Investors were pleasantly surprised by SBI Life Insurance’s Q1FY23 numbers, especially because the first half of the financial year is seasonally weak for the company’s business. Customers usually buy insurance products either when the calendar year ends in December, or in time for tax planning when the financial year ends in March. According to the management, SBI Life’s partnership with Indian Bank, UCO Bank, South Indian Bank, Punjab & Sindh Bank and YES Bank contributed 3% to the total individual new business premium growth. Individual new business premium growth is from new premiums from products sold to individual customers.
SBI Life’s Q1FY23 net profit rose 17.8% YoY to Rs 262.9 crore. The company’s gross written premium (new business premium + renewal premium) rose 35% YoY to Rs 11,350 crore with the value of new business premiums (VNB) increasing by 130% YoY to Rs 880 crore. Its persistency ratios improved across the 25th month (78.7%), 49th month (70.3%) and 61st month (50.3%) time periods in Q1FY23.
Better product mix drives margin and earnings, says management
SBI Life’s management attributes the growth in value of new business margin (VoNB) to a better product mix.
New products are paying off
According to the management, the launch of its new products (Smart Annuity Plus, Platina Assure and Smart Platina Assure) in the ‘non-participating’ segment in March is bearing results in Q1FY23. “This is a product that we found customers preferred and wanted,” said SBI Life’s Managing Director and CEO Mahesh Kumar Sharma. “Our Smart Platina Assure (product), which we launched earlier, was also doing very well.”
This segment is important as it adds to margin growth in life insurance companies. Non-participating products do not require life insurance companies to share any profits or pay dividends to policyholders. This makes them more lucrative products to sell to life insurers.
The shift in product mix towards non-participating products is bearing good results. SBI Life’s VNB margin improved in Q1FY23. In terms of annual premium equivalent (total value of regular or recurring premiums + 10% of new single premiums), new products in the non-participating segment add up to 30% of the mix.
Although the management does not have a specifically targeted product mix, there is a clear shift towards protection (insurance cover on the loss of income) and non-participating products.
One of the reasons to continue with this product mix is that it can safeguard against interest rate risk effectively in case of frequent changes in interest rates. This helps in maintaining the cash flow without denting the operations of the company.
In its recent earnings call in Q1FY23, the management says that the contribution of non-participating products should rise to 25-30% as there is a growing trend among other segments as well. “But then the value that I deliver will continue to grow because we are looking at good growth going forward, upwards of 25% growth in premiums,” Sharma said.
With the volatility in the stock markets, the demand for unit-linked insurance products (ULIP) is on the lower side. Yet, SBI Life managed to grow its new business premium in ULIPs by 42% YoY. Since the sale of this product is mostly through its ‘bancassurance’ channel - one of its largest networks of selling insurance through the State Bank of India, the sale of ULIPs is likely to remain high. The management also said in the Q1FY23 earnings call that the sale of ULIP products through the agency channel is robust.
SBI Life performed better than its peers in ULIP sales, according to a report from Yes Securities. However, the management is not sure how sustainable this will be in the coming quarters given the market conditions.
Despite robust growth, uncertainty on reserves loom
High claims due to the pandemic meant life insurers need to maintain high reserves. Despite getting out of Covid waves at the beginning of 2023, SBI Life continues to maintain high reserves for contingencies. Its reserves in Q1FY23 increased 11.2% YoY to Rs 11,760 crore. The management admits that hospitalization and mortality rates are down but they are unsure about writing back the reserves. The Managing Director & CEO of SBI Life Mahesh Kumar Sharma says that the vaccination programs have helped. But he didn’t give a timeline for rolling back the reserves and using these funds for other operational purposes.
SBI Life’s solvency ratio is at 221%, much higher than the Insurance Regulatory and Development Authority of India (IRDAI) mandate of 150%. The solvency ratio is a measure of a life insurer's ability to fulfil its short and long-term liabilities.
With impressive results brokerages like YES Securities, Motilal Oswal, and BOB Caps, recommend a ‘Buy’ rating on the stock. They believe a shift in product mix towards non-participating products will drive margins and sustain growth given the constant shift in interest rates. Motilal Oswal expects VNB margins to go up by 340 bps in FY23. It also expects the return on embedded value to increase to 20.4% in FY23 and over 18.7% in FY22. Trendlyne’s Forecaster shows a consensus recommendation from 28 analysts recommending a ‘Buy’ on the stock.