SBI Life Insurance rating ‘buy’: Nomura says performance largely matched expectations

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New Delhi | Published: May 7, 2018 2:08:31 AM

Overall growth in FY18 was better than industry, a trend likely to be sustained in the near term; however, lags peers on protection; TP raised to Rs 880.

SBI Life Insurance, sbi, life insuranceSBI Life’s EV increased from Rs 165 bn in FY17 to Rs 191 bn in FY18 with core RoEV of 17.9%.

SBI Life’s Q4FY18 performance was in line, with VNB margins expanding to 16.2% in FY18 vs. 15.4% in FY17 (80bps improvement was on expected lines). SBI’s overall APE growth at 27% in FY18 was better than peers and, with SBI’s distribution strength, growth in the near term will be stronger than peers. The miss in FY18 has been a muted performance on protection growth which lagged peers. Overall, we continue to like ULIP players and SBI Life for its ability to generate higher-than-industry growth. We thus maintain Buy rating with revised target price of `880/share (15% potential upside; implies 3.2x FY20F EV). Our pecking order in the insurance space is ICICI Prudential Life Insurance (IPRU IN, Buy) > SBI Life Insurance > Max Financial Services (MAXF IN, Buy).

VNB margin expansion on expected lines

SBI Life’s VNB margins expanded from 15.4% in FY17 to 16.2% in FY18, driven partially by: (i) lower expense ratio; and (ii) persistency related assumption change. SBI Life did not change its tax rate assumption, unlike IPRU, which had a130bps margin expansion due to tax rate change. The quantum of margin improvement was on expected lines but did not surprise (unlike IPRU) given muted growth in protection business (3% y-o-y in credit protect and only Rs 330 mn of pure protection business).

Core RoEV of 18%

SBI Life’s EV increased from Rs 165 bn in FY17 to Rs 191 bn in FY18 with core RoEV of 17.9%. On the variances, a large positive variance on persistency (`1.9 bn) was offset by `1 bn negative impact on mortality relating to government protection business. Management explained that this is a one-year business and hence the mortality impact will not recur in FY19.

Other highlights

(i) APE growth of 27% y-o-y in FY18—individual APE share increased by 100bps; (ii) share of ULIPs increased to 56% from 51%; (iii) branch efficiency increased from Rs 1.8 mn to Rs 2.4 mn; (iv) opex ratio moderated to 11.2% in FY18 from 11.6% in FY17.

VNB margin expansion on expected lines

SBI Life’s VNB margins expanded from 15.4% in FY17 to 16.2% in FY18 driven partially by: (i) lower expense ratio; and (ii) persistency related assumption change. SBI Life did not change its tax rate assumption, unlike IPRU, which had a ~130bps margin expansion due to tax rate change. The quantum of margin improvement was on expected lines but did not surprise (unlike IPRU) given muted growth in protection business (3% y-o-y in credit protect and only Rs 330 mn of pure protection business).

Increase PT to Rs 880/share

Overall, we continue to like ULIP players and SBI Life for its ability to generate higher-than-industry growth. We thus maintain Buy rating with a revised target price of `880/share (15% potential upside; implies 3.2x FY20F EV).

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