The life insurance outperformer with a valuation bonus

By Aparna Iyer
Photo: Reuters

India's largest private life insurer has had a good run so far this fiscal, showing a marked recovery from the second covid wave’s impact. Its shares too have reflected this revival, gaining 32% so far in fiscal 2021-22. Indeed, it looks like investors have taken note of the company’s performance.

Notwithstanding the stellar increase that shows SBI Life has outperformed the broader market this year, its shares trade at a discount to peers such as HDFC Life Insurance Company Ltd and Max Financial Services Ltd, the parent of Max Life. That explains why some analysts still have the stock as their top pick over others in the sector.

“Our positive stance on SBI Life is driven by its strong growth recovery, best-in-class distribution and cost franchise, strong margin expansion potential (low non-PAR mix) and reasonable valuations at 2.4 Sep-23F EV (embedded value)," those at Nomura Financial Advisory Services Ltd wrote in a note.

Bouncing back
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Bouncing back

The latest business data from the insurance regulator has only shown how strong SBI Life’s business revival has been. During August, the life insurer reported a 67% jump in its business based on annualized premium equivalent (APE). Of course, the growth has a statistical low base to thank.

Recall that last year, life insurers faced a sharp drop in business owing to the strict nationwide lockdown during April and May, and recovery was slow in the following months.

If we smooth out the base effects by factoring in the two-year compounded annual growth rate or CAGR, SBI Life still shows a strong 20% growth for August.

That is an improvement from the previous months as the adjoining chart shows. For the largest player in the private insurance sector to show a high double-digit growth is no chump change.

However, despite all this, SBI Life has not been able to get more bang for its buck. While its products may be flying off the shelves, that has not resulted in greater profitability compared with peers.

To be sure, the insurer’s value of new business (VNB) grew by 19.8% in FY21 and the VNB margin expanded to 23.2%. However, rival HDFC Life trumped with a VNB margin of 26.1%. For the June quarter too, SBI Life’s margins trailed that of peers. What’s more, persistency ratios too are slightly lower compared with HDFC Life.

Another factor is that SBI Life’s portfolio is Ulip-heavy (unit-linked insurance product), while HDFC Life has a superior product mix with Ulip being just 22% of total.

Meanwhile, one foreign investor is looking to exit SBI Life. According to a Bloomberg report on Wednesday, Canadian Pension Plan Investment Board (CPPIB) wants to sell 20-30 million shares or its entire stake in the company. The floor price has been set at 1,159.20-1,220.50 per share. CPPIB had bought the shares during SBI Life’s initial public offer in 2017.

Anand Dama, analyst at Emkay Global Financial Services Ltd, believes the exit is more strategic and does not reflect much on the part of the insurer. “SBI Life’s growth is strong. They have enough reserves to manage covid claims. As such, there is no downside," he said.

Analysts believe that SBI Life’s subdued valuation multiple is its biggest ally. However, what the investors are looking for is endurance in the company’s growth metrics, going ahead.


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