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Business growth perks up; VNB margin surprises positively

Non-PAR/Annuity growth robust; Persistency trend improves

* SBI Life Insurance (SBILIFE) reported a robust quarter, with strong APE growth led by recovery in ULIP and continued strong traction in NonPAR/Annuity and Individual Protection. Also, it reported strong VNB growth of 93% YoY – on an effective tax rate (ETR) basis – with margins improving sharply to 27.7%. FY21 VNB margins improved to 23.2%.

* Persistency improved across cohorts, with 13th/61st month persistency improving 180bp/170bp YoY to 87.9%/61.6%. The company continues to maintain cost leadership, with the total expense ratio declining to 8.3% in FY21 (v/s 9.9% in FY20). The Embedded Value (EV) based on actual tax rate grew 27% YoY, aided by a positive economic assumption change. However, EV on an ETR basis stands at INR364b (32% YoY).

* Overall, we expect SBILIFE to deliver 24% VNB growth over FY21–23E and estimate VNB margins to improve to ~24%. Also, we expect EV to post a 17% CAGR over FY21–23. Maintain BUY.

VNB/APE trends robust; EV up 32% YoY

* SBILIFE posted net premium growth of 31% YoY, led by new business premium growth of 63% YoY, while renewal premium grew 16% YoY. For FY21, new business premium / APE growth came in at 24%/7% YoY.

* In 4QFY21, total APE grew ~46% YoY (7% above estimate), led by strong trends in the Non-PAR, Annuity, and Individual Protection segments. Thus, the share of Protection stood at 9.3%, and ULIP is also showing recovery trends. In FY21, the share of Protection increased to 10.5% (v/s ~9% in FY20) and that of Non-PAR/Annuity increased to 9%/3%, while the share of ULIP declined to 65% (v/s 70% in FY20).

* In 4QFY21, absolute VNB grew ~63% YoY (15% beat) to INR8.8b and the VNB margin improved to ~22.2%, aided by a better product mix. On an ETR basis, absolute VNB grew ~93% YoY, with margins improving to 27.7% in 4QFY21. Furthermore, on an ETR basis, absolute VNB grew 20% YoY in FY21, with margins improving to 23.2% (v/s 20.7% in FY20).

* EV based on actual tax rate grew 27% YoY, aided by a positive economic assumption change of INR23.2b. However, EV on ETR basis stands at INR364b (32% YoY). Operating ROEV for FY21 stood at 19.1%.

* Persistency (based on total premium) improved across cohorts, with 13th/61st month persistency improving 180bp/170bp YoY to 87.9%/61.6%. Furthermore, Persistency based on regular premium improved ~170bp YoY to 85.4% for 13th month. On the other hand, 61st month persistency declined 130bp to 48.7%. 4QFY21 shareholders’ PAT growth was muted YoY at INR5.3b.

* On the distribution front, the share of the banca channel in total APE stood at ~63% (~180bp YoY decline), the agency channel’s share stood at ~26% (~125bp YoY decline), and the share of other channels (including tie-ups with other partners) increased to ~11% (v/s 7% in FY20).

* SBILIFE continues to maintain its cost leadership with a total expense ratio of 8.3% (v/s 9.9% in FY20).

Highlights from management commentary

* SBILIFE was maintaining COVID-19 provision reserves of INR1.83b as of Mar’21.

* The total mortality claims settled on account of COVID stand at 5,076, valued at INR3.2b (net of re-insurance). Overall, the total death claims (COVID + nonCOVID) of ~INR30b were settled in FY21.

Valuation and view

SBILIFE reported strong growth in the Individual Protection and Non-PAR/Annuity businesses, while the ULIP business is also seeing recovery. We expect growth to revive from FY22E – we estimate APE growth of 25% for FY22E. However, we remain watchful of the impact of the lockdowns announced in various key states due to the resurgence in COVID cases. SBILIFE continues to maintain its cost leadership, while persistency trends have also improved.

VNB margins are showing strong improvement; we estimate VNB margins to reach ~24% by FY23E, enabling a 24% VNB CAGR and a ~17% EV CAGR over FY21–23E. Maintain Buy, with TP of INR1,150/share (2.3x FY23 EV).

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