Rating Rationale
October 22, 2020 | Mumbai
ICICI Prudential Life Insurance Company Limited
'CRISIL AAA/Stable' assigned to Subordinated debt 
 
Rating Action
Rs.1200 Crore Subordinated Debt CRISIL AAA/Stable (Assigned)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has assigned its 'CRISIL AAA/Stable' rating on the Rs 1200 crore subordinated debt of ICICI Prudential Life Insurance Company Limited (ICICI Pru Life). On October 16, 2020, ICICI Pru Life received approval from the Insurance Regulatory and Development Authority of India ('IRDAI') for issuance of subordinated debt. The proposed issuance is pursuant to the provisions of IRDAI (Other Forms of Capital) Regulations, 2015.
 
The rating factors 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, ICICI Pru Life's established market position within life insurance industry, well diversified distribution channels, healthy profitability and persistency metrics, and adequate capital position. These rating strengths are partially offset by high proportion of ULIP (unit-linked insurance plans) business exposing towards susceptibility in market movements, ability to grow 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's strong linkage with ICICI Bank driven by majority ownership (currently holds 51.37%) and a shared brand name is one of its key strength. The foreign promoter Prudential Corporation Holdings Limited held stake of 22.11% as on June 30, 2020. The strong linkage implies a moral obligation on ICICI Bank's part to support ICICI Pru Life in the event of exigency. 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. Additionally, ICICI Bank and ICICI Pru Life have one common member on board. Additionally, two members on the board of ICICI Pru Life are from ICICI Bank's senior management team. While, from day to day operations perspective, ICICI Pru Life is managed independently and is a self-sustaining entity. The chairman of ICICI Pru is also independent director. 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 rating also factors in established market position of ICICI Prudential Life's within life insurance industry. ICICI Pru Life has been among the top 3 players within the private sector life insurance space aided by its strong brand and distribution capabilities. ICICI Pru Life's private market share in terms of new business premiums stood at 15.3% during fiscal 2020 as against 14.1% during fiscal 2019. In terms of overall premiums (including renewal premium) it stood at around 5.9% as on March 31, 2020 (around 6.1% as on March 31, 2019). Further, within private insurers, it continued to maintain healthy market share of around 17.3% during fiscal 2020 (18.1% during fiscal 2019). It also continues to benefit from its extensive industry expertise, as it has been in operation for nearly two decades and has a presence across all the states and union territories in India.
 
The rating also takes into account the adequate capital position reflected in the healthy solvency margin. ICICI Pru Life has maintained solvency margin in the range of 194%-320% during last 5 fiscals (205% as on June 30, 2020) which is comfortably above the regulatory requirement of 150%. The solvency margin has been maintained at above 180% entirely through internal accruals, without any capital infusion from the shareholders, over the last nine years. CRISIL expects the solvency margin to be maintained at similar levels over the medium term.
 
The rating also factors in healthy persistency and profitability metrics maintained by ICICI Pru Life.The 13th month persistency based on individual premium stood at around 87% in fiscal 2020 as compared to 86% in fiscal 2019. However, in Q1 FY2021, the persistency ratio has been slightly lower given the uncertain economic environment for the quarter. The 13th month persistency in Q1 FY2021 stood at 84%.In terms of profitability, the return on equity has consistently been above 15% during last five fiscals. Additionally, the value of new business (VNB) margin has also steadily increased over the years and stood at 22% during fiscal 2020 improving from 17% during fiscal 2019.
 
The rating further factors in well diversified distribution channels. 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 exclusive direct tie-up with parent i.e. ICICI Bank. Around 85% of the bancassurance business comes from ICICI Bank, which predominantly sells protection and ULIP policies. Apart from ICICI Bank, the company has tie-up with 14 other banks including Standard Chartered Bank, IDFC First 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. For distribution of such products, the company is expected to focus on generating more business through its non-bancassurance channels. As on June 30, 2020, ICICI Pru Life's distribution mix, in terms of APE (annual premium equivalent), was bancassurance accounting for 40%, 25% by agency, 12% by direct, 9% by partnership distribution and 15% by group.
 
In the aftermath of covid-19 break-out, a number of regulatory relaxations had 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 had been announced by IRDAI. Furthermore, the restrictions on physical movements imposed by the government during the different phases of lockdown had also affected the growth in new business for the life insurance industry.
 
For first quarter of fiscal 2021, the overall new business premium (NBP) for the private sector players de-grew by 19.2% as compared to similar period last year. The industry faced maximum challenges during months April and May 2020 wherein the operations were affected due to lockdown and restrictions on field operations. Nevertheless, with the lifting of lockdown restrictions taking place in a calibrated manner and insurance companies expanding digital mode of acquisition, resulted in gradual growth in the new premiums. As of September 2020, the new business premiums of private players grew by around 2.6% as compared to similar period of last year. CRISIL believes that the manner and extent of resumption in economic activity and operations will continue to determine the growth outlook for the second half of fiscal 2021. Furthermore, at a structural level, the pandemic has increased awareness for the need for life insurance products - especially protection segment. This should help the industry increase penetration over the medium term.

Analytical Approach

For arriving at the rating, CRISIL has first assessed the corporate credit rating of ICICI Pru Life. CRISIL 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 Life 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 is committed to and capable of, infusing capital.  As on date, ICICI Pru Life doesn't have any debt obligation on its balance sheet.
 
* Established market position within life insurance industry
ICICI Pru Life is expected to maintain its market position as one of the top players within life insurance industry. ICICI Pru Life has maintained its market position and consistently improved its market share in each fiscal year. ICICI Pru Life's private market share in terms of new business premiums stood at 15.3% during fiscal 2020 as against 14.1% during fiscal 2019. In terms of overall premiums (including renewal premium) it stood at around 5.9% as on March 31, 2020 (around 6.1% as on March 31, 2019). Further, within private insurers, it continued to maintain healthy market share of around 17.3% during fiscal 2020 (18.1% during fiscal 2019). 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 Q1 FY2021, with ULIPs accounting for 44%, conventional products for 50% and group for 6% of annual premium equivalent (APE). The company also continued its focus on protection business and non-linked savings, wherein its contribution to APE increased to 50% in Q1- FY2021. In terms of total new business premium received, the protection segment reported CAGR (compound annual growth rate) of 67.3% over past 4 years ending fiscal 2020.
 
* Well diversified distribution channels
ICICI Pru Life offers its customers access to its products and services through an extensive muti channel sales network across India that includes bancassuarance, 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 bancassuarance, the company enjoys direct tie-up with parent i.e. ICICI Bank. Around 85% of the bancassuarance business comes from ICICI Bank which predominantly sells protection and ULIP policies. Apart from ICICI Bank, the company has tie-up with 14 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. As a result, on incremental basis, the proportion of business generated from bancassurance channel has witnessed declining trajectory. For distribution of non-linked or traditional products, the company is expected to focus on generating more business through its non-bancassurance channels. As on June 30, 2020, ICICI Pru Life's distribution mix, in terms of APE, was bancassurance accounting for 40%, 25% by agency, 12% by direct, 9% by partnership distribution and 15% by group. During recent period, the premiums generated from bancassurance channel has declined mainly on account of deterioration in ULIP heavy sale due to unfavorable market conditions. 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 profitability and persistency metrics
In terms of profitability, ICICI Pru Life has been generating healthy accruals which has also supported its capital position. The return on equity has consistently been above 15% during last 5 fiscals. Additionally, the value of new business (VNB) margin has also remained healthy at 22% during fiscal 2020 improving steadily over the years from 17% during fiscal 2018. In absolute terms, the VNB has improved to around Rs 1,605 crore during fiscal 2020 from Rs 412 crore in fiscal 2016 (representing CAGR growth of around 41%). Additionally, the company has also shown healthy growth in its Embedded Value to Rs 23,030 crore as on March 31, 2020 as against Rs 21,623 crore as on March 31, 2019. ICICI Pru Life has maintained its persistency ratios across buckets during last 4-5 years. During fiscal 2020, 13th and 49th month persistency ratios on overall premium basis stood at 86.8% and 67.3% respectively (86.2% and 65.0% during fiscal 2019). During Q1 fiscal 2021, the persistency ratios for first 2 months stood at 84.1% (13th month) and 66.2% (49th month) based on retail (including single premium). Persistency has been resilient with the ratios remaining stable across even though the equity markets continued to be volatile during first 2 months of fiscal 2021. Improvement in persistency primarily driven by focus on better quality of 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.
 
* 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 7,829 crore as on June 30, 2020 and Rs 7,541 crore as on March 31, 2020 (Rs 6,876 crore as on March 31, 2019). 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%.
 
ICICI Pru Life reported embedded value of Rs 23,030 crore as on March 31, 2020. The ratio of embedded value to networth stood at close to 3 times as on March 31, 2020 which was in line with its 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
* High proportion of ULIP business exposes towards susceptibility in market movements
ULIP remains dominant business segment as compared to participating and non-participating products. As on June 30, 2020, overall premium share of ULIP product stood at 70%. While in terms of new business premiums, the share of ULIP stood at 50% as on same date. This makes the company prone to cyclicality of the stock markets, as retail investors generally purchase ULIPs during stock market booms and vice-versa. This could impact new business premiums as well as margins. Additionally, the company has a low share of non-participating business, which is a high-margin segment. However, the share of ULIP in total APE has declined to 43.6% in Q1 fiscal 2021 as compared to 64.7% in FY 20 due to subdued market performance. Furthermore, CRISIL notes that  management has incrementally 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 sustain the business growth and 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.
 
* Ability to grow in non-linked segment
During fiscal 2020, proportion of non-linked products on new business premiums improved to 45% as compared to 21% in FY 2016-17 whereas on total APE basis, non-linked segment improved to 32% of total APE in fiscal 2020 as compared to 14% in fiscal 2017. This has supported healthy expansion in new business margins from 10% in FY 2017 to 22% in FY 2020. The management expects the ULIP business to revive, while the mix of non-linked segment to improve further. However, as historically ICICI Pru Life has been market leader in ULIPs, their ability to grow in non-linked segment on sustained basis will be a 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 47,302 crore as on March 31, 2020; of which 95.2% were in sovereign instruments and 'AAA' rated instruments. The major outflow for the company was in the form of claims & benefits settlement and operating expenses which totally stood at around Rs 23,809 crore during fiscal 2020. Since life insurance inherently is highly granular and stable business, CRISIL expects liquidity to remain comfortable on an on-going basis.
 

Outlook: Stable

CRISIL 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 Prudential Life Insurance Company Limited is promoted by ICICI Bank Ltd and Prudential Corporation Holdings Ltd, a part of Prudential Group. ICICI Bank and Prudential held 51.37% and 22.11%, respectively, in ICICI Pru Life as on June 30, 2020. 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   Q1 FY21 2020 2019
Gross direct premium/Gross written premium Rs crore 5,747 33,431 30,930
Profit after tax Rs crore 288 1,069 1,141
Persistency ratio (13th month) % 84% 87% 86%
Persistency ratio (61st month) % 61% 59% 58%
Solvency ratio % 205 194 215
 

Any other information: Not applicable

Note on complexity levels of the rated instrument:
CRISIL complexity levels are assigned to various types of financial instruments and are included (where applicable) in the Annexure -- Details of Instrument in this Rating Rationale. For more details on the CRISIL complexity levels, please visit www.crisil.com/complexity-levels.
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 Subordinated Debt NA NA NA 1200 Complex CRISIL AAA/Stable
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
Subordinated Debt  LT  1200.00
22-10-20  		CRISIL AAA/Stable    --    --    --    --  -- 
All amounts are in Rs.Cr.
Links to related criteria
CRISILs Bank Loan Ratings - process, scale and default recognition
Rating Criteria for Life Insurance Companies

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