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SBIL pushes guaranteed business and controls cost to sustain margin

Result Highlights

* VNB margin: Calculated VNB margin for 3QFY22 declined 33bps QoQ but expanded 383bps YoY to 25.5% (on effective tax rate basis)

* VNB growth: VNB growth was healthy at 13.6%/53.9% QoQ/YoY driven by VNB margin expansion YoY and healthy APE growth QoQ

* APE growth: New business APE growth was also healthy at 15.1%/30.9% QoQ/YoY driven sequentially by Non-par savings, ULIPs and Groups savings

* Expense control: Expense ratio declined 94/67 bps QoQ/YoY to 7.8% as opex ratio declined 69/31 bps QoQ/YoY

* Persistency: 37th month ratio declined 74/46 bps QoQ/YoY to 68.2% whereas 61st month ratio rose 193/10 bps QoQ/YoY to 45.3%

Our view – SBIL pushes guaranteed business and controls cost to sustain margin

Management stated that sales of Non-par Guaranteed business will be driven by customer demand and they are not looking at internal limits at the moment: They further stated that the share of Non-par Guaranteed business could rise to 15-18% and even 20% of overall new business APE over time. Total Non-Par savings (including Annuties) rose 37% QoQ to occupy 15% of total new business APE for 3QFY22.

SBIL has not changed anything on the retention approach for retail protection as far as the new product launched in 2QFY22 is concerned: SBIL had launched a new pure term product in 2QFY22 after discussion with reinsurers and had, therefore, factored in the new reinsurance rates prescribed. Consequently, there was no need to alter the pricing strategy for this product or associated retention approach. Retail protection is still dominated by ROP for SBIL with more than 80% share.

Two key reasons for improvement in VNB margin for SBIL on YoY basis has been improved margin for product buckets and declining expense ratio: SBIL has witnessed material VNB margin expansion without any favourable product mix changes as such. Improvement in opex ratio has been another contributing factor to margin expansion. SBIL is yet to alter its cost assumption even though the experience has been positive.

We maintain ‘BUY’ rating on SBIL with a revised price target of Rs 1768: We value SBIL at 3.6x FY23 P/EV for an FY22E/23E/24E RoEV profile of 22.6/22.0/21.4%.

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