Incrementally competitive protection pricing has the potential to boost margins through product mix. This adds 100 bps on a sustainable basis to our earlier estimated ‘steady-state RoEV’ of 18%.
SBI Life Insurance reported a drop of 32% yoy in new business APE in Q1FY20. Protection APE dipped 24% yoy and ULIP weakness (51% yoy plunge) remained the defining and anticipated top line feature. Individual non-par savings/annuities registered 360% yoy APE growth in the quarter. VNB margin rose 80 bps yoy to 18.7% due to high-margin products such as protection and non-par savings garnering a greater share. In the luxury of P&L problems, we argued that persistency assumption revisions will have the deepest impact on ULIP component of the balance sheet.
With capital markets in a rush to top February highs and sequential persistency drops remaining limited to an average of ~50 bps across buckets for SBI Life, we are revising our assumption on persistency erosion for all sector leaders.
A 700 bps yoy drop over the course of FY21 seems more appropriate versus the 1,000 bps we built in earlier. This lifts our embedded value (EV) estimate by 2–4% for FY21/22. Valuations are reasonable at 3.1x FY21E P/EV. We estimate ~100 bps ‘steady-state’ RoEV boost due to margin impact of likely protection market share gain; driven by incrementally more competitive pricing.
This raises our target multiple to 3.2x FY22E P/EV from 2.9x – increasing TP to Rs 1,010 from RS 860. We maintain ‘buy’.
Incrementally competitive protection pricing has the potential to boost margins through product mix. This adds 100 bps on a sustainable basis to our earlier estimated ‘steady-state RoEV’ of 18%. While persistency ratios have held up in ULIPs so far, it remains a key parameter to watch out for both operating leverage and EV accretion. Maintain ‘buy/SP’ with a TP of Rs 1,010.