SBI Life IPO: Comparison with ICICI Pru Life

SBI Life Insurance IPO
SBI Life IPO is approaching  the market its Rs 8,400 crore initial public offering and has set the price band for the issue at Rs 685-700 per share. SBI Life Insurance Company Limited (“SBI Life”) is India’s Leading Private Life Insurer, in terms of New Business Premium generated in each fiscal year, since Fiscal 2010.
Insurance Sector in India

In the global insurance industry, around 55% of premium comes from life insurance and the rest from the non-
life segment. Emerging markets also reflect this trend with around 54% of premium coming from life insurance. However in India due to  under penetration and nascent stage of insurance sector, the share of life insurance is high at ~78% .

However this is not the true picture as in terms of parameters like insurance penetration (premium as a percentage of GDP), insurance density (premium per capita) and sum assured to GDP, the Indian market is still significantly under insured. India’s life insurance netration stood at ~2.7% in 2016, whereas the average penetration for the life insurance
industry globally is 3.5% as of 2016. Further, due to higher share of savings than protection in the premium, the actual
protection provided by insurance in India would be much lower compared with even other developing markets.

The Indian life insurance industry consisted of only one player – LIC till the year 2000. Post year 2000, private plers were allowed and 10 private players entered the life insurance industry during 2000 to 2001. Among the current top five players in the industry, HDFC Standard Life was the first to register in 2000, followed by
ICICI Prudential Life and Max Life Insurance in the same year. SBI Life and Bajaj Allianz entered the industry
in fiscal 2002.

The top five players accounted for more than 60% of the total premium collected by the private sector in 2016-
17. Their dominance has increased in the last few years due to the relative strength of their brands and wider
distribution network. The top private players are mainly driven by bancassurance channel and have made impressive growth.
SBI Life Market Share

SBI Life vs ICICI Pru Life 
Rs. In Crores
SBI Life ICICI Pru Life
Revenue-Total Premiums Earned 21,015.10 22354
5 Year CAGR(till 2017)  9.9% 9.8%
% Share (Pvt Players) 17.82% 18.96%
New Business Premium 10,146.00 7863
Value of New Business (VNB) margin 15.40% 10.01%
5 Year CAGR(till 2017)  9.2% 9.1%
% Share (Pvt Players) 20.04 15.53
Revenue-Investment Income 9,294.90 14976
Profit Before Tax 974.5 1784.22
Profit After Tax 954.6 1681.66
Share Capital 1000 1435.35
Face Value 10 10
EPS FY17 9.5 11.72
EPS q1FY18 3.1 2.76
IPO or Market Price 700 423.7
PE  (Fy17) 73.68 36.15
PE(Q1fy18 annualized) 56.45 38.38
NAV 31/03/17 55.5 44.63
P/BV (Fy17) 12.61 9.49
RONW  18.50% 28.67%
ROE 18.60% 26.24%
Dividend Payout ratio 18.90% 39.50%
Embedded value 16538 16184
Market Cap 70000 60816
Market Cap/Embedded value 4.23 3.76
AUM 97736 122919
Operating Expense Ratio 7.8 10.50%
Solvency Ratio 2.17 2.87
Persistency Ratios  13th month  81.07% 85.70%
Persistency Ratios  25th month  73.90% 73.90%
Persistency Ratios  37th month  67.00% 67.00%
Persistency Ratios  49th month  62.50% 59.30%
Persistency Ratios  61th month  67.18% 56.20%
Distribution new business- Bancassurance 54.58% 57%
Distribution new business- Indv Agents 43.69% 23%
Claims Settlement Ratio 97.98 97.2

The SBI Life IPO is fully priced even if one considers its relatively better performance over  its only listed peer ICICI Prudential.  Its valuations are at Price/Embedded value ratio of   4.23  versus  3.76 of ICIC Pru. SBI Life is better placed on key operational ratios. SBI Life 61st month persistency ratio is the highest among the top five private life insurers in India.  If it continues to show the same traction, the SBI Life IPO can be considered suitable for medium to long term.

While steep pricing of SBI Life IPO  can result into no listing gains or even marginal loss, taking into account its e operating metrics of the company  its return ratios,
efficiency ratios, renewals growth and strong bancassurance channel, long term investors may benefit in the long run. 

Industry Related Terms

  • Annual Premium Equivalent (APE) is a measure of new business written by a life insurance company. It is computed as the sum of annualised first year premiums on regular premium policies, and ten percent of single premiums, written by the Company during any period from new retail and group customers.
  • Value of New Business (VNB) and VNB margin: VNB is used to measure profitability of the new business written in a period. It is present value of future profits to shareholders as measured at the end of the year in which the business is written. Future profits are computed on the basis of long term assumptions which are reviewed annually. Also referred to as NBP (new business profit). VNB margin is computed as VNB for the period/APE for the period. It is similar to profit margin for any other business.
  • Embedded Value (EV): EV is the current networth of the company plus the present value of all future profits to shareholders< from the existing book of the Company (including new business written in the year). As in the case of VNB, future profits are computed based on assumptions which are reviewed annually. A positive EV variance is indicative of superior performance by the Company as compared to what was assumed in arriving at the EV at the beginning of the year. A positive EV variance and VNB increase the EV year on year.
  • AUM refers to the carrying value of investments managed by our Company and includes Investment loans and net current assets pertaining to Unit Linked investments.
  • Bancassurance: An arrangement entered into by a financial institution (such as banks, non-banking financial companies, micro-finance institutions and small finance banks) and an insurance company (either through corporate agency or master policyholder arrangement),, through which the bank sells or markets the insurance products of the Company to the bank’s client base 
  • Persistency Ratio: The ratio of policies remaining in force to all policies issued in the period 13 month/25month etc, prior to the date of measurement and is referred to as 13th month/25th month persistency etc It is the percentage of policies that have not discontinued paying premiums or surrendered. It can be measured in terms of number of policies or in terms of premium.

Standard disclaimer: I am not a SEBI registered analyst and above analysis is for educational purpose only. I may have vested interest in every stock I discuss and my views may be biased. Please do your own due diligence as stock market investments have high degree of inherent risk.

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