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SBI Life Insurance Co. Ltd’s March quarter performance has given credence to the recent sharp gains in the company’s share price, despite the impact of the second wave of covid-19 infections.

SBI Life reported 63% growth in value of new business (VNB) and an expansion of VNB margin to 22.2%. On both these metrics, the company exceeded analysts’ expectations. Ergo, most have increased their expectations for the next year, citing the healthy growth trajectory of the company and its conservative assumptions behind margins.

“We raise VNB forecasts for FY22-23 by 9-10% as we factor in better premium growth," wrote Jefferies India Pvt. Ltd analysts.

For a life insurance company, the cost of taking on board a customer is upfront, while returns are staggered over many years. Ergo, a jump in business growth today would pressure profits but is in fact salutary for future profitability. In this context, a rather flat net profit for the March quarter can be looked through.

V-shaped recovery
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V-shaped recovery

The life insurer reported 46% growth in business on an annualized premium equivalent (APE) basis. Of course, Q4 growth figures are inflated largely due to a low base. For instance, the 46% increase in retail APE for the quarter is due to the 13% contraction in the corresponding quarter last year.

Nevertheless, analysts at Jefferies India Pvt. Ltd point out that on a compounded annual growth rate (CAGR) basis, SBI Life saw healthy 13% growth in total APE in the past two financial years. A large part of this growth has come in from a surge in non-participatory products, while the share of protection has remained unchanged. Market-linked products, too, have shown strong 47% growth for FY21, and they remain the biggest segment in the portfolio.

SBI Life’s growth was not only driven by its parent’s branches, but also other bank networks. Its tie-ups with other partners have served much more than State Bank of India’s network during FY21.

While the pandemic may have made Indians more aware of the importance of a life insurance cover, there is still a challenge in terms of pushing products to more customers beyond bank branches. Restrictions due to the second covid wave have widened in many states, limiting operations. That said, SBI Life’s profitability metrics have all the ingredients in place for improvement, analysts said.

Despite the fact that the insurance company’s shares have outperformed rival HDFC Life Insurance Co. Ltd, analysts believe there is still room for more upside as valuations are relatively modest. SBI Life shares trade at a multiple of 2.5 times its estimated embedded value for FY22, while HDFC Life shares trade at a multiple of over four times.

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