Correction in SBI Life stock an opportunity for long-term investors

(Photo: Reuters)
The Life insurance sector has seen a sea-change in recent times. The advent of many private insurers has altered the landscape. Competition has led to loss of market share for LIC. There may also have been a change in attitude towards life insurance due to the pandemic. Rather than being seen as a tax-saving instrument, many are seeing it now as a necessary seat-belt.

While LIC is by far, the largest player, the private sector’s share is now close to 50 per cent, or over that, if we count SBI Life as a private player. There is fierce competition within that space. SBI Life is #2 (SBI holds 55.7 per cent stake in SBI Life, which makes it state-controlled but the substantial non-government stake would arguably let us think of it as private sector).

HDFC Life is #3 with ICICI Prudential Life at #4 but ICICI Pru has gained market share vs HDFC Life and SBI Life overall has a narrow lead in market share. In terms of financials, HDFC Life and SBI Life have considerably better Return on Embedded Value (ROEV) ratios at around 19 per cent each, versus 14 per cent ROEV for ICICI Pru. ROEV measures profits as a ratio of the net present value of all premiums.

Through the second half of 2020-21, New Business Premium (NBP) grew month-on-month (MoM) for the industry. But there was a crash in April 2021, and recovery in MoM growth for NBP has been visible again only since June 2021. In year-on-year (YoY) terms, NBP grew through the second half of 2020-21, but dropped into negative territory in 2021-22.

Growth in the Annual Premium Equivalent (APE) was volatile in YoY terms in FY 2021-22 between March-July 2021. The APE is the total value of regular, or recurring premiums, plus 10 per cent of new single premiums written in a given period. It is a useful way to aggregate and compare different types of premium.

August 2021 was a good month for the industry, especially for the larger private players. The APE was up 18 per cent YoY and private sector APE was up 36 per cent while LIC gained 2 per cent. Individual APE was up 19 per cent YoY in August 2021, and group APE was up 14 per cent YoY. Averaging the last two fiscals to reduce base effects, August 2021 was also seen as a strong month with total APE up 11 per cent versus the 2-year average, compared to an average of minus 2 per cent in APE over Apr-Jun 2021.

LIC could be a mega-IPO, as and when it happens. The next three life insurance companies are all listed. The outperformer on the stock market is clearly ICICI Pru (CMP Rs 697), which has returned 60 per cent in the last 12 months, while SBI Life (CMP Rs 1,173) has returned 41 per cent and HDFC Life (CMP Rs 737) has returned a relatively low 25.9 per cent.

SBI Life has seen recent divestment by US private equity fund, CA Emerald Investments at Rs 1,130/ share and Canada Pension Plan Investment Board, which offered its 2 per cent stake at block deals between the range of Rs 1,159-1,220. This caused a dip in price of about 3.9 per cent and it also led to selling in the other life insurers (ICICI Pru down 2.7 per cent; HDFC Life 0.8 per cent) on Thursday. This may be an opportunity for long-term investors if the industry is on the recovery trail.

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