Beyond the net profit fall, SBI Life gives more bang for the buck in Q22 min read . Updated: 16 Oct 2019, 11:55 PM IST
- The winning point was that margin-friendly protection biz continued to grow at a fast pace
- The share of protection and annuity products in the total portfolio is now 18% for SBI Life
MUMBAI : Investors seldom like it when the business they invest in fails to show profit growth.
So what explains the fact that SBI Life Insurance Co. Ltd’s stock gained nearly 5% on Wednesday despite the insurer reporting a 48% year-on-year drop in net profit for the September quarter?
There are a handful of reasons. First off, if an insurance firm is not making profits, it means it is getting more business. Insurers have to bear the cost of acquiring customers upfront, while the pay-offs or profits come later in a staggered manner. In other words, if SBI Life writes an insurance policy today, it gets profits at regular intervals in the future. Investors like it when prospects of future profits rise rather than present profits.
Therefore, investors found it more important that SBI Life reported an increase of 34% in its new business premium, much of which was driven by a broad-based growth in most product categories. The winning point, of course, was that margin-friendly protection business continued to grow at a fast pace.
In other words, the insurer’s products continued to fly off the shelves, with term plans getting most of the demand. Protection products are similar to no-frills bank accounts and generate high margins for insurers. The share of protection and annuity products in the total portfolio is now 18% for SBI Life. Growth in non-participatory savings products zoomed.
What this means is that SBI Life will get more bang for every buck in the coming quarters. For the September quarter too, the life insurer continued to do well on profitability metrics. The value of new business margin was 20.2%, slightly higher than analysts’ expectations. It is worth noting that the life insurer has access to a large branch network of its parent, State Bank of India (SBI).
Analysts at Jefferies India Pvt. Ltd consider this a unique advantage. “SBI Life’s business done through SBI bank was 25 basis points of SBI’s deposit base, vs IPRU’s (ICICI Prudential Life Insurance Co. Ltd) new business with ICICI Bank at 80 bps," it said in a note. This means that for SBI Life, there is still scope to get more business out of its parent.
But what is behind the net profit fall at the company?
Insurance firms have to put premium they get somewhere to earn money and they invest their so-called surplus into bonds. SBI Life suffered a blow to its investments from its exposure to beleaguered Dewan Housing Finance Corp. Ltd (DHFL). Analysts at Emkay Global Financial Services Ltd said that the insurer set aside ₹70 crore towards erosion in value of its investments, of which ₹67 crore was towards DHFL exposure.
That said, analysts believe that valuations at three times estimated embedded value for FY21 are still modest compare with rival HDFC Life Insurance Co. Ltd.