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Summary: SBI is largest private insurer in terms of market cap and also has the largest market share in terms of APE and VNB. It has lowest operating cost ratio amongst its peers and is constantly improving (9.9% in FY20 to 8.6% in FY22) mainly due to its operating efficiencies and low commission cost.

Leveraging bank’s network: SBI Life leverages on SBI Bank as its bancassurance partner which gives it access to large customer base and also helps penetrating in underpenetrated markets (semi-urban and rural). Its bancassurance share channel
mix increased from 60% in FY17 to 63% in FY22. The relationship with the bank helps the insurer to earn higher new business premium thereby generating value. We expect that the insurer will continue to maintain strong relationship with the bank which will increase the NBP margin.

Diversified product mix: SBI Life share of ULIPs in product mix is declining from 50% in FY17 to 44% in FY22 while the share of protection (5% in FY17 to 12% in FY22) and non  par products (2% in FY17 to 7% in FY22) is seeing an increase. We expect growth in non par and protection products to continue in estimates which will also drive  margin and help improve persistency ratio even further.

NBM margin expected to increase: Better product mix, cost control and higher persistency ratio helps the company to show improvement in margin. NBM  improved from 20.7% in FY20 to 25.9% in FY22 and expect margin to improve even
further. Along with NBM, we expect NBP to grow as the product mix undergoes a transition and expect NBP to grow at a CAGR of 23% over FY22-25E.

Low cost ratio: SBI Life’s cost ratio declined from 9.9% in FY20 to 8.6% in FY22. The low cost ratio is a result of bank operating efficiencies and effective utilization of distribution channel and increase in direct channel. We believe the insurer to continue to operate efficiently while we forecast the cost ratio to be at 8.4% level in
FY25E.

Valuation: We are positive on the insurance company due to its cost efficiencies, leveraging on SBI Bank’s network and access to its customer base while change in product mix from ULIP to protection and non par products. We believe the insurer is better place to capture the growth insurance market in the country and also operating efficiently. We expect APE/NBP/VNB to growth at 19%/18%/23% CAGR over FY22-25E. We initiate coverage of the insurance company with a Buy rating and target price of Rs 1,330 valuing the company at 2.2x of FY25E embedded value.

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