Recommendation From Insurance Sector

This column gives you scrip chosen by the research team during the fortnight that is fundamentally strong and expected to give good capital appreciation over a time period of 1 year. 

SBI LIFE INSURANCE : PROFITABLE PROTECTION 

HERE IS WHY
☛Huge growth potential through SBI.
☛Best-in-class cost ratio.
☛Increasing share of higher margin product.

The Indian life insurance industry is going through a structural change and is at the cusp of change after the pandemic. While growth in the past has been largely dominated by the savings business, the protection business will play an important role over the next decade. Insurance penetration measured by premiums as a percentage of GDP is only 2.8 per cent in 2020 in India. To exploit this opportunity, SBI Life Insurance is uniquely placed, having access to more than 22,000 branches of State Bank of India (SBI) spread across the nook and corner of the country. These branches altogether have about 45 crore clients.

With only 3 crore of them insured, there is a huge opportunity for the company to increase its premium growth. Moreover, the company has designed its product in a way that attracts more and more of bank’s clients. For example, its ULIP product is skewed towards debt and its individual protection business largely comes from return of premium (ROP) products. To further strengthen its distribution, the company has tied up with Yes Bank. ULIP, which formed a majority of annualised premium equivalent (APE) for SBI Life Insurance in FY20, will continue to remain a dominant product. 

Shares of higher-margin products such as protection (9 per cent of APE) and non‐par savings (7 per cent of APE) have increased of late. It is up from 5 per cent and 1 per cent, respectively. A decline in ULIP sales in 1HFY21 has also resulted in a higher proportion of protection and non-par savings products in total APE. Consequently, VNB (value of new business) margin for the company increased to 18.8 per cent in H1FY21 from 15.4 per cent in FY17. Proportion of higher-margin products will result in steady growth in VNB margin. 

Margin for the individual products segment is higher for SBI Life Insurance than its peers, mainly due to its lower acquisition expenses and lower operating expense ratio. In the first half of FY21, SBI Life Insurance saw a significant decline in its credit protection business due to lower credit disbursements. Nonetheless, credit off-take trends continue to improve as the economy resumes to normalcy. Disbursements for both home loans and automobile loans have seen yearly growth in the last three months. Hence, we expect growth for the credit protection business to bounce back in H2FY21. 

SBI Life Insurance reported new business premium (NBP) growth of 27.2 per cent YoY in Q2FY21. APE declined by 3.6 per YoY due to a 15.3 per cent decline in individual savings’ business. The implied VNB margin for the quarter stood at 18.9 per cent, up 50 bps YoY. The company posted NBP at Rs 5,829.7 crore, surplus growth of 13 per cent at Rs 393.1 crore and PAT growth of 131 per cent YoY at Rs 299.7 crore. At the current market price, the stock trades at one-year PEV multiple of 2.4 times, which is at the lower end of its historical valuation range. Hence, we advise our readers to BUY the stock with a target gain of 25 per cent in the next one year.