Detailed Rationale

CRISIL Ratings has reaffirmed its ‘CRISIL AAA/Stable’ rating on the Rs 1200 crore subordinated debt of ICICI Prudential Life Insurance Company Limited (ICICI Pru Life).

 

The rating continues to factor in the strategic importance to, and expectation of support, if required, from its parent, ICICI Bank Limited (ICICI Bank; rated 'CRISIL AAA/CRISIL AA+/Stable') both on an ongoing basis and in the event of distress; the established market position of ICICI Pru Life within life insurance industry, well diversified distribution channels, healthy persistency metrics with stable profitability, and adequate capital position. These rating strengths are partially offset by an ability to sustain a growth in non-linked segment, and challenges that ICICI Pru Life is expected to face in sustaining its profitability due to rising competition.

 

ICICI Pru Life is managed independently and is a self-sustaining entity; strong linkage with ICICI Bank driven by majority ownership (currently holds 51.3%) and a shared brand name adds to its strength. ICICI Bank’s presence in the life insurance sector is through ICICI Pru Life, which is, therefore, one of the critical entities for the bank. The strong linkage implies a moral obligation on ICICI Bank’s part to support ICICI Pru Life in the event of exigency. ICICI Bank has provided ICICI Pru Life access to its network of branches and for selling insurance products to their customers on an exclusive basis. The ICICI brand and the bank’s wide distribution network, particularly among salaried and affluent individuals, gives ICICI Pru Life competitive advantage in terms of acquiring new business. The foreign promoter Prudential Corporation Holdings Limited held stake of 22.1% as on September 30, 2021.

 

In the light of second wave of pandemic, ICICI Pru Life had witnessed elevated claims as compared to first wave. During Q1 fiscal 2022, the company honored claims of Rs 500 crore (as against Rs 198 crore fiscal 2021). As on June 30, 2021, the company held reserves of Rs 498 crore towards COVID claims (Rs 332 crore till fiscal 2021 and Rs 166 crore during Q1 fiscal 2022). However, in Q2 fiscal 2022, the company witnessed steady reduction in claims due to Covid. During second quarter, the company honored claims of Rs 362 crore (net of reinsurance). This took total Covid-19 claims (net of insurance) to Rs 862 crore during first half of fiscal 2022. In terms of provisions, the company held reserves of Rs 412 crore for the potential Covid-19 claims including IBNR (incurred but not reported) as of September 2021. CRISIL Ratings notes the surge in claims has largely been due to second wave of Covid-19. With the situation still evolving, CRISIL Ratings will continue to monitor level of claims that company may receive in coming 2-3 quarters and its resultant impact on overall credit profile of the company.  

Analytical Approach

For arriving at the rating, CRISIL Ratings has first assessed the corporate credit rating of ICICI Pru. CRISIL Ratings has factored in ICICI Pru Life’s business, financial, and management risk profile and the company’s strategic importance to, and expectation of strong support from, ICICI Bank Limited (ICICI Bank; rated ‘CRISIL AAA/CRISIL AA+/Stable) for arriving at the corporate credit rating. Additionally, the extent of cushion that ICICI Pru Life intends to maintain in the solvency ratio over and above the regulatory stipulation on a steady state basis is taken into consideration for arriving at the rating on the subordinated debt instrument.

Key Rating Drivers & Detailed Description

Strengths:

• Strategic importance to, and expectation of support from ICICI Bank

ICICI Pru has a strong linkage with ICICI Bank which is reflected in a shared brand name and majority ownership. ICICI Bank's presence in the life insurance sector is through ICICI Pru Life, which is, therefore, one of the critical subsidiaries for ICICI Bank. Established brand name and market reputation of ICICI Bank has enabled the company to build its own brand equity, which assists in selling to customers of all segments. ICICI Bank and ICICI Pru Life have a common member at board level. Additionally, two members on the board of ICICI Pru Life are from ICICI Bank’s senior management team. In addition, ICICI Bank also acts as a corporate agent for ICICI Pru Life, which allows ICICI Pru Life to access ICICI Bank's vast network of bank branches and customers for selling its insurance products. ICICI Pru Life being a listed entity, has ability to source capital from external investors and has the financial flexibility to raise capital whenever necessary. Further, ICICI Bank will continue to support the growth plans of ICICI Pru Life and will contribute to any incremental capital requirement.

 

• Established market position within life insurance industry

ICICI Pru Life is expected to maintain its market position as one of the largest players within life insurance industry. ICICI Pru Life's market share in terms of new business premiums (within private players) stood at 13.8% during fiscal 2021 (15.3% during fiscal 2020). In terms of overall premiums (including renewal premium), ICICI Pru Life’s market share stood at around 5.6% as on March 31, 2021 (around 5.9% as on March 31, 2020). During Q1 fiscal 2022, the company’s market share improved within new business (within private players) to 14.9% (11.7% during Q1 fiscal 2021). The company has been in operation since 2001 and has a presence across all the states in the country. ICICI Pru Life has been able to diversify its sourcing channels over the years which has led to strong business growth. Further, strong brand image and direct access to large customer base of ICICI Bank, provides critical support to the business growth of ICICI Pru Life. Furthermore, low insurance penetration and other supportive macro factors are expected to drive growth.

 

With the intent of maintaining customer centric, balanced and profitable suite, the management is focused to maintain a balanced portfolio mix with focus on sourcing through multiple channels. This is reflected in the product mix for H1 fiscal 2022, with ULIPs accounting for 48.2%, conventional products for 47% and group for 4.8% of annual premium equivalent (APE). The company also continued its focus on protection business and non-linked savings; its contribution to APE stood at 42.6% during H1 fiscal 2022 (43.7% during fiscal 2021).

 

• Well diversified distribution channels

ICICI Pru Life offers its customers access to its products and services through an extensive multi-channel sales network across India that includes bancassurance, agency and direct channels (online, etc.). ICICI Pru Life has diverse mix of sourcing channels with, the proportion of business from bancassurance channel has been the highest. For bancassurance, the company enjoys direct tie-up with parent i.e. ICICI Bank. Out of the APE distribution mix of 39% of Bancassurance, share of roughly 28% is by ICICI Bank and all the other banks constituted the balance share. Apart from ICICI Bank, the company has tie-up with 22 other banks including Standard Chartered Bank, IDFC Bank and few other banks. Nevertheless, during last 1-2 years, the company has been transitioning and increasing its focus towards non-linked or traditional segments. During FY2021, the non-linked or traditional products were majorly sourced through agency and partnership distribution channels. As on September 30, 2021, ICICI Pru Life’s distribution mix (in terms of APE) was bancassurance 39%, agency accounted for 24%, direct acquisition 13%, 8% by partnership distribution and 15% by group. ICICI Pru Life, nevertheless, is expected to focus on increasing its non-linked business which will be driven mainly through agency and direct channels. 

 

• Healthy persistency metrics and stable profitability

At March 2021, 13th and 49th month persistency ratios (retail excluding single premium) stood at 84.8% and 63.0% respectively. At September 2021, the persistency ratios improved and stood at 85.1% (13th month) and 63.2% (49th month). Improvement in persistency is primarily driven by focus on better quality business and leveraging technological capabilities to provide a superior customer experience. The healthy persistency also reflects the company's ability to hold on to its policyholders for longer duration. ICICI Pru Life has maintained its persistency ratios across buckets during last 4-5 years. In terms of profitability, ICICI Pru Life has been generating healthy accruals which has also supported its capital position. The return on equity that had been consistently been above 12% during last 5 fiscals. The value of new business (VNB) margin has remained healthy at 25% during fiscal 2021 improving steadily over the years from 17% during fiscal 2018. In H1 fiscal 2022, the VNB margin further improved to 27%. In terms of absolute profitability, the company reported PAT of Rs 956 crore during fiscal 2021 (Rs 1067 crore during fiscal 2020). The profitability did suffer during first quarter fiscal 2022 due to higher than expected claims (due to Covid) and dividend pay-out, which resulted in company reporting loss of Rs 186 crore. However, the company recovered fairly well during second quarter fiscal 2022 wherein it reported PAT of Rs 445 crore (combined PAT of Rs 259 crore for first half fiscal 2022). 

 

• Adequate capital position

ICICI Pru Life maintains adequate capital position which is reflected in healthy solvency margin of over 190% maintained for last 10 years. The absolute net worth was Rs 8,518 crore as on September 30, 2021 and Rs 8,504 crore as on March 31, 2021 (Rs 7,541 crore as on March 31, 2020). While CRISIL expects capital support from ICICI Bank to be forthcoming if required; ICICI Pru Life has been maintaining its capital position through internal accruals, not necessitating any such support. Although, there has been no incremental capital infusion during last eleven years, ICICI Pru Life has maintained solvency margin of above 190%. The company’s solvency ratio as on September 30th, 2021 stood at 200% as compared to 217% for fiscal 2021.

 

In terms of embedded value (EV), the company has shown healthy growth in its EV which stood at Rs 29,106 crore as on March 31, 2021 as compared to Rs 23,030 crore as on March 31, 2020. EV further improved to Rs 30,203 crore as of September 30, 2021 (Rs 25,711 crore as of September 2020). The ratio of embedded value to networth stood at close to 4 times as on March 31, 2021 which was in line with similar sized peers. The embedded value can be seen as a representation of actual capital position since it includes the future profits that company is expected to receive from the business it has underwritten till valuation date. The steady increase in internal accruals enables the company to maintain capital position while achieving healthy business growth.

 

Weaknesses:

• Ability to sustain growth in non-linked segment

The company has taken measures to create a balanced mix between linked and non-linked segment.  During fiscal 2021, proportion of non-linked products on new business premiums improved to 54% as compared to 21% in fiscal 2017. On total APE basis, proportion of non-linked segment improved to 52% in fiscal 2021 as compared to 16% in fiscal 2017. Further, during first half fiscal 2022, proportion of non-linked segment was maintained at around 52% of APE. This has supported healthy expansion in new business margins to 25% in fiscal 2021 from 10% in fiscal 2017. Nevertheless, ULIP continued to account for decent share of 58% (of overall premiums) as on June 30, 2021 as compared to 63% in fiscal 2021.This continues to keep the company prone to cyclicality of the capital/stock markets to certain extent, given it is linked with economic environment and investor sentiments. CRISIL Ratings, however, notes that company over the past one and a half year have shifted their focus towards creating balance mix between linked and non-linked segments in order to reduce their dependency on ULIP and also improve bottom line profitability. Accordingly, the management is expected to focus more on mass customer segment along with the affluent segment. As historically, ICICI Pru Life has been market leader in ULIPs, their ability now to sustain growth in non-linked segment will be a key monitorable.

 

• Exposure to inherent competition in the insurance business, and associated challenges

Intense competition from other private life insurers can make it challenging for ICICI Pru Life to maintain its profitability. Moreover, with the dominant position of the Life Insurance Corporation of India in the domestic market, private players need to continuously innovate to attract customers, and also manage the returns expectation of policy holders. Further, with application of new tax regime, certain benefits that policyholder or policy buyers had (under section 80c of Income Tax Act) are no longer available. Therefore, its impact on the overall demand for life insurance products needs to monitored over the medium term. Hence, the company's ability to continue to gain on new business, generate profit and manage the investment portfolio to earn adequate returns, will determine its profitability and market position over the longer horizon.

Liquidity: Superior

ICICI Pru Life had debt investment book (within traditional segment) with market value of Rs 65,668 crore as on June 30, 2021; of which 97% were in sovereign instruments and 'AAA' rated instruments. The major outflow for the company was in the form of claims & benefits settlement including the higher than usual Covid claims and operating expenses which totally stood at around Rs 6,706 crore during quarter ended June 30, 2021. Since life insurance inherently is highly granular and stable business, CRISIL Rating expects liquidity to remain comfortable on an on-going basis.

Outlook: Stable

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

Rating Sensitivity factors

Downward Factors

• Revision in rating or outlook of the parent ICICI Bank, resulting in similar action on ICICI Pru Life
• Any change in strategic importance or inability of ICICI Bank to extend support to ICICI Pru Life
• Significant reduction in cushion in the solvency ratio taking it below 170%

About the Company

ICICI Pru Life, is promoted by ICICI Bank Ltd and Prudential Corporation Holdings Ltd, a part of Prudential Group. ICICI Bank and Prudential held 51.34% and 22.10%, respectively, in ICICI Pru Life as on June 30, 2021. ICICI Pru Life commenced its operations in Fiscal 2001 and was amongst India’s first private sector life insurance companies. The company offers its customers vast and diversified products in life insurance, health insurance and pension products services to cater to the specific needs of customers in different life stages, enabling them to meet their long term savings and protection needs.

Key Financial Indicators

As on / for the period ended		H1 fiscal 22	2021	2020
Gross direct premium/Gross written premium	Rs crore	16,403	35,733	33,431
Profit after tax	Rs crore	259	956	1,067
Persistency ratio (13th month)*	%	85.1%	84.8%	83.2%
Persistency ratio (49th month)*	%	63.2%	63.0%	64.6%
Solvency ratio	%	2.00	2.17	1.94

*IRDAI circular dated January 23, 2014, retail excluding single premium

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
INE726G08014	Subordinated Debt	6-Nov-20	6.85%	06-Nov-30	1200	Complex	CRISIL AAA/Stable