SBI Life Insurance needs to cruise beyond the expected for valuation pop

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Insurance company shares haven’t been doing well ever since insurers began to list on the bourses and SBI Life Insurance Co. Ltd’s stock is no exception. The stock gained over 1% on Tuesday but is still 9.7% down from its list price of Rs733.

The tepid performance of SBI Life’s stock was partly because the IPO (initial public offering) price of Rs700 was rich at a valuation of four times its estimated embedded value for fiscal year 2018 (FY18). The company’s embedded value has grown a decent 9.33% for the first six months of FY18. Given that the second half of a fiscal year is typically stronger for life insurers, SBI Life’s strong growth in most of its metrics augurs well for it.

The largest private sector insurer reported 37.4% growth in its new business annualized premium equivalent that drove the 20.6% growth in assets under management (AUM). Of course, the growth in new business premium came primarily through individual premium, in line with the company’s historic performance.

For all the growth, SBI Life managed to keep its costs under check. The total cost ratio rose marginally to 13.3% from 12.9% a year ago. Its operating expenses ratio reduced to 8.6% from 9.4%.

Such a good set of numbers should indeed please investors but for an insurer that has a grand advantage over its peers in access of a physical network as well as an established pedigree, strong growth is a given. The AUM growth of 20% is kind of assured since the insurer has the largest branch network of State Bank of India (SBI) at its disposal to hawk its policies. It also has tie-ups with other agencies, besides having a network of its own agents.

Data from the insurance regulator shows that SBI Life’s premiums have been increasing, partly driven by a rise in ticket size. This means that the insurer is seeing fast growth in its market-linked policies. Indeed, the share of market-linked products is 49% of new business premium and such products get a boost owing to stock indices surging ahead. Also, the number of policies it sold in August was down, showed the data.

SBI Life hasn’t gone beyond the expected in its growth story and that perhaps explains why the stock has underperformed since listing. The management has said that penetration of its policies is low when juxtaposed with its parent’s customer base. For it to command higher valuation, the insurer can start with picking these low-hanging fruits of growth.