Life insurance biz springs a surprise

Its value and margins are higher than Street estimates; this could push up the bank’s valuations

For the first time, State Bank of India (SBI) disclosed the embedded value (EV) of its life insurance business recently. This metric stood at ~12,999 crore as on March 31, 2016. This is much higher than the estimates the Street was working with prior to the June 2016 quarter. On an average, analysts were estimating SBI Life's EV at ~8,000-10,000 crore. EV is calculated by adding the adjusted net asset value and the present value of future profits of a firm. It is the measure of shareholders' interest in the business of a company. It is a key parameter to value insurance companies.

Given the much higher EV, most analysts have raised the value they assign to this business in SBI’s overall sum-of-the-parts (SOTP) valuations. Accordingly, the target price assigned by various brokerages to SBI, too, has moved up.

Alpesh Mehta, financials analyst at Motilal Oswal Securities, says: “Our SOTP has increased by ~10-15 a share after factoring in the higher EV of SBI Life. While the merger upsides are already factored in, the listing of ICICI Prulife and HDFC Life-Max Life merged entity could lead to some more price discovery in the insurance sector.”

Another factor that could drive SBI Life’s valuations higher is its high growth relative to peers — that too at healthy margins. For the June 2016 quarter, SBI Life has grown its premiums by 70 per cent — much higher than the average growth of 21 per cent registered by its private-sector peers. The bank’s increased focus on cross-selling its products at all branches is the key driving force behind its insurance business.

“SBI Life has also disclosed its FY16 pre-overrun (before cost over-run) new business margins at 16 per cent and post-overrun NBP (new business premium) margins at 14.2 per cent, which is a material-positive surprise,” says Adarsh Parasrampuria, analyst at Nomura, who had earlier pegged these metrics at 14 per cent and 12 per cent, respectively. He believes SBI’s target price could move up by five per cent as valuations of its life insurance business catch up with that of peers, who are trading at three to four times their EV.

Besides the news flow around the insurance sector, the SBI stock could move in tandem with progress on the merger of its associates banks/subsidiaries as well as the bank’s asset quality performance. Given its relatively superior show on both market share expansion as well as asset quality, most analysts are positive on SBI.