SBI Life's premium pricing justified

Better profitability, superior growth, wide distribution network & strong market-hold place the life insurer's IPO favourably

Many factors are playing to the advantage of SBI Life’s initial public offering (IPO), including the timing or its business model, where superior growth and profitability are among the highlights. The strength of these reflects in the IPO valuation of Rs 70,000 crore. 

At these levels, the pricing is 1.5 times the stake sale value in December 2016. That was when leading private equity entity KKR and Government of Singapore owned-Temasek Holdings acquired 3.9 per cent stake. SBI Life’s ability to maintain the top spot (based on new business premium or NBP) or the second spot (trailing ICICI Prudential Life or I-Pru Life, based on total premium), its cost-effective business structure, vast distribution network and healthy product mix are factors that  substantiate the premium over the earlier transaction and a moderate one over I-Pru Life. 

Hence, the IPO, priced at 4.2 times the FY17 embedded value (EV) appears reasonable for long-term investors. The IPO is an offer for sale of 120 million shares, after which State Bank of India’s (SBI’s) stake will be 62.1 per cent and BNP Paribas’ at 22 per cent.

Operations

Established in 2001 as a joint venture between SBI holding 70.1 per cent stake and BNP Paribas Cardiff having 26 per cent, it was quick to earn a place among the top five private life insurers. Over time, SBI Life has scored ahead of peers in key metrics such as renewal premium growth, total cost ratio, persistency ratio and the mis-selling ratio (see table).

With an operating expenses ratio of 9.8 per cent as on end-June (again ahead of peers), a diversified product offering and strong bancassurance network are perhaps its key reasons for the successful growth path. SBI Life’s individual NBP contributed by its bancassurance channel clocked a compounded annual growth rate (CAGR) of 46.7 per cent, from Rs 1,944 crore in FY15 toRs 4,185 crore in FY17, versus 27.2 per cent CAGR by its private peers. 
 

A progressive change in product mix is also noteworthy. In FY15, about 35 per cent of NBP was from unit-linked insurance policies (ULIPs), 39 per cent from non-participating (non-par) policies and 26 per cent from participating (par) policies.

As on end-June, this stands at 50 per cent ULIP, 35 per cent non-par and 15 per cent par products. 

Financials

The operational strengths reflect positively on its financials, with SBI Life turning profitable within five years. From FY07 to FY17, the NBP has seen a 14.7 per cent CAGR, with faster growth in FY15–17 at 35.5 per cent, highest among the top five private life insurers. Gross written premium and new business annualised premium equivalent (NBAP) saw a 27.8 per cent and 36.6 per cent CAGR, respectively, in FY15-17. Consequently, assets under management rose from Rs 71,340 crore in FY15 to Rs 101,000 crore at edn-June 2017. NBAP is the sum of net profit on all the new business during a year.

Valuations

The EV was Rs 16,540 crore in FY17. The valuations work out to 4.2 times the FY17 price to embedded value (P/EV). Seen against I-Pru Life’s asking rate of four times the FY17 P/EV, SBI Life is at a marginal premium. However, being ahead of the sectoral average growth rate, its product profiling, and strong distribution network offer comfort on sustaining the current performance. This justifies the IPO pricing.

Risks

While the product mix is at a comfortable level for now, it needs to be seen if SBI Life would tinker with the proportion of ULIP products, in a bid to grow faster than peers. The share of ULIPs has already risen from 35 per cent in FY15 to 50 per cent as on end-June 2017. A further change might help it accomplish faster growth while impacting the profitability. Therefore, an adverse change in product and distribution mix could weigh on the current growth momentum.