In an under penetrated market such as India, the mettle of a life insurer is known by how fast it can push its products. In that, SBI Life Insurance Company wins hands down.
The country’s largest private life insurer grew its new business premium by 35% for the first nine months of the current financial year. In annualised premium equivalent terms, which considers first year premiums and 10% of one-time premiums, SBI Life reported 22% growth.
In short, the life insurer was able to push its products to more and more customers, faster than competition. The fact that it has access to an unparalleled distribution network of its parent doesn’t hurt.
But fast growth for an insurance company would mean a sacrifice of profits given that the costs of underwriting insurance is upfront while the payoffs to the insurer are staggered.
Add the fact that SBI Life took a hit on its investment book due to defaults by Dewan Housing Finance Ltd on its bonds, the insurer’s profit after tax grew by a modest 3%.
Surely, investors seem to ignore this and focus on the strong business growth the insurer has reported. Shares of the life insurer gained 1.45% over and above the 1% increase on Wednesday in response to its earnings.
While business growth is critical, an important aspect is how much profit the insurer is able to squeeze out of every policy. Here, SBI Life seems to have fallen behind ICICI Prudential Life Insurance. SBI Life reported a value of new business margin of 18.3% which was lower than ICICI PruLife’s 20%. Another competitor, HDFC Life Ltd would release its earnings later today. HDFC Life has trumped competition in profitability metrics for many quarters.
SBI Life has been on analysts’ buy recommendation for long now. But after the stellar 29% increase in share price in the last six months, concerns over valuations have emerged.
The life insurer needs to up its game on profitability for investors to stay positive on the stock.