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Strong all-round performance

Shift in underlying product mix resulted in a spike in VNB margin

* SBILIFE reported a robust 1QFY23 with APE growth of 80% YoY (7% beat) and a sharp jump of 132% YoY in VNB (28% beat). VNB margin spiked 665bp YoY to 30.4% while shareholders’ PAT grew 18% YoY to INR2.6b.

* Strong momentum in APE was reflected across all product segments. However, non-par savings stole the limelight in 1QFY23 with a massive growth of 645% YoY. It now forms 28% of business in APE terms. The growth was aided by a strong response to the newly launched product ‘Smart Annuity Plus’ in Mar’22.

* The notable improvement in VNB margin was primarily driven by a shift in underlying product mix with a larger share of high-margin products such as non-par savings and protection. Together, they constituted 39% of APE in 1QFY23 v/s 20%, a year ago. Retail protection APE growth of 54% YoY to INR2b is commendable, considering the muted performance of private peers.

* We raise our VNB margin estimates by 340bp and 270bp for FY23 and FY24 to 30.1% and 29.7%, respectively, and raise VNB estimate by 19% each over FY23/24. We expect SBILIFE to deliver 27% CAGR in APE over FY22-24, thus enabling 36% VNB CAGR, while RoEV sustains at ~22%. SBILIFE remains our preferred pick in the Life Insurance space. Maintain BUY.

Robust momentum in non-par savings leads to a spike in VNB margin???????

* SBILIFE reported 33% YoY growth in net premium, led by 67% growth in new business and 14% YoY growth in renewal business. Shareholders’ PAT grew 18% YoY, aided by controlled expenses and lower claims.

* Total APE rose 80% YoY, led by a massive growth of 645% YoY in non-par savings and 46% YoY in protection. Par products and ULIPs also saw a healthy growth of 42% and 33% YoY, respectively. Surprisingly, annuity was flat after a strong performance in FY22.

* With this, the share of non-par savings in business mix increased to 28% from 7% in 1QFY22. SBILIFE does not have any internal cap on share of this segment and will continue to underwrite as long as it can hedge interest rate risk effectively. However, 25-30% is a sustainable range as per the management.

* Trends in retail protection are encouraging with a growth of 54% YoY. This is quite commendable in our view, given a weak performance by private peers in this segment during the quarter.

* VNB grew 132% YoY to INR8.8b led by a dramatic rise of ~665bp YoY in VNB margin to 30.4% in 1QFY23, coupled with a robust 80% YoY growth in APE.

* On the distribution front, banca channel outperformed agency with a 98% YoY growth v/s 65% YoY growth for agency on APE basis. This along with rising productivity further boosted overall performance.

Highlights from the management commentary

* SBILIFE aims to grow premiums by 25%+ on a sustainable basis ? Non-par guaranteed savings saw a robust growth as demand for this segment remains strong. The new product, ‘Smart Annuity Plus’, launched in Mar’22 has been well received by the market.

* There are no internal targets on the share of this segment and the company will continue to underwrite as long as it can hedge interest rate risk well.

Valuation and view

SBILIFE displayed a strong show in 1QFY23 with 80% YoY growth in APE along with a sharp jump of 132% YoY in VNB. VNB margin spiked ~665bp YoY fueled by a shift in underlying product mix in favor of high-margin products such as Non-PAR and Protection. Despite volatility in capital markets, ULIPs grew 33% YoY. All distribution channels contributed to the growth along with a rise in productivity of banca and agency channels. This led to a better cost ratio and SBILIFE continues to maintain cost leadership. Persistency improved across all key cohorts. We estimate 27% CAGR in APE over FY22-24. We further estimate VNB margin to remain steady from hereon to reach ~30% in FY24, thus enabling 36% VNB CAGR, while RoEV sustains at ~22%. We retain our BUY rating with a revised TP of INR1,500 (based on 2.6x FY24E EV).

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