A StronG quarter saw (i) above-industry savings growth; (ii) strong traction in protection; (iii) renewed focus on non-par savings and annuity businesses. Increasing mix of return-guarantee business will be crucial margin driver over next few years. Exclusive distribution access with SBI and strong brand recall from its pseudo-sovereign identity give SBI Life a unique competitive advantage. Maintain Buy, TP, Rs 988, valuing at 3.2x FY21EV.
Fast ramp-up of return-guarantee & protection business
We refer back to our recent note discussing the shifting priorities of life insurers. The shrinking profitability of linked business has made it a mere revenue driver, edging players to move towards non-linked products (protection & return-guarantee) for profitability. Mix shift from “return-pass through” to “return-guarantee” is the new reality and growth trends reflect this.
Realigning business mix
New business for Q2 grew 34% y-o-y, driven by non-par savings (+800% y-o-y), protection (+32%). Par-savings business was down 35% y-o-y, as the focus of SBI shifted to cross-selling protection, return-guarantee & annuities. APE growth for 1H was 26% y-o-y, protection mix for 1H improved to 8.8% (o/w 4.9% retail & 3.8% group credit life or term insurance) from 5.4% for 1H FY19. We build ~25% APE growth for FY20 and ~19% for FY21/22.
Margin levers intact
VNB margins for H1 FY20 stood at 18.1%, a 80 bp improvement y-o-y due to:
(i) Higher protection mix (8.8% APE mix vs 5.4% last year) (ii) renewed focus on return guarantee & annuity business (7.9% APE mix vs 0.5% last year. We build 19.6% margins for FY20, and a gradual improvement of 430 bps over FY19-22, driven by an 780 bps increase in protection mix (15% in FY22) and non-par savings (13% in FY22). Adjusting for effective tax rate assumption (as followed by IPRU & HDFC Life), VNB margins for SBI Life are 20.2% for 1H FY20 (~210 bps higher than reported).
Distribution
Having SBI as exclusive distributor for SBI Life gives it a unique advantage versus peers. A metric that indicates the latent opportunity of the channel: SBI Life’s business done through SBI was ~25bp of SBI’s deposit base, vs IPRU’s new business with ICICI Bank at ~80bp. New business written by banca channel grew at 31% for H1 (57% mix).
Top pick
In terms of distribution, SBI Life is most strongly positioned insurer. On product innovation & being early mover, HDFC Life has been ahead of industry by far. For IPRU, in our opinion, distribution capacity is mostly utilised. In this context, both SBI Life & HDFC Life provide a good case for stable 20%+ EV compounding, and thus, we expect valuation multiple gap between SBI Life (trading at 2.7x FY21EV) & HDFC Life (trading at 4.6x FY21EV) to reduce.
Estimates
We tweak our EV estimate by (-)0-1% for FY20-22, factoring in interest rate change impact, exposure to stressed asset, better margin trajectory.
