Photo: Reuters
Photo: Reuters

While earnings buttress valuations, new challenges emerge for SBI Life

  • In the new year, though, some new challenges may emerge for the company
  • SBI Life’s profitability metrics such as value of new business, cost ratios and even embedded value have increased sharply in the first two quarters of FY20

Indian life insurers trumped global peers in terms of share price gains last year. The largest private insurer—SBI Life Insurance Co. Ltd—gained 61% in 2019, unmatched by any insurer across the world, according to data on global insurance companies compiled by Bloomberg.

The insurer’s performance last year has given enough reason for investors to prefer the stock. SBI Life’s profitability metrics such as value of new business, cost ratios and even embedded value have increased sharply in the first two quarters of FY20.

Graphic: Satish Kumar/Mint
Graphic: Satish Kumar/Mint

In the new year, though, some new challenges may emerge for the company.

Firstly, analysts expect business growth to taper off for the industry as a whole. While SBI Life may have an edge considering the mammoth network of its parent and other bancassurance tie-ups, it is unlikely to completely escape a slowing of growth.

Even so, some analysts believe the insurer would be able to maintain its growth at FY19 levels. Nomura Financial Advisory and Securities (India) Pvt. Ltd expects SBI Life to show 20% growth in new business premium, similar to that of FY19.

A larger issue is the fact that the banking regulator may ask banks to pare their stake in their insurance subsidiaries to 30%, according to a Mint report on 26 December.

This would mean that for investors of SBI Life, there is a risk of significant dilution ahead. Parent State Bank of India (SBI) holds over 57.6% in the insurer. Bringing down this stake is a tall ask unless the time given is significant.

Then there is the issue that strong parentage gives additional comfort on trust as well as capital, which will get diluted if banks have to pare their stake. To be sure, bankers will wait for a formal notification from the regulator. Even so, this is a risk which is unlikely to be ignored by investors.

Meanwhile, analysts are confident that SBI Life would continue to report strong performance metrics, something that may support valuations going ahead.

“We believe SBI Life is on the right track given the increased focus on improving product mix toward the high-margin protection segment and taking granular steps toward digitalization," analysts with Embay Global Financial Services Ltd said in a note. The brokerage firm along with several others has a buy rating on the stock.

After the massive gains last year, SBI Life’s shares trade at a multiple of around three times its estimated embedded value for FY21. Given the distribution heft and superior product mix, analysts believe valuations are justified.

What’s more, shares of HDFC Life Insurance Co. Ltd trade at an even higher valuation of four times estimated embedded value for FY21.

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