SBI Life: Sturdy H1FY20 boosts Street confidence

Stock at lifetime high, with potential for further gains

A strong performance by SBI Life Insurance Company (SBI Life) for April-september 2019 (first half of 2019-20, or H1FY20) — announced on Tuesday late evening — boosted Street confidence. The stock hit its all-time high at ~891.95 on Wednesday before ending the session at ~877.4 — an increase of 4.5 per cent. In fact, SBI Life’s strong performance also rubbed off positively on the other two large private insurers’ stocks — ICICI Prudential Life and HDFC Life — which gained 2-3 per cent on Wednesday.

While the gross written premium of SBI Life rose by 36 per cent year-on-year (YOY) to ~16,938 crore in H1FY20, its annual premium equivalent, which is a common revenue measure of life insurers, grew by 26.2 per cent. In fact, a 32.4 per cent increase in the company’s value of new business (VNB) and 100 basis point (bp) expansion in VNB margin to 20.2 per cent indicates further potential gains for shareholders. VNB is the economic value of profits likely from new business generated.

Focus on high-margin products such as protection (term plans) and annuity, improved operating leverage (lower cost), and persistency ratio (indicates customer stickiness) pushed up SBI Life’s VNB margin, despite the 300 bp negative impact, on account of falling interest rates (which have a bearing on the investment income).

In H1FY20, the share of protection products in the overall new business premium improved by 148 bps YOY to 11.9 per cent and that of annuity products surged by 400 bps to 6 per cent.

Going ahead, the outlook appears good. “The strong distribution footprint of its parent State Bank of India (over 22,000 branches), upward margin trajectory, and tailwinds from financialisation of savings would result in over 20 per cent annual growth in SBI Life’s VNB over 2018-19 (FY19) to 2021-22 (FY22),” say analysts at HDFC Securities. Those at Emkay Securities, too, see around 24 per cent annual growth in SBI Life’s VNB over FY19-FY22.

Though the company provided 48 per cent for its ~140crore exposure to the stressed Dewan Housing Finance Corporation, which also weighed on SBI Life’s net profit in H1FY20, the overall stressed portfolio of up to ~400 crore is just 0.5 per cent of total assets under management (excluding ULIPS). Analysts believe the expected additional provisioning in the ensuing quarters is unlikely to have a material impact on the company’s business potential.

On the whole, while the H1 performance was good and future prospects appear healthy, the 13-24 per cent gains in the past three months in the stocks of the three large private life insurers could limit nearterm upsides.