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Strong performance to raise expectations

SBI Life has been able to manage improvement in product mix, distribution productivity, and cost efficiency leading to more than expected VNB growth, VNB margin and EV growth through positive variances. The strategy of ‘pursuing all profitable business opportunities’ seems to have a working model on ground. At 2.1x FY23E P/EV, the valuation remains attractive (core RoEV of 19.4% in FY21). Maintain BUY.

* Strong VNB performance driven by margins:

SBI Life managed to clock 20% VNB growth in FY21 driven by 7% increase in APE and 260bps increase in margins. Q4FY21 margins were even higher at 27.7%. The relatively important growth segments were protection (APE up 16% / 25% YoY in Q4/FY21), non-par (APE up 64 YoY in FY21), annuity (APE up 169% YoY in FY21) and channel ex-banca ex-agency (APE up 55% / 51% YoY in Q4/FY21).

* Levers ahead:

1) New products and price hikes in protection segment in FY22, which can continue to support margins. 2) Continued strong demand for life insurance. 3) Management confidence on ULIP traction (also echoed by other insurers). 4) Increase in distribution productivity. Banca and agency channels registered growth of 15% and 7% YoY respectively. There was 70% YoY increase in NBP from ‘other channels’ (non-SBI & non-agency), which total 12,500 branches. New partnerships added during the year are with UCO Bank, Yes Bank, and Suryoday Small Finance Bank.

* Operating performance continues to improve:

Persistency improved in all cohorts. 13Th month / 61st month persistency now stands at 87.9% / 61.6%. Opex ratios have improved by 110bps YoY to 4.8% in FY21. Solvency remains healthy at 215%.

* Core RoEV at an impressive 19.4% in FY21:

Company is managing increase in mortality risks (high number of policy track records) with additional reserving. The positive operating variance of Rs7bn in FY21 and economic variance of Rs23bn (largely due to lower interest rates) have led EV to increase to Rs364bn. Company has raised its assumptions on mortality impact (Rs800mn) on EV and also built an additional Rs1.8bn in covid reserves. The increase in claims (+74% YoY) also incorporates increase in non-covid claims though the demarcations might not be very accurate.

* Maintain BUY with an FY23-based target price of Rs1,315. Basis effective tax rate, the embedded value of SBLI is expected to grow from Rs364bn in FY21 to Rs472.4bn in FY23E driven by addition of Rs58bn unwind and Rs68.7n of VNB, which has grown from Rs16bn in FY18 to Rs26.6bn in FY21. SBLI currently trades at 2.1x FY23E P/EV. Maintain BUY with a target price of Rs1,315 (implied 2.8x P/EV).

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