SBI Life Insurance’s superior growth makes valuations look fair
Fiscal year 2017 (FY17) was phenomenal for SBI Life Insurance Co. Ltd on most metrics as it reported a sharp growth in new business premium, reduction in expense ratio and an improvement in persistency ratios.
The growth in business has continued in the first quarter of the current fiscal year as well and therefore the timing of the initial public offering (IPO) couldn’t have been better for the promoters.
Promoters State Bank of India (SBI) and BNP Paribas Cardiff seek to garner Rs5,600 crore and Rs2,400 crore, respectively, from the IPO, the price band of which is set at Rs685-700 apiece. At this band, the life insurer will be valued close to Rs70,000 crore.
That is a steep 52% appreciation from the previous transaction in December where investors KKR and Co. Lp and Temasek Holdings Pte Ltd bought a 3.9% stake by valuing the insurer at close to Rs46,000 crore.
But it would seem that the surge in valuation is justified. SBI Life’s embedded value has risen by 32% to Rs16,538 crore for FY17. That of its closest rival ICICI Prudential Life Insurance Co. Ltd has grown 16.1% for the same period. ICICI Prudential Life Insurance was valued at around Rs48,000 crore in September last year when it went public. The private insurer is currently trading at Rs426 apiece, which values the company at close to Rs61,000 crore.
SBI Life has indeed beaten its peers at growth metrics, not just in the past fiscal year but for three years in a row. The insurer’s new business premium grew 35% between FY15 and FY17, the highest among peers. Its assets under management also rose 17.1%, again the highest among peers.
Notwithstanding a large agency network, its cost ratio which includes operating expenses and commissions is the lowest among peers. Its persistency ratios are also higher than others, even for the 37th and the 61st month, which shows that customers tend to stay on course.
SBI Life also has access to the largest branch network in the country due to its promoter, besides having a strong agency network. For the June quarter, bancassurance contributed 60% of new business premium while the rest was through agency. Arijit Basu, managing director of the insurer, said that the mix is unlikely to change.
All said and done, what investors need to watch out for is the rising share of market-linked products in the insurer’s mix. This share has gone up to 50% in FY17 from 35% in FY15 in terms of new business premium. However, Basu assures that part of this was due to the focus to get high-networth individuals as customers and the share is unlikely to go up further.
SBI Life is valued at four times estimated embedded value for FY18, just a shade higher than that of ICICI Prudential Life Insurance. Taking its strong growth into consideration, valuations are not so rich as to deter investors. The insurance business has a lot of potential and there is plenty of appetite in the market for exposure to the sector.
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