SBI life insurance rated buy by Axis Securities

By-Axis Securities

SBI Life with its unparalleled distribution network, leadership in New Business Premium (NBP) among private insurers, strong management team and top quartile service ratios is a proxy play to the huge opportunity in India’s life insurance space. The company is yet to harness benefits from a large part of State Bank of India’s (SBIN) unmatched branch network –a single factor that itself can drive exponential growth in NBP in ensuing years. Robust premium growth along with increasing share of high-margin products and operating leverage should drive return on Embedded Value (EV) of ~19% by FY20E. We expect 19.5% EV CAGR over FY17-20E to Rs 282 bn driven by ~30% CAGR in Value of New Business (VNB) to Rs 22.7 bn in FY20E. We initiate coverage with Buy rating and TP of Rs 850 (~30% upside from CMP).

Multiple structural growth levers; private plays to outgrow industry

Growth trajectory of life insurance products is expected to be significantly stronger over the next five years led by gradual growth in economy and structural drivers like rising life expectancy, increase in share of working population, healthcare spending, and pension needs. CRISIL research expects India’s new business premium /total premium of life insurance industry to post CAGR of 11-13% /13-15% over FY17-FY22. Market share of private life insurers has been rising over the past two years and is expected to grow at a faster clip than the industry average in the coming years.

Company’s superior metrics

SBI Life is India’s largest private life insurer in terms of New Business Premium (NBP) since FY10 and the second largest player in terms of Individual Rated Premium (IRP). NBP posted CAGR of 14.7% over FY07-FY17 — faster than that of private life insurance industry in India; whereas, SBI Life posted CAGR growth at 35.5% over FY15-17 — the highest among Top 5 private insurers in India.

We expect its market share to improve given its aggressive stance on utilisation of SBIN branches for sourcing and improving agent productivity. We have factored in NBP CAGR of 23% over FY17-FY20. It has issued 1.28 million individual life policies annually — the highest among private life insurers in India since FY14—CAGR of 6.4% over FY15-FY17 leading to a more granular book.

Superior distribution model

SBI Life over the years has developed unparalleled distribution network among private insurance players well supported by its twin engines of growth (bancassurance partnership with SBIN and large and productive individual agent network). Agency and Banca are prominent channels providing a well-diversified distribution model supported by additional branches (from 750 offices as of FY15 to 801 offices as of FY17), increasing the number of sales and customer support employees.

SBI Life’s diversified distribution network reduces the risk of dependence on any particular channel, leverages economies of scale, and allows it access to a wide range of customer segments.