This week’s tactical pick is SBI Life Insurance (current market price: Rs 741).
SBI Life has been one of the fastest-growing life insurers in India with its annual premium equivalent (APE) having grown at more than CAGR of 20 percent in the past 5 years. It is now the second-largest private life insurer with market share of 20.3 percent among private insurers -- excluding LIC -- in terms of individual new business premium as of June-end. SBI Life has doubled its market share among private players since FY14.
However, our enthusiasm for the insurer is not just limited to improving market share. There is more than a reason that make us positive on the stock. Read: Ideas for Profit | SBI Life – Strong growth potential with high profitability; buy
First, SBI Life has by far the largest addressable bancassurance network consisting of more than 25,000 branches of its parent bank, SBI. SBI Life’s bancassurance partnerships with its parent bank remain exclusive. The banca channel has enabled SBI Life to grow much higher than peers over the last few years and shift towards ULIPs. Apart from being huge, the banca channel is under-leveraged, indicating a strong growth potential for SBI Life if the cross-sell efficiency of the bank improves.
Second, despite being banacassurance leader, SBI Life never defocused on its individual agency network. It has a large network of 59,000 agents and 124,000 CIFs (certified insurance facilitators) as of end FY19. Hence, despite its large bank network, its agency channel constituted 30 percent of individual rated premium in FY19 vs 15- 25 percent for peers. Higher share of agency network also indicates that SBI Life, like LIC, enjoys a strong brand.
Third, SBI Life has the lowest cost structure compared to peers with total cost ratio at 10.5 percent of gross written premium in FY19 vs 13-17 percent for peers.
Last, after staying on the sidelines for the last 3 years, SBI Life turned aggressive on the high margin protection business in FY19. In 2018-19, protection share stood at 6.8 percent of APE. As a result, value of new business (VNB) margins expanded by 150 bps to 17.7 percent in FY19.SBI Life’s stock trades at 3.3 times trailing P/EV (price-to-embedded value), which is reasonable considering its RoEV (return on embedded value) at 17.4 percent. SBI Life, in our view, is well positioned for growth in the insurance space with many levers for further improvement in RoEV. Investors looking to participate in insurance growth story available at reasonable price should buy into the stock.
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