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Strong business performance; Maintain Buy
* SBI Life Insurance Company (SBIL) reported gross written premium (GWP) of Rs113.7bn (+22.5% yoy, +24.1% qoq), almost in line with our estimate, supported by annualized premium equivalent (APE) growth of 16.8% yoy to Rs30.4bn.
* Value of new business (VNB) margin was 17.7% (at gross-tax), 10bps below Emkay est. (+150bps yoy and +20bps ytd). Product mix boosted margins 300bps yoy, while assumption change and other negative variance impacted margin by 150bps yoy.
* Persistency (excl. single premium) expanded for all major cohorts with 13th month persistency up by 263bps yoy to 83.9%, and 49th month persistency up by 125bps yoy to 60.3%. Sequentially, FY19 over 9M19 saw 13th month persistency picking up 190bps.
* In order to expand margins, SBIL is looking at diversifying the product mix with segments such as immediate annuity and non-par guaranteed product. We reaffirm our positive view on the stock and maintain our Buy rating with a TP of Rs830 at 2.7x FY21E EV.
Protection segment growth tops growth of traditional segment
SBIL’s ramp-up in individual protection (+554% yoy) on APE basis – while on a low base – helped margin expansion despite the contraction in individual par (-13% yoy) and non-par (- 40% yoy) segments in FY19. Product mix helped margin expansion by 300bps yoy, while assumption change and other negative variance impacted margins by 150bps yoy. Integration with YONO app to offer credit life played well, tapping 2-3% of the target population.
Embedded value (EV) walk-down
SBIL reported return on embedded value (ROEV) of 17.4% (-50bps yoy), driven by the negative impact of operating assumption change to the tune of Rs1.01bn on rising per-unit maintenance costs. The company experienced positive operating variance in persistency and largely from mortality; however, higher expenses led to some contraction in expense variance. Management expects higher expenses toward investments in digitalization to yield positive results in 2-3 years. With the rise in expenses, its acquisition to renewal mix forms 75:25 vs. the earlier mix of 80:20.
Outlook and valuation; maintain Buy
In order to expand its margin other than the protection segment, SBIL is looking at diversifying its product mix by scaling up new segments such as immediate annuity, non-par guaranteed products, and single premium non-par savings products. It is also planning to improve its competitiveness in the individual term plan, with the addition of some additional features (riders), taking a correction in the pricing in comparable products with peers. We believe these steps are in the right direction and should be margin-accretive in the long term. We reaffirm our positive view on the stock and maintain our Buy rating with a TP of Rs830 at 2.7x FY21E EV. In our view, SBIL’s overdependence on SBI Bank for distribution poses a distribution risk, although we do not see any change in this relationship in the near future.
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