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Product mix shift drives VNB margin expansion

* SBI Life Insurance (SBILIFE) reported 9% YoY growth in new business APE to INR39.7b (in line).

* VNB margin for the quarter stood at 27.4% vs our estimate of 28.5% (26.8% in 1QFY25). Absolute VNB grew 12% YoY to INR10.9b (in-line), driven by the product mix shift toward non-linked products.

* Shareholder PAT grew 14% YoY to INR5.9b (in-line) in 1QFY26.

* The company reaffirmed its full-year guidance of mid-teen APE growth, supported by new non-par and protection product launches. Apart from the focus on product mix shift toward non-linked products, higher sales of products with larger sum assured and improved rider attachment are expected to drive VNB margin expansion to 26-28% for FY26, according to management.

* We expect SBILIFE to clock a CAGR of 16%/19% in APE/VNB over FY25-27, while RoEV is likely to remain at ~19% over FY27. We maintain our estimates and reiterate our BUY rating on the stock with a TP of INR2,140 (premised on 2.2x FY27E EV).

Distribution shifting gradually toward non-linked across channels

* SBILIFE reported 3% YoY growth in new business premium (NBP) to INR72.7b. Gross premium stood at INR178.1b (in-line), reflecting 14% YoY growth. This was driven by 24%/12% YoY growth in renewal premium/first year premium, which was offset by a 4% YoY decline in single premium.

* The total cost ratio was 10.8% vs. 9.8% in 1QFY25. The commission ratio was stable at 3.7%. The operating expense ratio stood at 7% vs. 6.1% in 1QFY25, owing to investments toward branch expansion, employee addition, and digital infrastructure during the quarter. The company expects the opex ratio to remain in the range of 6-6.5%.

* On the product front, ULIP APE grew 3% YoY, contributing 57% to total APE (61% in 1QFY25). Increasing focus on non-linked products resulted in 10%/29% YoY growth in the non-par/par savings segment. Strong growth in group protection (+100% YoY) was fueled by both the credit life and GPI businesses. Consequently, the protection business grew 53% YoY, with its contribution increasing to 11.6% from 8.2% in 1QFY24.

* On the distribution front, SBILIFE added 36,000 agents on a gross basis during the quarter and continues to focus on productivity enhancement, along with a shift toward margin-accretive product mix for each channel. While the agency channel witnessed a 15% YoY decline with respect to ULIP APE, the par and non-par segments witnessed 29%/37% YoY growth, leading to channel growth of 1% YoY (after 49% YoY growth in 1QFY25). Individual APE in the bancassurance channel grew 9% YoY, with 13%/60% YoY growth in ULIP/Par, while non-par APE declined 4% YoY. Other channel partners (brokers, digital, etc.) witnessed 6% YoY growth in individual APE, with 25%/9% YoY growth in ULIP/Non-par segments.

* The company witnessed continued improvement in the 13th and 61st month persistency (based on premium) in 1QFY26, increasing ~60bp and ~500bp YoY, respectively. The 49th month persistency declined 430bp YoY due to a particular cohort that could not be revived.

* AUM grew 15% YoY to INR4.8t (in line). Solvency ratio was stable at 1.96x.

Highlights from the management commentary

* SBILIFE continues to pivot toward a margin-accretive product mix, with the agency channel already achieving this shift. Similar progress is visible in the bancassurance segment, where ULIP contribution declined 2%, and the company remains focused on further increasing the non-par share.

* Group protection reported robust growth, led by credit life (up 25% YoY), while GPI growth was also in double digits. Management expects credit life to maintain 20-25% YoY growth, backed by 10-15% YoY growth in home loans and better attachment rates. However, GPI growth may moderate due to its inherently lumpy nature.

* SBILIFE currently works with 14,000+ branches of partner banks, of which 10- 20% are active monthly. The company aims to improve activation levels to unlock higher growth.

Valuation and view

* SBILIFE continued to report improvement in the VNB performance in 1QFY26, aided by a shift in the product mix toward traditional products, strong growth in the protection segment, and rising attachment rates. Going forward, sustained traction in non-linked products and further improvement in rider attachment are expected to drive VNB margin expansion. Continued investments in agency and digital channels are expected to drive overall growth, supported by a recovery in the bancassurance channel.

* We expect SBILIFE to clock a CAGR of 16%/19% in APE/VNB over FY25-27, while RoEV is likely to remain at ~19% over FY27. We maintain our estimates and reiterate our BUY rating on the stock with a TP of INR2,140 (premised on 2.2x FY27E EV).

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