SBI Life takes a lead over ICICI Prudential, HDFC life on key parameters

With favourable business mix and valuations, stock emerges top pick for analysts

On a day that did not belong to life insurance stocks, SBI Life was the only exception. Share prices of peers ICICI Prudential Life (I-Pru Life) and HDFC Life, which had issued their quarterly results after market hours on Tuesday and fell short of expectations, shed 11 per cent and three per cent, respectively, on Wednesday.
 
Overall, life insurance stocks haven’t had a great run at the bourses, due to their dependence on equity markets.
 
However, a good mix of equity-linked schemes and protection plans has helped SBI Life (promoted by State Bank of India) stay ahead.
 
In fact, reports suggest it has gained market share in the individuals segment over the past few months.
 
Data for December indicate with 23 per cent growth in annualised premiums from individuals, SBI Life tops in the retail (meaning policies for individuals) market.  With the value of new business (VNB) growing 34.5 per cent year-on-year, SBI Life has demonstrated faster growth than its peers.
 
Growth has also been more rounded. Based on new business premium (NBP) from individuals, SBI Life has 57 per cent exposure to the equities market through unit-linked insurance policies (Ulips).
 
This segment grew 23 per cent year-on-year in the December quarter (the third one or Q3 of 2018-19). On the other hand, I-Pru Life’s exposure of 79 per cent to Ulips led to a 14 per cent decline in retail NBP.
 
HDFC Life has 59 per cent exposure to Ulips which grew a little over four per cent, slower than in previous quarters.
 

SBI Life’s business is more tuned to protection policies. These are largely term insurance plans, where the focus is on full insurance cover and not much on saving or investment.
 
Therefore, it tends to be a sticky and profitable business.
 
Around 12 per cent of SBI Life's business is from protection plans, compared to seven per cent and nine per cent of HDFC Life and I-Pru Life, respectively. SBI Life’s protection business grew 220 per cent in Q3 over a year.
 
Despite a nearly 100 per cent growth in the protection business, it might take a while, given its low base, before I-Pru Life gains from these. At HDFC Life, protection plans grew 50 per cent. 
 
The other positive for SBI from its Q3 results is improving profitability. At a 5.5 per cent operating expenses ratio, its business is far more cost-effective than its peers, thanks to strong bancassurance support from SBI.
 
However, the improving pricing power of SBI Life is now showing up in its operating margins (see table).
 
That said, much of the growth lately has been through single-premium products. While these help shore profitability, it could disturb the persistency ratio and not be sustainable in the long run.
 
For now, however, 13-month persistency ratio has increased from 78.4 per cent to 83.3 per cent in Q3 from a year before, while the 61-month persistency ratio has risen from 54 per cent to 58 per cent. 
 
Considering these positives and attractive valuations, SBI Life is the top pick in the life insurance space for analysts at Jefferies and Nomura.