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Valuations continue to belie performance

SBI Life reported Rs3.9bn VNB (basis effective tax rate) from Rs16.2bn APE in Q1FY22, which is better than Q1FY20 and Q1FY21 driven by better product mix. Management commentary continues to be strong across product categories and distribution channels with multiple growth levers ahead. The mortality experience and outlook also remains better than peers. Maintain BUY.

* Extra mortality reserve is out of prudence and not related to IBNR. This translates to better mortality experience compared to peers. SBI Life reported Rs5.7bn of covidrelated claims in Q1FY22 while creating an additional reserve of Rs4.45b (vs Rs1.83bn in FY21-end). Hence, the total covid-related P&L impact was Rs8.32bn in Q1FY22 (similar range to peers). However, as Q1FY22 total mortality experience is within expectations, the company expects no negative mortality variance in FY22 as of now. In other words, if there is no incremental adverse experience, the provision of Rs4.45bn would not be required. In that direction, the company also hinted at early signs of improvement in mortality experience. Management remains confident of growing the protection business through enhanced underwriting and appropriate repricing. There may be reinsurer-driven price hike in the group segment.

* Multiple levers ahead: 1) Non-par savings mix will increase to double-digit mix in FY21 from 7% in Q1FY22 (based on total APE) aided by higher guarantees; 2) bancassurance contribution (57% in Q1FY22) will increase with normalisation of walk-ins; 3) management confidence in ULIP traction; 4) increase in distribution productivity of ex-SBI tie-ups.

* Mix change in terms of products in Q1FY22 compared to FY21. In terms of total APE, Individual saving mix has declined from 83% in FY21 to 77% in Q1FY22, while Protection mix improved from 10% to 13%, Annuity mix improved from 3% to 4% and Group savings improved from 4% to 6% in the same period. Within Individual savings, PAR / Non-Par / ULIP mix declined from 8%/ 9%/65% in FY21 to 7%/ 6.8%/63% in Q1FY22  Mix change in terms of distribution in Q1FY22 compared to FY21. In terms of total APE, banca / Agency mix declined from 63% / 26% in FY21 to 57% / 29% in Q1FY22

* Operating performance highlights: On YoY basis, persistency improved in all cohorts except for 61st month. 13th month / 61st month persistency now stands at 84.5% / 60.9%. Opex / Commission ratio increased 18bps / 10bps YoY to 7.2% / 3.2% in Q1FY22. Solvency ratio remains healthy at 215%

* Maintain BUY with an FY23-based target price of Rs1,370 (earlier 1,315). Basis effective tax rate, the embedded value of SBLI is expected to grow from Rs364bn in FY21 to Rs471bn in FY23E driven by addition of Rs58bn unwind and Rs67n of VNB, which has grown from Rs16bn in FY18 to Rs26.6bn in FY21. Our Rs31.3bn/36bn VNB in FY22E/FY23E factor modest 15% APE CAGR and 24% VNB margin, both of which have strong upside risks. SBLI currently trades at 2.3x FY23E P/EV. Maintain BUY with a target price of Rs1,370 (implied 2.9x P/EV).

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