SBILIFE seems ideally positioned for ‘serving the underserved’
Expected postponement of LIC IPO and a heightened post-covid insurance awareness makes SBILIFE, the largest private insurance player well positioned vis-a-vis peers. We are LONG.
SBI Life Insurance was incorporated in 2000 as a joint venture between State Bank of India and French financial institution BNP Paribas Cardif (now exited). With a market share of c. 8%, SBILIFE is the 2nd largest insurance company and largest private insurer in India.
Industry is growing rapidly and a 9% CAGR growth is expected in coming years
Based on life insurance premiums, India is the 10th largest life insurance market in the world and the 5th largest in Asia. The size of the Indian life insurance industry was INR6,200bn based on total premium in FY 2021. Total premium has grown at 11% CAGR while New Business Premiums (NBP) grew at 15% CAGR during FY 2016-2021. The industry is projected to grow at c. 9% CAGR to reach INR8,000bn by 2024, supported by recent policy changes which increased FDI limit to 74% and heightened post-covid awareness for insurance policies. Overall insurance penetration was 4.2% in FY 2021, providing a huge underserved market.
Heavy reliance on bancassurance channel, being cost effective and reliable
Product mix comprises participating policies (46.3% of FY 2021 revenue), non-participating policies (53.7% of FY 2021 revenue).
SBILIFE has a strong distribution network of 194,177 insurance professionals along with 947 offices across the country. Bancassurance is the largest and most reliable distribution channel, with a c. 56% slice. Aside from SBI bank, SBILIFE has recently entered into partnerships with Indian Bank, UCO Bank, South Indian Bank, Yes Bank and Punjab Sind Bank, which contributed c. 3% of the individual APE as at December 2021.
The company also launched a new product “SBI Life e-shield Next” in its protection portfolio, which offers dynamic pricing and is likely to accrue superior VNB margins compared to its existing portfolio.
Strong foothold and meaningful growth
Net premium for FY 2021 stood at INR498bn, growing at a CAGR of 24% during FY 2018-2021 while APE was INR115bn, growing at 15% CAGR during the same period. Investment yield stood at 16.8% and solvency ratio was 2.2x, one of the highest in the industry, with conservative reserving. Embedded value of the Company grew by 27% from INR263bn as at FY 2020 to INR334bn as at FY 2021. ROE for FY 2021 stood at 15.2%.
VNB as at FY 2021 stood at INR23bn, resulting in an VNB margin of c. 20.4%. As a result of healthy growth in protection and annuity business, the company registered a VNB of INR22bn, resulting in a VNB margin of 21.9% during 9M 2022. Solvency ratio marginally declined to 2.1x. As at 9M 2022 the company was handling an AuM of INR2,568bn, 1.3x the AuM of HDFC Life Insurance.
Since its listing the company has shown a CAGR of 19.1% in GWP & 22.6% in AuM. The spread between ROE & COE is a crucial determinant of success in the long run and SBILIFE’s L4Y average ROE has been around 17.6% against the industry COE of c. 8-12%, indicating positive value creation.
Valuation on relative terms looks fairly attractive
SBILIFE trades at 75.5x P/E on FY23F and 2.6x P/EV on LTM. Close comps HDFC Life (NSE: HDFCLIFE) trades at 73.2x P/E on FY23F and 4.9x P/EV on LTM while ICICI Prudential Life (NSE: ICICIPRULI) trades at 74.9x P/E on FY23F and 3.0x P/EV on LTM.
LIC, the largest life insurer in India was last expected to go public at a LTM P/EV multiple of c. 2.4x. Potential risk factors include underwriting risk, investment risk and other nontechnical risk but not unique to SBILIFE. Promoters hold 56% shareholding while c. 36% of the shareholding is institutional.
The global equity markets are expected to face headwinds in the near term. Expected postponement of LIC IPO coupled with a heightened post-covid insurance awareness places SBILIFE in a sweet spot for unlocking long run growth. Being the largest private player with an institutional ecosystem, ample reserves, industry best cost optimization, highly experienced management, and a business model to cater a largely untapped market, gives comfort around forward-looking performance. We are LONG.
Disclaimer: The views expressed here are the views of Arkvega Partners LLP, and are subject to change at any time based on market and other conditions. This is neither an offer nor solicitation for the purchase or sale of any security, and should not be construed as such. References to specific securities and issuers are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendations to purchase or sell such securities. We strongly advise you to do your own research and consult an accredited investment advisor before investing based on what you read here. Arkvega Partners LLP or its employees may have exposure in the financial instrument discussed above and can close positions in the future without prior intimation.