Correction in SBI Life an opportunity for long-term investors as industry recovers

Annual premium equivalent up 11% in August versus two-year average

The life insurance sector has seen a sea change in recent times with the influx of many private firms. Competition has led to the loss of market share for the Life Insurance Corporation of India (LIC).

The pandemic, too, appears to have changed attitudes towards life insurance. Rather than being seen as a tax-saving instrument, many are seeing it now as a necessary seat-belt.

Though LIC is by far the largest player, the private sector’s share is now close to 50 per cent, or over that, if we count SBI Life as a private player. There is fierce competition within that space. SBI Life is in the second position (SBI holds 55.7 per cent stake in SBI Life, which makes it state-controlled, but the substantial non-government stake would arguably let us think of it as private sector).

HDFC Life stands third with ICICI Prudential Life at fourth spot. However, ICICI Pru has gained market share compared with HDFC Life, and SBI Life overall has a narrow lead over the others in market share. In terms of financials, HDFC Life and SBI Life have considerably better return on embedded value (ROEV) ratios at around 19 per cent each, versus 14 per cent ROEV for ICICI Pru. ROEV measures profits as a ratio of the net present value of all premiums.

Through the second half of financial year 2020-21 (FY21), new business premium (NBP) grew monthon-month (MOM) for the industry. But there was a crash in April, and recovery in MOM growth for NBP has been visible again only since June. In year-on-year (YOY) terms, NBP grew through the second half of FY21, but dropped into negative territory in FY22.

Growth in the annual premium equivalent (APE) was volatile in YOY terms between March and July. The APE is the total value of regular, or recurring premiums, plus 10 per cent of new single premiums written in a given period. It is a useful way to aggregate and compare different types of premiums.

August was a good month for the industry, especially for the larger private players. The APE was up 18 per cent YOY and private sector APE was up 36 per cent, while LIC gained 2 per cent. Individual APE was up 19 per cent YOY in August, and group APE was up 14 per cent YOY. Averaging the last two fiscals to reduce base effects, August was also seen as a strong month with total APE up 11 per cent versus the two-year average, compared with an average of minus 2 per cent in APE over Q1.

LIC’S initial public offering (IPO) could be huge, when it happens. The next three firms are all listed. The outperformer on the stock market is clearly ICICI Pru (~697), which has returned 60 per cent in the last 12 months, while SBI Life (~1,173) has returned 41 per cent and HDFC Life (~737) has returned a relatively low 25.9 per cent.

SBI Life has seen recent divestment by US private equity fund CA Emerald Investments at ~1,130 per share and Canada Pension Plan Investment Board, which offered its 2 per cent stake at block deals between the range of ~1,159-1,220. This caused a dip in price of about 3.9 per cent and led to selling in the other life insurers (ICICI Pru down 2.7 per cent, HDFC Life 0.8 per cent) on Thursday. This may be an opportunity for long-term investors if the industry is on the recovery trail.