Detailed Rationale

CRISIL Ratings has reaffirmed its ‘CRISIL AA+/Stable’ rating to the subordinated debt issuances (also known as hybrid instrument) of PNB MetLife India Insurance Company Limited (PNB MetLife).

 

The rating centrally factors in the expectation that PNB MetLife will maintain sufficient cushion in its solvency ratio over and above regulatory stipulation, primarily backed by adequate capitalization and further aided by strong support from majority owner and and co-promoter, MetLife Inc. (MetLife, rated at 'A-/Stable/A2' by S&P Global Ratings [S&P Global]. MetLife is also supportive of PNB MetLife’s stance of maintaining a high level of cushion in its solvency ratio above the regulatory requirement.

 

The rating is driven by the strategic importance of PNB MetLife to, and expectation of need-based support from MetLife, its majority shareholder and co-promoter, both on an ongoing basis and in case of distress. Established market position of the company in the life insurance industry, sound investment portfolio and adequate capital position are also centrally factored into the rating. These strengths are partially offset by modest profitability metrics constrained by high, though reducing, operating expenses and inherent challenges in maintaining growth and improving profitability amid rising competition.

 

In line with its initial plan, MetLife has increased its shareholding in the company from ~32% to ~47% stake – which reflects the strategic importance of PNB MetLife to MetLife. Considering the regulation around foreign direct investment (FDI) in the Indian insurance sector (maximum stake of 74%), MetLife can further increase its stake to 72% in PNB MetLife – subject to the shareholders’ agreement. The company also derives its brand name, technical know-how relating to life insurance business and managerial oversight from MetLife. By virtue of MetLife’s strong position and experience in the global life insurance market, PNB MetLife benefits significantly from this association. In return, presence of PNB MetLife augments the product suit and geographical presence of MetLife, thereby making it critical for the former’s consolidated position and future scope of expansion. Additionally, MetLife has adequate board representation in PNB MetLife and also oversees the latter’s operations.

 

Punjab National Bank, the second largest bank in India, has been a shareholder of PNB MetLife since 2013. It provides a vast access of over 10,000 branches for PNB MetLife to distribute its products. It also has board representation with four seats and through the Board of Directors, oversees PNB MetLife’s operations.

 

PNB MetLife is the ninth-largest private life insurer in the country with a market share of about 1.0% (based on total premium income for fiscal 2022) and has been among the top players in the industry for many years now. During fiscal 2022, the company’s total (gross) premium (new business and renewals) grew at 22% compared to 10% in the previous fiscal. A larger proportion of this growth was contributed by new business premiums which grew at 24% during the year whereas renewal premiums grew at 21%. The growth in new business premiums was propelled by increased awareness and requirement for life insurance products following Covid-19. Upward revision in pricing of group policies also contributed. On September 30, 2022, the 13th and 61st month persistency ratio stood at 82% and 46%, respectively.

 

For fiscal 2022, the company reported a net loss of Rs 71 crore owing to surge in frequency of claims reported after the second wave of the pandemic. However, as the instances of pandemic cases declined – profitability also corrected. For H1 fiscal 2023 – the company reported a net profit of Rs 40 crore.

 

The rating also considers adequate capital position and buffer in solvency ratio over the regulatory stipulation. Average solvency ratio has been about 1.94 times over the last 10-12 quarters and was 1.98 times as on September 30, 2022. On a steady state basis, the company is expected to maintain adequate buffer in solvency ratio over the regulatory requirement of 1.5 times. The rating is also supported by the sound quality of investment portfolio that is driven by stringent regulatory norms. The return on equity (RoE) has ranged between 7 – 14% over the last 5 fiscals however, was negative for fiscal 2022 due to Covid-19 claims. The value of new business margin was 23.7% for fiscal 2022 as compared to 21.7% for the previous fiscal. 

 

In terms of business sourcing, PNB MetLife relies majorly on bancassurance channel which constitutes >60% of the the overall business of the company. Driven by its established parentships with banks like PNB, J&K Bank, Karnataka Bank, Shinhan Bank and emerging SFBs like ESAF SFB, PNB MetLife has easy access to the footfall in their branches which are present across most locations in the country. For fiscal 2022, the business contribution by bancassurance channel was 63% followed by 23% from direct channel and balance through agency and other avenues. Up until fiscal 2017, agency was the second largest distribution channel for the company however, its focus shifted to direct sourcing thereafter as that segment was found to be more efficient and suited to the long term business strategy of the company. While higher reliance on bancassurance channel has yielded cost benefits over the last few years, it makes the distribution channel base of PNB MetLife concentrated.

Analytical Approach

CRISIL Ratings has first arrived at the corporate credit rating of PNB MetLife, which is an indication of the company’s ability to meet policyholders’ obligations. For this, CRISIL Ratings has factored in the support PNB MetLife receives from its parent companies, in addition to the assessment of business, financial, and management risk profiles of PNB MetLife. 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 PNB MetLife 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 PNB MetLife and MetLife Inc. on the level of cushion PNB MetLife 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 MetLife Inc.

PNB MetLife is strategically important to MetLife Inc. and derives significant technical, funding and branding support from it. This is reflected in representation of MetLife’s directors including the regional president of MetLife Asia being the Chairman of PNB MetLife’s Board, and the company’s high involvement in PNB MetLife’s functioning. Since PNB MetLife’s inception in 2001 as MetLife India, MetLife Inc. has been its key stakeholder and demonstrated need based capital support to the latter in times of need. In line with earlier expectations, MetLife has increased its shareholding in PNB MetLife during fiscal 2022 from ~32% to ~47% and, the former is expected to remain the largest shareholder with high representation on the board and management and operational oversight. As per FDI regulation applicable for the insurance sector in India, a foreign investor can hold a maximum of 74% stake in an insurance company. In PNB MetLife, Oman India Joint Investment Fund II holds about 2% stake and considering this, MetLife has a further headroom to increase its stake upto 72% in PNB MetLife, if required. PNB MetLife’s strategic importance to MetLife is underpinned by the former's established market position among private sector life insurance companies in India and expectation of gradual improvement in its market share and overall profitability over the medium term. Further, PNB MetLife - being the Indian life insurance arm of MetLife Inc. – enhances its market position in the Indian market and adds diversity to the latter's bouquet of insurance product offerings.

 

• Adequate capitalisation and cushion in solvency over regulatory minimum

PNB MetLife’s capitalisation is adequate in relation to the nature and scale of its business. On September 30, 2022, the company reported a networth of Rs 1,390 crore which, apart from the financial support from the parent companies, has been supported by PNB MetLife’s internal accruals.

 

The company has maintained its solvency ratio at above 1.8 times over the last 5-7 years and, intends to operate at a solvency margin of above 1.7 times on a steady state basis – which is in alignment with the stance of its parent – MetLife. On March 31, 2022, PNB MetLife had a solvency ratio of 2.09 times which dipped marginally to 1.98 times as on September 30, 2022 due to growth. Considering the company’s current product portfolio is focused on the traditional term products where the policyholders’ risks are limited, the quantum of capital required, and buffer maintained by PNB MetLife has been higher. However, as it migrates towards a more balanced product mix across ULIPs and traditional products, its capital requirement is not expected to increase materially alongside growth.

 

Over the near to medium term, in a stress case scenario of a severe third pandemic wave, the company’s solvency ratio is expected to remain above 1.7 times.

 

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

Since its inception in fiscal 2001, PNB MetLife has been among the top 10 life insurers in the country. Between 2014 and 2022, its overall market share in terms of gross premium written has increased marginally from 0.7% to 1.0% whereas in terms of annual premium equivalent (APE), the market share has increased from 1.1% to 1.6% over the same period. Based on its market share of fiscal 2022, PNB MetLife is the ninth largest private insurer in the country. In terms of business strategy, the company’s portfolio was initially focused on participating products (PAR) and Unit Linked Insurance Plan (ULIPs) however, it has migrated towards a higher share of non-PAR business (including protection) over the last few years. As of fiscal 2017, over 40% of total (gross) premium was sourced from PAR segment whereas 23% was sourced from ULIPs. Since then, the cumulative contribution from both these segments has been declining to be replaced by non-PAR segment (including protection). For fiscal 2022, PAR segment constituted 28% and ULIPs formed 19% of total (gross) premiums whereas non-PAR segment accounted for a significant 53% (including protection). This evolution in premium mix corresponded to an increased annual growth rate as well. As against 15% growth registered in fiscal 2017, the company’s annual growth rate for the following two fiscals increased to >20% each. Thereafter, the outbreak of pandemic in March 2020 resulted in some moderation in growth – though there has been revival in fiscal 2022. Over the medium term, the company aims to achieve a more balanced product mix between traditional and ULIP segment, while continuing to grow at a rate marginally higher than industry growth.

 

• Sound investment portfolio supported by stringent regulations

PNB MetLife follows a stringent investment policy of its own, in addition to the regulations prescribed by IRDA. The investment expertise of MetLife and its oversight provide further strength. As on September 30, 2022, 49.2% of the total investments were in GSecs (majorly in Central GSecs) and ~26% of the total portfolio were in the form of debt securities – of which 99.4% were rated AA and above or were sovereign in nature. Equity investments constitute 18.1% of the investment portfolio as on September 30, 2022. The company also maintains a track record of having zero NPAs since inception in non-linked portfolio.

 

Weaknesses:

• Moderate profitability metrices constrained by high though reducing operating expenses

PNB MetLife’s expense ratio, though improving, have been higher than most peers owing to higher operating expenses. This is a factor of higher operating expenses incurred to source new business premium, as compared to close peers. As the share of renewal premiums has been increasing gradually over the last few years, the operating expense to net premium and new business premium ratio, has also been declining however, it still remains higher than peers. For new business premium, PNB MetLife’s operating expense ratio has remained with 50-60% whereas for overall (Net) premiums – the company’s operating expense ratio has ranged within 17-23% over the last 3-5 years. Resultantly, PNB MetLife’s earnings profile has been moderate. Moreover, factors like the company’s non-PAR focused business model and its lower than peer persistency ratios have constrained its premium incomes. PNB MetLife’s pre-tax returns have remained sub 1% and its Return on networth (RoNW), sub 15%, for the last 3-5 fiscals. The company’s VNB margins, however, have improved gradually from 17.1% in fiscal 2018 to 23.7% in fiscal 2022 – indicating the high potential in new business. The company has revised the pricing of its group insurance policies upwards in fiscal 2021, however – with the expectation that industry wide product prices may rise in the medium term after pandemic experience, the ability of PNB MetLife to improve returns alongside growth and competition, remains key.

 

• Exposure to certain challenges remains; sustaining profitability due to changing regulatory environment and growing competition

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. Moreover, with the entry of many new players over the past decade, the competitive intensity in the industry has increased multi fold. Top 2-3 players have had the early mover advantage and captured a larger market share whereas the others are continuously focusing on innovating products and increasing persistency to get a higher share of the market. Ability to generate adequate profits while growing in sync with the industry over the long term will be a key monitorable.

Liquidity: Strong

As on September 30, 2022, total non-linked policyholder investments stood at Rs 26,600 crore. The company had debt investment (non-ULIP, excluding investments in Real Estate, InvITs and Money market investments (TREPs)) book value of Rs 24,225 crore; of which 99.8% was either rated 'AA or above or was sovereign in nature. The major outflow for the company is benefits to claimants (net of reinsurance) which has remained broadly stable over the years, barring the months for which Covid-19 claims elevated. Since life insurance inherently is a highly granular and stable business, liquidity is likely to remain comfortable on an ongoing basis.

Outlook: Stable

CRISIL Ratings believes that PNB MetLife will continue to derive strong financial, managerial support and oversight from MetLife, both on an ongoing basis and in the event of a financial distress. The company will maintain adequate cushion in its solvency ratio over and above regulatory minimum on a steady-state basis.

Rating Sensitivity factors

Upward Factors

• Material increase in shareholding of MetLife Inc. in PNB MetLife, depicting increase in the strategic importance of the latter to, and expectation of support from, MetLife Inc. - supported by relaxation in regulatory ceiling on FDI

 

Downward Factors

• A downward revision in rating or outlook on the parent - MetLife Inc., will result in a similar action on PNB MetLife
• Significant reduction in cushion in the solvency ratio taking it below 170%

About the Company

Incorporated in 2001, PNB MetLife India Insurance Company Limited (PNB MetLife) is one of the leading life insurance companies in India with MetLife International Holdings LLC (MIHL) and Punjab National Bank Limited (PNB) being promoter shareholders with a cumulative shareholding of ~47% stake as on September 30, 2022.

PNB MetLife is present in 109 locations across the country with access to over 206 million customers in ~15,000 locations through its strong bank partnerships with PNB, J&K Bank, KBL and other bank partners. The company offers a wide range of protection and retirement products through its Agency sales of over 9,200 financial advisors and multiple bank partners and provides access to Employee Benefit plans for approximately 700+ corporate clients in India.

Key Financial Indicators

As on / for the period ended	Unites	2022	2021	2020
Net premium income	Rs crore	6,960	5,814	5,348
Profit after tax	Rs crore	(71)	101	93
Persistency ratio (13th month)	%	80%	76%	74%
Persistency ratio (61st month)	%	44%	39%	31%
Solvency ratio	%	2.09	1.90	1.89

 

Any other information: Not applicable

Annexure - Details of Instrument(s)

ISIN	Name of the instrument	Date of issuance	Coupon rate (%)	Maturity Date	Complexity levels	Size of the issue (in.Cr)	Rating assigned with Outlook
INE207O08019	Subordinated Debt	27-Jan-22	8.12%	27-Jan-32	Complex	400	CRISIL AA+/Stable