SBI Life’s numbers support deal valuation

Does a value of Rs46,000 crore for SBI Life Insurance Co. Ltd that holds a little over 9% market share, look rich? Analysts are divided but the answer could of course be found in its performance in the first half of 2016-17.

The 3.9% stake sale by the insurer’s parent, State Bank of India (SBI), to KKR and Temasek Holdings at Rs460 a share valued the business at Rs46,000 crore, a shade lower than ICICI Prudential Life Insurance Co. Ltd (valued at Rs47,957 crore through the initial public offering in September).

The life insurance unit of the country’s largest lender SBI showed an impressive 77% growth in its new business premium to Rs4,644 crore, driven by the 54% growth in the most coveted segment of individual new business premium. The insurer posted a 6% rise in its net profit to Rs428 crore for the six-month period ended September despite such a scorching pace of growth. Insurance is a sector wherein high growth tends to bleed the business entity.

But the biggest argument for the valuation was the embedded value of Rs13,000 crore for 2016-17 as disclosed by the insurer. The deal values the company at 3.5 times its embedded value of 2016-17, which looks cheap in comparison to ICICI Prudential Life Insurance being valued at a multiple of 3.45 and HDFC-Max Life at 4.3. According to Nomura Securities, SBI Life’s valuation is 2.47 times its estimated earnings for 2017-18, cheaper than both ICICI Prudential Life and the combined HDFC-Max Life Insurance.

Another point underscoring the stated value was SBI Life’s cost efficiency. Its ratio of operating cost to total weighted received premium was 14%, sharply down from 17% in the same period of the previous fiscal year. Analysts at Nomura Securities note that cost ratios are among the best in the industry, leading to superior margins and expect operating expense ratios to only improve from here on given the growth rates. In comparison, ICICI Prudential Life Insurance’s cost ratios increased to 15.6% from 14.1%.

Given the strong pedigree the insurer enjoys and favourable earnings metrics, there is little reason to question current valuations. The insurer’s long-term prospects too seem to trump those of its peers. SBI Life’s persistency ratios for 13th month and 61st month are 77.4% and 26.97%, respectively, an improvement from the previous year and its renewal premium business grew by 20%.