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Tailwinds of volume and margin levers to drive growth

SBI Life reported strong Q2FY22 performance with 41% / 78% YoY APE / VNB growth in Q2FY22 along with 180bps QoQ improvement in VNB margin to 25.8%. However, the bigger takeaway is the combination of multiple levers ahead for volume and margin improvement, which include new products, pricing and improved distribution efficiency. Stress on margin improvement as a strategy, guidance on increase in nonpar mix, and launch of new protection product has set up strong expectations for H2FY22. Maintain BUY.

* VNB at >Rs10bn and VNB margin at >25% is superlative performance for Q2FY22. Management commentary remains strong on volume as well as margin outlook ahead.

* Levers for volume growth include: (1) Attractive rates being offered in non-par product Platina, (2) continued traction in ULIPs, (3) growth in new distribution (ex SBI and agency), (4) launch of new pure protection product e-shield Next with embedded optionalities, and (5) continued traction in the core bancassurance channel with increasing activation rate of SBI branches and continued addition of effective agents (total 20,000 added in H1FY22). Company has upped its growth targets which on the back of the overall 41% APE growth in H1FY22.

* Margin levers include: (1) Active pricing strategy across products, (2) expected increase in non-par savings product mix from 9% in H1FY22 to ~12% in FY22, and (3) launch of pure protection product e-shield Next in Aug’21. No incremental price hike is required in protection considering the already taken higher reinsurance rates during the launch of e-shield Next. 

* Higher than expected increase in total covid claims: Total covid claims (sum of actuals plus provision) increased from Rs10bn in Q1FY22 to ~Rs16bn in Q2FY22. This is higher than expected, especially when there were expectations of write-back of provisions at the end of Q1FY22. However, considering the overall decrease in covid cases, fatalities and increase in vaccinations, this is not critical and is also supported by the existing Rs2.66bn provisions in the book.

* Agency channel APE increased sharply in H1FY22: In terms of total APE, agency APE grew 60% YoY in H1FY22 while banca APE grew 42% YoY. Share of agency increased from 24% in H1FY21 to 27% in H1FY22 while that of banca rose marginally to 61.6% in H1FY22.

* Maintain BUY with an FY23 target price of Rs1,500 (earlier: Rs1,370). Basis effective tax rate, the embedded value of SBI Life is expected to grow from Rs364bn in FY21 to Rs479bn in FY23E driven by addition of Rs58bn unwind and Rs78bn VNB. Our estimate of Rs37.2bn/41bn VNB in FY22E/FY23E factor-in modest 18% APE CAGR and ~26% VNB margin, both of which have strong upsides. The stock currently trades at 2.5x FY23E P/EV. Maintain BUY with a target price of Rs1,500 (implied 3x P/EV).

* ULIP registers strong growth in H1FY22: In terms of total APE, individual savings APE grew 53% while group savings declined 24% YoY. Within savings, growth was led by ULIPs (67% YoY) and non-par (27% YoY) while par and annuity registered decline of 6% and 9% respectively. Protection APE grew 25% YoY led by strong growth in individual protection (38%) and group protection (11%). Within group APE, credit protect grew 41% / 33% YoY in H1FY22 / Q2FY22. Group term protection grew 13% YoY in Q2FY22. Share of individual APE savings APE increased from 75% in H1FY22 to 82% driven purely by ULIP, which saw an improvement in mix from 56% to 67% in the same period. Protection mix declined from 13% in H1FY21 to 11% in H1FY22. 61M persistency declined to 43.3% in Q2FY22 from 45.3% in Q1FY22 and 47.6% in Q2FY21 led by ULIPs. Management indicated that drop in persistency was due to profit booking and not anything structural.

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