SBI Life Insurance: A good cover

In an industry with sound long-term prospects, the insurer is on top

The life insurance space in India has been through several ups and downs over the past decade. If insurers focussed on gaining market share through aggressive growth in new business premium before 2010, regulatory changes thereafter, forced them to re-structure their product portfolios and turn their attention to cost rationalisation and persistency.

The past 2-3 years has been particularly robust for private life insurers with significant market-share gains. At the industry level, between FY16 and FY18, new business premiums for private insurers have grown at a CAGR (compounded annual growth rate) of 20 per cent .

SBI Life is the second-largest private life insurer in terms of new business premium (NBP), with a market share of 17.3 per cent in the first quarter of FY19. The company’s market share had risen substantially to 18-20 per cent in FY17 and FY18, led by strong growth in NBP.

Between FY16 andFY18, the insurer’s new business premium grew at a CAGR of 24 per cent. The lower growth of 15 per cent in NBP in the first quarter of FY19 has led to the slight dip in market share.

But the latest data (up to August 2018) published by the Insurance Regulatory and Development Authority of India (IRDAI), suggests that growth has picked up notably in the past two months. SBI Life’s NBP has grown 28 per cent YoY, year-to-date, with its market share among private players inching up to around 19 per cent.

Nonetheless, given the high base (growth in FY18 was aided by demonetisation), growth is expected to moderate this fiscal, which appears to have been factored into the stock prices of life insurance players. The recent carnage in the stock market has only made matters worse.

The stock of SBI Life has fallen 17 per cent over the past month. From its April peak of ₹766, it is down little over 25 per cent. At the current price of ₹551, the stock is well below its IPO price of ₹700 (IPO in September last year). Given the overall sound long-term prospects of the industry, SBI Life’s healthy profitability, leading market share, diverse product portfolio and strong distribution network, the sharp fall in the stock price provides a good entry point for long-term investors.

At the current price, SBI Life trades at 2.7 times its embedded value as of March 2018. HDFC Life trades at about 4.8 times, while ICICI Prudential Life trades at 2.5 times. Embedded value is a measure used to value a life insurance business. It, among other parameters, takes into account the future earnings of the company.

Good growth prospects

The growth of life insurers was impacted by the regulatory changes brought about by IRDAI in 2010 and 2013. The 2010 changes — including a cap on charges, surrender and discontinuance charges, and minimum levels of sum assured — impacted the sale of unlit-linked insurance plans (ULIPs). The tweaks made in 2013 — including linking commissions to premium-paying term and discontinuing highest net asset value guarantee products — impacted non-linked products.

Life insurance policies are broadly categorised into traditional policies and ULIPs. SBI Life has a well-balanced product mix. As of June 2018, SBI Life’s product portfolio is split 46:54 between ULIPs and traditional policies (in terms of total NBP).

Riding on its diverse product portfolio, SBI Life has been able to gain market share and deliver strong growth over the past three years.

SBI Life has the lowest operating expense ratio among the top three private life insurers (in terms of total premium). In the June 2018 quarter, its operating expense ratio (operating expenses excluding commission, divided by Gross Written Premium) stood at 9.7 per cent. SBI Life has maintained a healthy return on equity (ROE) of 19-21 per cent over the past three years. Its ROE stands at a healthy 21 per cent as of June 2018.

Strong network

In the past 4-5 years, bancassurance-led players have gained market share. While the bancassurance model should continue to drive market-share gains, over the long run, the agency channel is equally important. While SBI Life’s bancassurance network gives it an edge over other players, it has a good multi-distribution model, too. Bancassurance contributed 61 per cent to SBI Life’s NBP in the June 2018 quarter, while individual agent network contributed 23 per cent. Its agent network is strong with 1.12 lakh agents as of June 2018.

Persistency in life insurance policies — which measures the number of policies (or amount of premium) retained with an insurer across different time periods — is a critical factor. SBI Life saw its 49th month (fifth year after the policy issue) persistency ratio by premium at about 63 per cent in both FY18 and the June 2018 quarter.

Its 61st month persistency is also a healthy 57 per cent as of June 2018.

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