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Business growth recovering sharply; operating metrics steady

Estimate VNB to grow at 24% over FY21-24E

* SBILIFE has reported strong traction in new business growth, with Individual WRP growth of 52%/67% over Jul’21/Aug’21. In FY22 YTD, it has delivered Individual WRP growth of 48% YoY, while two-year CAGR stands healthy at 20%.

* Our recent interaction with the management indicates pick up in business momentum, with growth bouncing back strongly across all segments. The management is aiming at healthy double-digit growth over FY22E (20-25%), which would be among the best in the past few years. We estimate 20% CAGR in APE growth over FY21-24E.

* Agency channel has shown a strong bounce back and is contributing well to business growth. Strong momentum in high margin segments such as Annuity and Credit Life would aid further improvement in VNB margin.

* SBILIFE does not see any major challenge with respect to COVID-related claims. However, it may take a few months for the trend to stabilize completely. Persistency ratios are holding well across cohorts, while cost ratios may increase slightly on a revival in business growth.

* We estimate VNB to grow at 24% CAGR over FY21-24E, with operating RoEV to sustain by ~18% by FY24E. SBILIFE is among our preferred picks in the Life Insurance space. We reiterate our BUY rating with a TP of INR1,400/share (2.6x 1HFY24E EV).

Growth bouncing back strongly, FY22 may be the best in the past few years

SBILIFE has been reporting strong traction in business volumes, with Individual APE growth of ~48% YoY over FY22 YTD. The management said all products are contributing to the growth revival, with ULIPs growing at 50-60% YoY, Annuity over 40% YoY, Non-PAR Guaranteed at more than 20% YoY, and Protection at over 45% YoY. Credit Life is seeing healthy traction, led by rising demand for home loans. We expect the share of Non-PAR to increase further over FY22E. The management is aiming at healthy double-digit growth over FY22E (20-25%), which would be among the best in the past few years. We estimate 20% CAGR in APE growth over FY21-24E.

Product mix improvement to aid expansion in VNB margin

The shift in product mix shift towards higher margin products such as Non-PAR and Protection would drive improvement in VNB margin. Strong trends continue in the Credit Life segment, thus supporting overall Protection growth. While we are not factoring in a major decline in the share of ULIP mix, SBILIFE has a significantly higher share of the ULIP business at 65% (FY21) among leading private insurers. The company will continue to benefit from the improvement in product mix over the next few years. SBILIFE has reported a 340bp improvement in VNB margin over FY19-21. We estimate margin to improve further to 25.5% by FY24E.

Agency channel making a strong comeback; banca trend remains robust

SBILIFE’s agency channel has made a strong comeback as mobility restrictions have eased considerably. The management suggested that the agency channel is currently growing at 50% YoY (4.6% CAGR over FY19-21), while banca growth trends remain robust. On the distribution front, YONO is emerging as the key focus area for growth in the Individual Protection business. SBILIFE has the agent network of ~147k and will continue to make investments in expanding the agency channel. We expect both banca and agency channel to reflect improving business trends in the medium term.

Cost ratios to increase slightly – leadership in opex to sustain

SBILIFE has demonstrated significant control in cost ratios as the same declined to 8.3% during FY21 v/s 11.2% three years ago – a significant lead over peers. The management will continue to work on cost optimization. However, overall expenses are likely to increase due to continued investments in technology and a revival in business growth. SBILIFE has one of the lowest cost structures among its peers. It has lower banca commission rates, which allows it to maintain strong control on cost ratios. We expect cost ratios to increase to ~9.5% by FY24E.

COVID-related claims to increase over 2QFY22 levels, but the provision buffer seems adequate

The management does not see any major challenge with respect to COVID-19 claims. However, it may take a few months for the trend to stabilize completely. Most insurers in our recent conference guided at elevated claim trends over 2QFY22 due to delays in the intimation of claims. SBILIFE said it has adequate provisioning buffers to absorb incremental COVID-19 claims.

Valuation and view

SBILIFE witnessed strong traction in premium growth across all product segments, with both agency and banca channel contributing to overall growth. We estimate APE growth at 20% CAGR over FY21-24E, led by continued momentum in non-PAR savings and Protection products, while growth in ULIP has also recovered.

We estimate VNB margin to improve to 25.5% by FY24E, driving 24% CAGR in VNB over FY21-24E. Persistency ratios are holding well across cohorts, while cost leadership continues. We expect operating RoEV to sustain ~18% and estimate 17% EV growth over FY21-24E. SBILIFE is among our preferred picks in the Life Insurance space. We reiterate our BUY rating with a TP of INR1,400 per share (2.6x 1HFY24E EV).

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