusing on innovating products and increasing persistency to get a better market share. Ability to generate adequate profits while growing in sync with the industry in the long term will be a key monitorable.

Liquidity: Strong

Liquidity position of ABSLI remains strong. As on March 31, 2022, over 37.8% of the company’s total investments were in the form of GSecs. Of its total debt investments as on date, over 99% were rated AA or above or were sovereign in nature. Since life insurance business is inherently granular and relatively stable, CRISIL Ratings expects liquidity to remain comfortable on an on-going basis.

Outlook: Stable

CRISIL Ratings believes that ABSLI will continue to derive strong support and oversight from ABCL over the medium term, both on an ongoing basis and in the event of a financial distress, and that it will maintain adequate level of cushion in its solvency ratio over and above regulatory minimum on a steady-state basis.

Rating Sensitivity Factors

Upward Factors

•          Revision in CRISIL Ratings’ view on the parent - ABCL

 

Downward Factors

•          A downward revision in CRISIL Ratings’ view on ABCL or/and, a sizeable reduction in the extent of ownership in, or strategic importance of, ABSLI to ABCL.

•          Significant reduction in cushion in the solvency ratio taking it below 170%

About the Company

Aditya Birla Sun Life Insurance Company Limited (ABSLI), is a life insurance subsidiary of Aditya Birla Capital Ltd (ABCL). ABSLI was incorporated on August 4th, 2000 and commenced operations on January 17th, 2001. ABSLI is a 51:49 a joint venture between the Aditya Birla Group and Sun Life Financial Inc., a leading international financial services organization in Canada. Formerly known as Birla Sun Life Insurance Company Limited, ABSLI offers a range of products across the customer’s life cycle, including children future plans, wealth protection plans, retirement and pension solutions, health plans, traditional term plans and Unit Linked Insurance Plans (“ULIPs”).

Any other information: Not applicable