Detailed Rationale

CRISIL Ratings has reaffirmed its corporate credit rating of ‘CCR AAA/Stable’ on SBI Life Insurance Company Ltd (SBI Life)

 

The rating continues to factor in an established market position as one of the top private life insurers (in terms of market share) and benefits derived from a wide and efficient distribution network comprising of vast branch network of State Bank of India (SBI; ‘CRISIL AAA/CRISIL AA+/FAAA/Stable/CRISIL A1+’) and a strong agency network spread across India. The rating also factors in healthy persistency and operating profitability, and maintenance of an adequate capital position. These rating strengths are partially offset by the challenges expected for sustaining profitability due to rising competition.

 

The company has a strong linkage with SBI driven by the latter’s 55.5% ownership and the shared name. SBI’s presence in the life insurance sector is through SBI Life, which is, therefore, one of the critical subsidiaries of the bank. The two entities have a common board chairperson. Additionally, one member on the board of SBI Life is also director on the board of SBI. Also, the MD & CEO of SBI Life is deputed from SBI. Hence, SBI should continue to provide the necessary support to SBI Life. 

 

SBI Life is the largest player among private insurers in the life insurance sector with a total market share of 7.4% based on new business premium written in India in fiscal 2021. The company continued to maintain its leading position among private players with market share of around 21.9% in new business premium in fiscal 2021.  It also continues to benefit from its strong industry expertise, having been in operation for nearly two decades, and has a presence across all the states and union territories in the country.

 

Gross written premium (net of reinsurance) grew by 23.4% in fiscal 2021 to Rs 49,768 crore from Rs 40,324 crore in the previous fiscal. In terms of new business premium, the growth was 24.3% on-year in fiscal 2021 as compared with the industry growth of 7.5%. The persistency and profitability metrics are healthy. The 13th month persistency stood at around 87.9% in fiscal 2021 as compared with 86.1% in fiscal 2020. The return on equity has been at an average of around 18% during the five fiscals through 2021. Additionally, the value of new business margin on actual tax rate basis has steadily increased over the years and stood at 20.4% for fiscal 2021, improving from 18.7% in fiscal 2020.

 

Capitalisation is adequate, reflected in the healthy solvency margin. As on March 31, 2021, the networth was Rs 10,093 crore against Rs 8,884 crore a year earlier. The company has maintained a solvency margin of 1.95-2.15% during past five fiscals (2.15% as on March 31, 2021), which is comfortably above the regulatory requirement. This has been through internal cash accrual, without the need of capital infusion from the shareholders since fiscal 2008. The solvency margin is likely to be maintained at a similar level over the medium term.

 

The company has always tried to maintain a well-diversified distribution mix, with bancassurance accounting for 56% of the new business premium in fiscal 2021, which includes over 22,000 SBI branches. Additionally agency contributes 17% of the business, which includes more than 1.7 lakh agents, with the remaining being corporate agents, brokers, and direct channels.  The company has developed and nurtured each channel, while ensuring business diversification. It has achieved long-term sustainable and profitable growth by balancing the product mix across various channels of distribution. During the year, Company has strengthened its Digital services and automation for on-boarding new customers remotely as well as in providing uninterrupted services to existing customers.

 

In fiscal 2021, the company has created provision of Rs 183 crores towards Covid claims as compared to Rs 60 crores in fiscal 2020. With the second wave, wherein the severity and frequency of casualties are higher, the losses incurred due to the pandemic and its impact on the overall performance remain key monitorable.

For fiscal 2022, growth in new business premium in the life insurance segment could remain muted in the first quarter and will pick up based on the opening up of lockdowns across states. Renewal premiums could also be impacted on account of job losses and pay-cuts. However, once the situation normalises, the demand for life insurance products is expected to increase.

Analytical Approach

For arriving at the rating, CRISIL Ratings has assessed the standalone financial and business risk profiles of SBI Life. The company's strategic importance to, and expectation of receiving necessary support from, SBI (holds majority stake) has also been factored.

Key Rating Drivers & Detailed Description

Strengths:

* Strategic importance to, and expectation of strong support from, SBI

The strong linkage with SBI is indicated by a shared brand name and majority ownership by SBI. The bank’s presence in the life insurance sector is through SBI Life, which is, therefore, one of the critical subsidiaries. The established brand name and market reputation of SBI has enabled the company to build its own brand equity, which assists in selling to customers of all segments.

 

SBI and SBI Life have a common chairperson at the board level. Additionally, one member on the board of SBI Life is also director on the board of SBI. The MD & CEO of SBI Life is deputed from SBI. In addition, SBI also acts as a corporate agent for SBI Life, which allows the latter to access the bank’s extensive network of branches and customers for selling insurance products.

 

SBI Life, being a listed entity, has the ability to source capital from external investors and has the financial flexibility to raise capital whenever necessary. Further, SBI is committed to and capable of, infusing capital. As on date, SBI Life doesn’t have any debt obligation on its balance sheet.

 

* Established market position among private life insurers

The company is expected to maintain its market position as one of the top players within the life insurance industry. It has maintained its market position and consistently improved market share in each fiscal. The total market share in terms of new business premiums stood at around 7.4% as on March 31, 2021 (around 6.4% a year earlier). As of March 2021, the company continued its leadership position among private life insurers in India on an individual rated premium basis. Within private insurers, it continued to maintain healthy market share of around 21.9% during fiscal 2021 (20.5% during fiscal 2020) in new business premium. The company has been in operation since 2001 and has a presence across all the states in India. A strong brand image, direct access to the large customer base of SBI, and having one of the strongest and most productive agency networks provide critical support to business growth. Furthermore, low insurance penetration and other supportive macro factors are expected to drive growth.

 

*Adequate capital position

The company has consistently maintained an adequate capital position year on year. The comfortable capital adequacy position is reflected in the healthy solvency margin of 2.15 times (as on March 31, 2021) against the regulatory requirement of 1.5 times. The absolute networth was Rs 10,093 crore as on March 31, 2021 (Rs 8,884 crore a year earlier). As on March 31, 2021, SBI and BNP Paribas Cardiff held 55.5% and 0.2% stake, respectively, while the remaining stake was with the public and other institutional investors. Further, the solvency margin has remained healthy despite no capital infusion since fiscal 2008.

 

The embedded value (on actual tax rate basis) was Rs 33,386 as on March 31, 2021, against Rs. 26,290 crore a year earlier, a growth of 27%. The ratio of embedded value to networth stood at over three times as on March 31, 2021, which was in line with some of the close peers. The embedded value is a representation of the actual capital position as it includes the future profits expected to be received from the business underwritten till valuation date. The steady increase in internal cash accrual enables the company to maintain the capital position while achieving healthy business growth.

 

*Healthy persistency and profitability metrics

The company has maintained healthy persistency in its overall product portfolio. The 13th month persistency stood at around 87.9% in fiscal 2021 against 86.1% in fiscal 2020. The persistency at 61st month basis improved to 61.6% in fiscal 2021 from 59.9% in fiscal 2019. Improvement in persistency across cohorts has been led by focus on better quality of business and leveraging technological capabilities to provide a superior customer experience. The healthy persistency also reflects the ability to hold on to policyholders for longer duration.

 
Healthy cash accrual has also supported the capital position. The return on equity was at an average of 18% during the five fiscals through 2021. Additionally, the value of new business margin on actual tax rate basis has remained healthy at 20.4% in fiscal 2021, improving from 18.7% in fiscal 2020. The value of new business on actual tax rate basis has improved to around Rs 2,330 crore in fiscal 2021 from Rs 2,012 crore in fiscal 2020 registering a growth of 16%.

 

* Well-diversified distribution network

The company’s products are distributed through bank branches as the primary distribution channel, leveraging the 22000+ branches of State Bank of India and its vast distribution reach and large customer base. As a part of SBI’s strategy, there is a strong and renewed focus on tapping the synergies with subsidiaries. The bank’s continued focus on cross selling augurs well for SBI Life and will help the latter improve its market share. For fiscal 2021, around 56% of the new business premiums were sourced through the bancassurance channel. Also, the agency channel is the biggest (in terms of new business) in the private sector and comprises a large sales force of over 1.70 lakh licensed agents as on March 31, 2021. For fiscal 2021, the agency channel contributed 17% of the new business premiums. The Company has also focused on developing other key partnerships and have strong association with some of the key names like Indian Bank, UCO Bank, South Indian Bank, Punjab & Sind Bank, Yes Bank, etc. As on March 31, 2021, SBI Life had its own 947 branches across India, which provide support to policyholders and distributors.

 

Further, the distribution model also results in the lowest operating expense ratio among private life insurance companies (operating expense ratio is calculated as operating expense as a percentage of gross premiums earned).

 

Weakness:

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

Intense competition from other private life insurers can make it challenging for the company to maintain 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. Hence, the ability to generate profit and manage the investment portfolio to earn adequate returns, will determine profitability over the long term.

Liquidity: Superior

The cash and bank balance was Rs 2,711 crore as on March 31, 2021. The debt investment book (within the traditional segment) had a  market value of Rs 93,450 crore as on December 31, 2020; of this, 60% was in sovereign instruments and 29% in ‘AAA’ rated instruments. The major outflow is claims settlement, which was Rs 21,583 crore in fiscal 2021 (Rs 16,251 crore in fiscal 2020). As life insurance is an inherently highly granular and stable business, liquidity should remain comfortable.

Outlook: Stable

SBI Life should continue to receive strong support from SBI over the long term, and benefit from the latter’s distribution channel.

Rating Sensitivity Factors

Downward factors:

• Downward revision in the rating on SBI
• Reduction in the proportion of shareholding of SBI to below 51%
• Reduction in the solvency margin to below the minimum set by the Insurance Regulatory and Development Authority (1.5 times)

About the Company

SBI Life, began as a joint venture between SBI (currently 55.5% stake) and BNP Paribas Cardif (0.2%) and commenced operations in 2001. The company is uniquely positioned to tap the vast potential of the Indian life insurance sector by harnessing the extensive branch network of the SBI group. Over the years, SBI Life has gradually increased the coverage of branches and presently around 22,000 branches of the SBI group are covered under this channel. SBI Life was able to successfully place its initial public offering during the third quarter of fiscal 2018. Around 12% stake was diluted during the process. In June 2020, SBI offloaded 2.1% stake in the company and in March 2021, BNP Paribas Cardif offloaded 5% stake.

 

Profit after tax (PAT) was Rs 1,456 crore in fiscal 2021 (Rs 1,422 crore in fiscal 2020). As on March 31, 2021, the networth was Rs 10,093 crore, embedded value Rs 33,390 crore (on actual tax rate basis), value of new business Rs 2,330 crore and solvency margin 2.15 times.

Key Financial Indicators

As on/For the period ended March 31,	Unit	2021	2020	2019	2018
Gross direct premium/Gross premium written	Rs crore	50,254	40,635	32.989	25,354
PAT	Rs crore	1,456	1,422	1,327	1,150
Persistency ratio (13th month)	%	87.9	86.1	85.1	83.0
Persistency ratio (25th month)	%	79.4	78.5	76.7	75.2
Persistency ratio (61th month)	%	61.6	59.9	57.2	58.4
Solvency margin	Times	2.15	1.95	2.13	2.06

 

Any other information: Not applicable

ISIN	Name of Instrument	Date of Allotment	Coupon Rate (%)	Maturity Date	Issue Size (Rs.Cr)	Complexity Level	Rating Assigned  with Outlook
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