IPO Snapshot:

SBI Life is entering the primary market on Wednesday 20^th September 2017, with an offer for sale (OFS) of up to 12 crore equity shares of Rs. 10 each, by SBI (8 crore shares) and BNP Paribas (4 crore shares), in the price band of Rs. 685 to Rs. 700 per share, with an employee discount of Rs. 68 per share and 10% of the issue reservation for SBI shareholders. Representing 12% of the post issue paid-up capital, the OFS will raise about Rs. 8,400 crore at the upper price band and will close on Friday 22^nd September. Listing is expected on 3^rd October.

Company Overview:

SBI Life, JV between SBI and France’s BNP Paribas since 2001, is India’s largest private sector life insurer, based on new business premium (NBP) of Rs. 10,146 crore for FY17, consistently bagging this top slot since FY10. With 20% market share in NBP among private life insurers and 5.8% in the entire life insurance industry (including LIC), NBP accounted for 48% of SBI Life’s gross premium income of Rs. 21,015 crore for FY17 (as against 35% for ICICI Prudential), roughly indicating higher growth for the company in the times to come.

Before moving forward, an in-depth comparison of the company with closest rival and sole listed insurer ICICI Pru, public since a year now, as well as HDFC Life, which is waiting in the wings to hit primary markets very soon, is warranted. Below is the comparative table on some key parameters for these top 3 private life insurers of India: 

Given SBI’s large (24,000+) and wide-spread branch network, banccasurance channel, comprising of additional 2,350 branches of company’s other bancassurance partners South Indian Bank and Punjab & Sind Bank, accounted for 53% of FY17 NBP. 95,000+ individual agents make up the second biggest distribution channel, contributing 22% to NBP. While its agent productivity of Rs. 2,34,500 is nearly double of ICICI Prudential’s Rs. 1,27,530 and among the highest in the industry, commission ratio at 3.73% is not too high, with LIC, HDFC Life and ICICI Pru reporting this parameter at 5.5%, 4.10% and 3.40% respectively for FY17.

Thus, besides a strong brand in SBI, which has been declared ‘too big to fail’, for the second successive year, by RBI, SBI Life’s bancassurance network is unmatched and rivals may never be able to replicate this, despite open architecture (banks permitted to hold upto 3 distribution agencies). All this trickles down to cost leadership position across the industry for SBI Life, with one of the lowest operating expense ratios of 7.83% for FY17, down from FY16’s 9.21%. LIC, HDFC Life and ICICI Pru had operating expense ratios at 9.6%, 12.3% and 10.5% for FY17 respectively.   

After touching upon distribution network and cost structures, let’s move on to the product mix and customer servicing:

Share of the lucrative protection business, fetching the highest margin, is 4.8% of NBP, vis-à-vis ICICI Pru’s 3.9%. ULIPs, which rank lower as a product-class in terms of margins, accounted for 50.5% of company’s FY17 NBP, as against 79% for ICICI Pru. Higher share of ULIPs explains the higher average individual new business premium for ICICI Pru, despite it selling 7 lakh policies annually, versus 12.7 lakh for SBI Life, with both having comparable total premiums of Rs. 21,000-22,000 crore in FY17. Thus, better product mix is improving company’s Value of New Business (VNB) Margin which is the highest in the peer set at 15.4% vs 10.1% for ICICI Pru.

Parentage of SBI makes SBI Life a quasi Govt institution in terms of ‘trust’ factor among customers, which is also reflected in one of the strongest persistency ratio (by premium), especially the 37^th and 61^st months, although ICICI Pru leads in the 13^th month persistency. In addition, at 0.20%, it has the lowest mis-selling ratio, along with decent death claim settlement ratio of 97.98%, boosting customer delight and loyalty.

Financials:

For FY17, SBI Life earned net premium of Rs. 20,852 crore, up 33% YoY, on total revenue of Rs. 30,277 crore, whereas ICICI Pru has reported net premium of Rs. 22,155 crore, up 17% YoY, on total revenue of Rs. 37,193 crore, indicating higher growth for SBI Life. However, FY17 PAT for SBI Life remains lower at Rs. 955 crore, vis-à-vis Rs. 1,682 crore for ICICI Pru, as accounting profit is not a true reflection of the actuarial profitability of life insurance business, given its complex and long term nature of business. On an equity of Rs. 1,000 crore, SBI Life’s EPS for FY17 stood at Rs. 9.55, which rose to 3.13 for Q1FY18. Company has net worth of Rs.5,879 crore (30-6-17), of which, SBI holds 70.10% stake and BNP 26%. Post IPO their holding will reduce to 62.10% and 22% respectively. Due to inherent weakness in PAT, other financial pointers become vital for valuing a life insurer.

While solvency ratio of both is above IRDA prescribed threshold of 1.5x, although ICICI’s is stringer at 2.8x vs 2.0x for SBI Life, at 1.2 lakh crore, AUM of ICICI Pru is the largest among the private sector, with SBI Life in second position. Due to lower PAT, SBI Life’s RoE is quite low, as compared to both ICICI Pru and HDFC Life, but its return on embedded value is the highest among the 3, a better reflection of the business fundamentals. 

^ takes into account value of in-force business

Valuation:

At Rs. 700 per share, company’s market cap will be Rs. 70,000 crore, which leads to Price/Embedded Value multiple of 4.23x, based on FY17 embedded value, which is a premium to ICICI Pru’s current multiple of 3.75x. While both ICICI Pru and SBI Life are strong players in the sector, each has its own strength and weaknesses, with one leading the other on some parameter (ICICI is the largest private life insurer based on retail weighted received premium and based on AUMs). Thus, both remain comparable, with mild positive bias towards SBI Life due to its vast distribution reach and cost leadership.  

Based on a private sale of 3.90% stake in the company by SBI to KKR and Temasek in December 2016, there is a 52% jump in company’s valuation over the past 9 months: 

While 27% of this 52% jump in valuation is attributable to strong YoY growth in embedded value during FY17, 20% jump in valuation multiple what is making the company valuation appear so high. Since ICICI Pru’s current price/embedded value is 3.75x, which is 6% higher than 3.54x, SBI Life is commanding a 14% higher multiple, over the past 9 months. Since its time of IPO a year ago, ICICI Pru’s multiple has also expanded by 10%, making SBI Life’s valuation appear in-line.

Conclusion:

Marquee pedigree, unparalleled distribution reach, superior product mix and healthy growth make the company a worthy investment stock. Secondary markets being close to all-time highs and huge appetite for quality BFSI stocks, despite not-the-most-attractive issue price, the issue is a subscribe, to be held over the long term, just as any life insurance policy!  

Disclosure: No Interest