Detailed Rationale

CRISIL Ratings has reaffirmed its ‘CRISIL AAA/Stable’ corporate credit rating on Kotak Mahindra Life Insurance Company Ltd (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 robust support provided by Kotak Mahindra Bank Ltd (Kotak Mahindra Bank; ‘CRISIL AAA/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 ranging 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 the adequate capital position maintained by the company. These strengths are partially offset by likely exposure to challenges in sustaining profitability amidst rising competition.

 

In terms of business performance, overall gross premiums for Kotak Life rose 18% year-on-year to Rs 15,320 crore in fiscal 2023 from Rs 13,015 crore in fiscal 2022. Kotak Life has maintained a fairly balanced product mix with PAR (participating) products at 26%, non-PAR (non-participating) products at 52%, and ULIPs (unit-linked insurance plans) at 22% in fiscal 2023. Owing to market conditions prevailing in the medium term, share of non-PAR products remained high at 53% in the first nine months of fiscal 2024. In terms of Persistency ratio, there has been an improvement in 13th month persistency ratio to 86.0% in first nine months of fiscal 2024 as compared to 85.2% in fiscal 2023. The company has maintained 13th month persistency ratio over 80% consistently during the last ten years. Similar trend is seen in the 61st month persistency ratio which stood at 53.3% during the first nine months fiscal 2024 as compared to 50.5% in fiscal 2023.

 

In terms of earnings profile, In fiscal 2023, the company reported improved profit of Rs 1,053 crore as compared to Rs 425 crore in fiscal 2022 translating into return on equity (ROE) of 22% in fiscal 2023 as compared to 10% in fiscal 2022. However, in nine months ended fiscal 2024, the company reported a lower profit after tax (PAT) of Rs 628 crore and ROE of 15% (annualised). During the first nine months fiscal 2024, Kotak Life maintained strong solvency ratio of 266% (or 2.66 times) against the required 150%.

Analytical Approach

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, he was Managing Director of Kotak Mahindra Bank, up to December 31, 2023, is Non-Executive Director on the Board of Kotak Life. Further, Mr. Gaurang Shah, who heads the Asset Management, Insurance ( Life and General) and International business of the Kotak Mahindra group, is Non-Executive Director on the Board of Kotak Life.

 

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. Its market share (in terms of new business premium) among private life insurers improved to 5.5% in fiscal 2023 from 5.3% in fiscal 2022. Kotak Life has maintained a fairly balanced product mix with PAR products at 26%, non-PAR products at 52%, and ULIPs at 22% in fiscal 2023. Owing to market conditions prevailing in the medium term, share of non-PAR products remained high at 53% in the first nine months of fiscal 2024. 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 and being 2.8 times in fiscal 2023. In accordance with growth, the solvency position remained comfortable at 2.66 times as of December 2023. The solvency margin has remained healthy driven by steady internal accrual, with no capital infusion by shareholders over the past decade. Absolute networth was Rs 5,754 crore as on December 31, 2023 (Rs 5,327 crore as on March 31, 2023). The Kotak Mahindra group holds 100% of the equity shareholding in Kotak Life.

 

Kotak Life reported embedded value of Rs 12,511 crore as on March 31, 2023 (Rs 10,679 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. A 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 1.11 lakh agents (individuals, corporates and brokers), which the management plans to enhance. Bancassurance accounted for 31% of the new business premium in the nine months of fiscal 2024 and the company enjoys a direct tie-up with Kotak Mahindra Bank, which accounts for around 90% of the bancassurance business. Moreover, the company has also tied up with various other banks for distribution of insurance products.

 

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 must 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 the ability to generate underwriting profits and manage the investment portfolio so as to maximise returns will determine the profitability of insurers over the long term.

Liquidity: Superior

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, 2023, government securities (G-secs) formed 74.3% of debt investments. Apart from G-Secs, majority of the portfolio comprises investments in AA or above rated securities. As on December 31, 2023, investments in government (G-Secs and state) and ‘AAA’-rated securities (within non-ULIP portfolio) constituted 99.3% of the portfolio (around Rs 41,894 crore out of Rs 42,209 crore). Further, the investment team has internal limits for taking decisions by CIO as per Investment Mandate which is approved in Investment Committee meeting. The investment decisions beyond CIO limit is taken by investment committee which comprises of senior management personnel that includes MD, CFO, and Appointed Actuary. 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 1.6times

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.

Any other information: Not Applicable