SBI Life Insurance Company Ltd

Transcription

1 IPO Review Rating matrix Rating : Unrated Issue Details* Issue Opens 2-Sep-17 Issue Closes 22-Sep-17 Issue Size ( Crore) Price Band ( ) No of Shares on Offer (crore) 12. QIB (%) 5 Non-Institutional (%) 15 Retail (%) 35 Minimum lot size (No. of shares) 21 *Reservation for SBI Bank shareholders for up to 1% of offered shares Objects of issue To achieve benefits of listing equity shares on Stock Exchanges and sell up to 12 crore equity shares by the selling shareholders. Listing of the equity shares will also enhance brand name and provide liquidity to the existing shareholders Shareholding Pattern Pre-Issue Post-Issue Promoter & promoter group 96.1% 84.1% Public 3.9% 15.9% Financial Summary Crore FY14 FY15 FY16 FY17 Premiums earned - Net Total income account PAT Valuation Summary (at 7; upper price band) (x) FY14 FY15 FY16 Pre Post P/E P/NAV P/IEV NA NA NA Research Analyst Kajal Gandhi kajal.gandhi@icicisecurities.com Vishal Narnolia vishal.narnolia@icicisecurities.com Vasant Lohiya vasant.lohiya@icicisecurities.com SBI Life Insurance Company (SBI Life) was established as a joint venture between State Bank of India and BNPPC, an insurance subsidiary of BNP Paribas. In FY15-17, growth in new business premium at 35.45% CAGR was the highest among top five private life insurers in India. SBI Life offers a vast product basket to customers including life insurance, health insurance and pension products and services. It has a comprehensive product portfolio of ~37 individual and group products, including a range of protection and savings products to address the insurance needs of diverse customer segments. In terms of distribution strength, it has individual agents (as of July 31, 217) and 2417 bank partner branches across the country. With AUM at billion as of June 3, 217, SBI Life is one of the top five largest insurers in India. In FY15-17, SBI Life saw robust growth of 35.45% CAGR in NBP leading to an increase in market share among private life insurers in India to 2.4% vs % in FY15. On capital adequacy, solvency ratio has been above 2% in last five fiscals (211% as of June 3, 217) vs. IRDAI mandated minimum solvency ratio of 15%. Key business aspects Largest private life insurer with a consistent track record of rapid growth SBI Life is India s largest private life insurer, in terms of NBP generated in each fiscal year, since FY1. In FY15-17, NBP increased at 35.45% CAGR; highest among top five private life insurers (total premium in FY17). Consequently, NBP market share among private life insurers increased from 15.87% in FY15 to 2.4% in FY17. In FY15-17, SBI Life s individual rated premium (IRP) growth remained fastest at 37.9% CAGR among top five private insurer (total premium in FY17) thereby increasing its market share from 15.61% in FY15 to 2.69% in FY17 among private life insurers. Expansive distribution with pan-india bancassurance, high agent productivity SBI Life offers its customers access to products and services through an extensive multi-channel sales network across India including branches of its bank partners, individual agents, corporate agents, employees and offices. As on July 31, 217, it had a large distribution network comprising individual agents, 2417 branches of SBI. In FY17, bancassurance, agents contributed ~53.3%, 22.31% of NBP, respectively. Total cost, operating expense ratios reduces over time The commission ratio was at 3.73% for SBI Life while operating expenses ratio was at 7.83% in FY17. Among five private insurers, operating expense ratio has improved in past five years, as player reassessed productivity of various distribution channels and their operating efficiency post FY1. SBI Life had the lowest operating expense ratio (as of FY17) followed by ICICI Prudential Life Insurance. Operating expense ratio for SBI Life declined substantially from 9.1% in FY15 to 7.83% in FY17. Concerns SBI Life Insurance Company Ltd Termination of, or any adverse change in bancassurance agreement Higher concentration of NBP generated by certain category of product Adverse change in relationship with promoter & BNP Paribas Cardiff Regulatory changes can have material impact on performance Priced at 4.2x P/IEV (post issue FY17 IEV) on higher band September 19, 217 Price band At the IPO price band of 685-7, the stock is available at P/IEV multiple of 4.2x FY17 (post issue) at the upper end of the price band. Post issue market capitalisation is at ~ 7 crore.

2 (%) Company Background SBI Life Insurance Company (SBI Life) was established as a joint venture between State Bank of India and BNPPC, an insurance subsidiary of BNP Paribas (BNP Paribas was a top 1 global financial institution in terms of revenues in 216), in 21. In FY15-17, growth in new business premium at 35.45% CAGR was highest among top five private life insurers in India. In terms of distribution strength, it has individual agents (as of July 31, 217) and 2417 bank partner branches spread across the country. With AUM at billion as of June 3, 217 ( billion as of March 31, 217), SBI Life is one of the top five largest insurers in India. In FY15-17, SBI Life witnessed robust growth of 35.45% CAGR in new business premium, which led to an increase in market share among private life insurers in India to 2.4% compared to 15.87% in FY15. SBI Life has a comprehensive product portfolio of ~37 individual and group products, including a range of protection and savings products to address the insurance needs of diverse customer segments. In the individual segment, participating products, non-participating protection products, other non-participating products and unit-linked products, contributed 1.77%,.95%, 1.69% and 5.36%, respectively, of new business premium in FY17 (15.43%,.72%, 1.85% and 49.61% as of Q1FY18). In the group segment, credit life group protection products, other group protection products, group fund management products and other group products contributed 2.72%, 1.14%, 31.73% and.65%, respectively, of new business premium in FY17 (2.91%, 2.4%, 26.84% and.6% in Q1FY18). In FY17, SBI Life s 13 th month and 61 st month persistency ratios was at 81.7% and 67.18%, respectively, with 61 st month persistency ratio being the highest among top five private life insurers (in terms of total premium in FY17) in India. As of June 3, 217, 13 th month and 61 st month persistency ratios were at 81.97% and 64.62%, respectively. Death claims settlement ratio has improved from 92.33% in FY15 to 97.98% in FY17, and was 89.61% as of June 3, 217. On capital adequacy, solvency ratio has been above 2% in the last five fiscals (211% as of June 3, 217), compared to the IRDAI mandated minimum solvency ratio of 15%. Exhibit 1: Customer wise break-up of new business annualised premium equivalent (APE) FY15 FY16 FY17 Q1FY18 individual SBI Life has developed a multi-channel distribution network comprising an expansive bancassurance channel, including State Bank of India, the largest bancassurance partner in India (2417 branches and ~42 crore customers) and a large and productive individual agent network Page 2

3 comprising agents (as of July 31, 217). Apart from these, other distribution channels, including direct sales and sales through corporate agents, brokers, insurance marketing firms and other intermediaries is undertaken. SBI Life commands strong brand equity in the financial sector. The company has received various recognitions recognised as among The Most Trusted Brands by The Economic Times Brand Equity Nielsen survey in FY17 for a sixth consecutive year. In addition, SBI Life was awarded Life Insurance Company of the Year and Bancassurance Leader Life Insurance (Large Category) at the Indian Insurance Awards 216 organised by Fintelekt, the Economic Times Best Corporate Brand, 216 and the LIMRA and LOMA Social Media Silver Bowl Awards, 216 at the Social Business Conference for Financial Services in Boston, Massachusetts. Product profile SBI Life Insurance offers a vast product basket to customers, which includes unit linked as well as non linked insurance products. In terms of customer segments, it caters to individual as well as group customers. Individual Products Individual or retail life insurance products can broadly be classified into two categories - non-linked life insurance products and linked life insurance products. Non-linked life insurance products can be further classified into participating, non-participating protection and other non participating products. SBI Life had a comprehensive product portfolio offering 29 individual life insurance products. These products include child plans, retirement/pension plans, protection plans and savings plans, with flexible and variable features addressing specific life insurance needs of the customer. In addition, various riders providing additional benefits for disability, illnesses and death due to accident are also provided bundled with the main product. Linked products Unit linked insurance plans offer a combination of investment and protection where the customer can choose the level of life coverage, subject to minimum levels mandated by regulations. In this product, customers have the flexibility to decide the asset classes in which their contributions are invested, based on their risk appetite, and to transfer money among different funds in a tax-efficient manner, depending on the market outlook and changing risk appetite. Non-linked products Participating products (Par): Participating insurance products are those for which the surplus is shared with policyholders in the form of bonuses and, hence, are also referred as with profit products. These policies usually have a minimum guaranteed amount that is payable on death or maturity in addition to bonuses declared from time to time. The bonuses, once declared, accrue to the policy and are guaranteed. Par products do not have an explicit cap on charges as Ulips, have exit loads on policy discontinuance and do not offer customers a choice of asset allocation. As of June 3, 217, SBI Life had a bouquet of 1 products in this category. Pure protection products Pure protection products are those that offer benefits that are guaranteed in absolute terms on occurrence of a particular event at the beginning of the policy. These products do not entail any investment risk for customers. These are protection oriented products, and generally expire without value if the designated event does not occur. The risk covered in Page 3

4 most cases covers death of the insured but may also include permanent disability or diagnosis of critical illness. As of June 3, 217, SBI Life has seven products in this category. Group products Generally, group product customers are employers across a range of industries, including banks and financial services companies as well as professional, consulting and other firms and informal groups. SBI Life Insurance s group life products are broadly classified into four categories: Group protection products (credit life): Group protection products provide protection to banks, financial institutions or other groups or associations in relation to repayment of outstanding loan amount in the event of death or disability of the insured members of the group. Group protection products: Group protection products provide life insurance coverage to a group of individuals, where, upon death of a member, the sum assured is paid to the member s nominee. These products provide benefits to both formal (employer-employee) and informal (nonemployer-employee) groups. Group FM products: These are fund based group insurance (unit-linked and variable insurance products), which cater to the needs of employers looking at financial solutions to fund their employees benefit schemes including gratuity, superannuation and leave encashment. Other group products: These products consist of group immediate annuity plans primarily for corporate clients (employer-employee groups) and other informal groups, who wish to purchase an annuity to provide for their annuity liability (existing or emerging or both) totally or partially. Buyout of pension liabilities is a method by which an insured transfers liability of a defined pension scheme completely to the insurance company. The defined benefits of group members are protected and the insured also gets rid of the risk of the pension scheme running into deficits due to adverse changes in demographic/macroeconomic scenarios, going ahead. Page 4

5 Exhibit 2: Geographical distribution of new business premium relating to individual products Location FY15 FY16 FY17 Andhra Pradesh Arunachal Pradesh Assam Bihar Chattisgarh Goa Gujarat Haryana Himachal Pradesh Jammu & Kashmir Jharkhand Karnataka Kerala Madhya Pradesh Maharashtra Manipur Meghalaya Mirzoram Nagaland Orissa Punjab Rajasthan Sikkim Tamil Nadu Tripura Uttar Pradesh Uttrakhand West Bengal Andaman & Nicobar Islands Chandigarh Dadra & Nagar Haveli 1 Daman & Diu Delhi Lakshadweep Puducherry Telangana Total 3,757 4,978 6,468 Page 5

6 (%) (%) billion crore billion Financial Performance SBI Life is India s largest private life insurer, in terms of new business premium at 1 crore and enjoyed a market share of individual rated premium of 2.69% among private life insurers. AUM increased from crore in FY15 to 97,736 crore in FY17, and was crore as on June 3, 217. PAT increased at 8.24% CAGR from crore in FY15 to crore in FY17 and was at crore for the three months ended June 3, 217. The company had 61st month persistency ratios of 64.6% and solvency ratio of 211% as of June 3, 217. Exhibit 3: Trend in AUM , FY15 FY16 FY17 Q1FY18 Exhibit 4: Healthy growth in premium 33.1% % % % FY14 FY15 FY16 FY17 Q1FY18 Premiums earned - Net YoY growth (RHS) 4% 3% 2% 1% % Exhibit 5: PAT growth trend FY14 FY15 FY16 FY17 Q1FY18 PAT YoY growth (RHS) 18% 16% 14% 12% 1% 8% 6% 4% 2% % Exhibit 6: Healthy return on net worth Exhibit 7: Solvency ratio remains prudent (%) FY14 FY15 FY16 FY17 Q1FY18 1 FY14 FY15 FY16 FY17 Q1FY18 Page 6

7 (USD) Life insurance industry Quick snapshot The Indian life insurance industry size was at 4.2 trillion (total premium basis) in FY17, making it the tenth largest life insurance market in the world and fifth largest in Asia (Source: Swiss Re, sigma No 3/217). In FY1-17, Indian life insurance assets under management grew at 19% CAGR to 3 trillion while total premium grew at a healthy pace of ~17% CAGR. Despite this, India continues to remain an under-penetrated market with life insurance penetration (insurance penetration refers to premiums as a percentage of GDP) at 2.7% in FY16 vs. 3.7% in Thailand, 7.4% in South Korea and 5.5% in Singapore. Similarly, insurance density (per capita premium or premium per person) also remains very low compared to other developed and emerging market economies at US$47 in 216. Protection gap (actual insured for every US$1 of insurance protection requirement) for India remains higher compared to other Asian peers at ~US$8.5 trillion as of FY14. (Source: Crisil report) Exhibit 8: Insurance penetration (as percentage of GDP) (%) S.Africa S.Korea Japan Thailand US India China Indonesia Exhibit 9: Life insurance density (216) Japan S.Korea US S.Africa Thailand Brazil China Indonesia India Turkey With economic growth gradually picking up and structural drivers including rising life expectancy, healthcare spending, pension needs in place, this is expected to drive strong growth in the life insurance industry in the next five years. In addition, prevailing low insurance density and penetration will support growth in the life insurance sector on account of the low base. Page 7

8 (%) According to Crisil Research, the new business premium for Indian life insurance companies is expected to grow at 11-13% CAGR in FY17-22, compared to 9% CAGR in FY Total premium in the Indian life insurance market is expected to increase from 4181 billion in FY17 to 79 to 81 billion by FY22. Improving economic growth, low inflation and increase in financial savings, along with rising awareness of insurance are expected be key catalysts for this growth. The government s focus on financial inclusion and initiatives including launch of Pradhan Mantri Jeevan Jyoti Bima Yojana is expected to increase awareness and open avenues for investments in insurance and other savings products. Structural strength to drive life insurance industry Demographics strength: Currently, India has one of the youngest populations in the world with a median age of 28 years. It is estimated that 9% of India s population will remain below 6 years of age by 22. Increase in proportion of individuals in the age bracket of 25-49, which is the target population for the industry, is expected to boost industry growth. Rapid urbanisation coupled with high share of working population with rising affluence is expected to provide impetus to growth in the Indian life insurance sector. Exhibit 1: Indian working population E Increase in share of financial savings and life insurance within: Higher GDP growth compared to previous fiscals and control over inflation is a key structural positive, which gives an impetus to overall savings in India. Increase in financial savings, coupled with expected increase in share of insurance as a percentage of financial savings, due to a significant improvement in product proposition and delivery mechanism, is expected to drive growth for the life insurance sector. Page 8

9 (%) (%) Exhibit 11: Financial savings as percentage of GDP FY7 FY8 FY9 FY1 FY11 FY12 FY13 FY14 FY15 FY16 Household Savings as a % of GDP Financial Savings as % of GDP Among financial savings, the share of life insurance has reached its peak at 26% in FY1. However, a downturn in the capital market, increasing inflation and regulatory changes in the sector led to a sharp deceleration in the share of life insurance to 15.3% of financial savings in FY14. Post FY14, there was a considerable revival, due to improving fundamentals and pick-up in the sale of linked products. Further increase in proportion of life insurance in financial savings provides an opportunity for growth in the Indian life insurance industry. Exhibit 12: Financial savings mix FY8 FY9 FY1 FY11 FY12 FY13 FY14 FY15 FY16 Currency Bank deposit Life Insurance premium Provident and Pension Fund Others Rise in healthcare spending: As per IRDAI data, only 35.9 crore people (27% of total population) have health insurance coverage as of FY16. Out of this, ~2% coverage is provided by commercial insurance providers (life and non-life included), while the remaining are covered under central or state government-sponsored schemes such as Central Government Health Scheme and Employee State Insurance Scheme. Page 9

10 (USD) Exhibit 13: Share of out-of-pocket mix (as % of total health expenditure) for other countries India Singapore Indonesia S.Korea China Japan Thailand % of Total Health Expenditure India s total expenditure on health was 4.7% of GDP in 214. As per the World Health Organization (WHO), per capita health spending increased from US$2 in 2 to US$75 in 214. Despite this, India has one of the highest shares of out-of-pocket expenses at ~62.4% in FY14 in its overall healthcare spending mix among Asian countries. Therefore, factors including low penetration, rising cost of healthcare, constraints for government spending, increasing demand for quality healthcare with rising income underscore a massive opportunity in health insurance for commercial insurance providers. Historical evolution of Indian life insurance industry The Indian life insurance sector was opened for private companies in 2 with the commencement of operations by four private companies in the first year. Further, eight companies got added to the list till 29, with total number of companies aggregating to 23. Among peers, LIC is the only public sector life insurer. Since inception, the private sector has grown significantly and currently accounts for ~53.9% of the individual rated premium of life insurance industry in FY17. The Indian life insurance industry has undergone various growth phases. The current structure of the industry is depicted in Exhibit 14. Exhibit 14: Structure of Indian life insurance industry Page 1

11 Private insurer gaining market share: In FY7-11, total premium growth remained robust at 17% CAGR, owing to an aggressive foray by private players. Since FY7, private players gained significant market share from 18% in FY7 to 3% in FY11, driven by Ulips. A favourable commission structure (high upfront commission to intermediaries) and capital market performance, supported growth in Ulips. On the distribution side, the share of banking corporate agents in the individual new business premium increased from 6% to 13% in FY7-11. Exhibit 15: Trend in IRP for private players and industry Post the financial crisis in 28 and regulatory changes in FY1, private insurer market share on an individual rates premium (IRP) basis declined to ~37.9% in FY14 from ~52% in FY1. However, driven by an improved product design, primarily for linked products that offer a superior customer value propositions and focus on bancassurance for marketing their products, private insurers regained significant market share to 53.9% in FY17. Rationalisation in commission, operating expense: Post IRDAI regulations in FY1, a significant decline was seen in commission on linked products. Consequently, commission-expense ratio on total premium basis fell considerably from 7.9% in FY7 to 5.3% in FY17. Among peers, LIC has higher commission expense ratio at 5.5% (FY17) compared to private insurers at 4.7%, owing to sourcing of significant proportion of individual business through individual agents (96% in FY17). Page 11

12 (%) Exhibit 16: Commission expense ratio (as percentage of total premium) FY7 FY8 FY9 FY1 FY11 FY12 FY13 FY14 FY15 FY16 FY17 Private Insurer Industry LIC In FY7-1, private players had a higher operating expense ratio due to high infrastructure costs incurred on increasing their geographic reach. However, post regulatory changes in FY1, private players went into a consolidation phase and began focusing on cost efficiencies. Therefore, an improvement was witnessed in operating expense ratio from 21% in FY1 to 15.7% in FY17. On a relative basis, LIC, being in a mature phase, had lower operating expense ratio since FY7. However, since an increase in salary in October 21 (effective from August 27), the expense ratio has been higher compared to the previous period. Despite a rise in operating expense ratio, the same remains lower for LIC compared to private peers. Channel mix shift towards bancassurance, direct sales: A significant shift in the channel mix of the Indian life insurance sector has been witnessed from earlier agency-only model to a diversified distribution mix. Further, a cap on ULIP charges, introduced in 21, has led to rationalisation of owned agency network and provided a shift towards third-party channels. Consequently, the share of bancassurance has increased from 6% of individual business, on a new business premium basis, in FY7 to 24% in FY17, while the share of new business premiums from individual agents declined from 9.5% in FY7 to 68.9% in FY17. A higher share of agency channel in the retail new business premium can largely be attributed to LIC. In FY17, bancassurance contributed to ~53.9% of new business premiums for private sector companies, led by a well-developed banking sector in India with a nationwide presence of branches. Direct distribution channel has also gained importance over the years for private sector companies. In FY17, direct sales contributed 5% of new individual business premiums for private sector companies. Page 12

13 crore ( billion) (%) Exhibit 17: Individual new business premium (for industry) by various distribution channels FY7 FY8 FY9 FY1 FY11 FY12 FY13 FY14 FY15 FY16 FY17 Individual Agents Corporate Agents Banks Corporate Agents Others Brokers Direct Selling Key strengths and strategies: Largest private life insurer with a consistent track record of rapid growth SBI Life is India s largest private life insurer, in terms of new business premium (NBP) generated each fiscal year, since FY1 (Source: Crisil Report). In FY15-17, NBP increased at a CAGR of 35.45%, which is the highest among the top five private life insurers (in terms of total premium in FY17) in India. The company increased its market share of NBP among private life insurers in India, from 15.87% in FY15 to 2.4% in FY17, and market share of NBP in the entire life insurance industry from 4.89% in FY15 to 5.8% in FY17. The company is able to leverage its diversified product portfolio to capitalise on favourable industry opportunities. As a result, gross written premium (GWP) and new business annualised premium equivalent (APE) increased at a CAGR of 27.8% and 36.59%, respectively, in FY It also issued the highest number of individual life policies annually among private life insurers in India since FY14 (Source: Crisil report). The number of policies issued by SBI Life increased at a CAGR of 6.42% from 1,126,211 in FY15 to 1,275,55 in FY17. Exhibit 18: NBP and growth (SBI Life) 42.7% % 6 9.1% FY15 FY16 FY17 NBP YoY growth (RHS) 5% 4% 3% 2% 1% % Exhibit 19: NBP comparison (FY17) SBI Life HDFC Standard Life ICICIPru Max Life Bajaj Allianz SBI Life has increased the market share of individual rated premium among private life insurers in India from 15.61% in FY15 to 18.83% in FY16 and to 2.69% in FY17. In FY15-17, individual rated premium increased at a CAGR of 37.9%, the fastest among the top five private life insurers (in terms of total premium in FY17) in India. Page 13

14 Ensure profitable growth through balanced product portfolio, expansive distribution network As of June 3, 217, SBI Life had a comprehensive product portfolio of 37 individual and group products, including a range of protection and savings products to address the insurance needs of diverse customer segments. The company s focus on maintaining a diversified product mix has resulted in the value of new business margin of 15.4% in FY17. The company s strategy is to further optimise its product portfolio by maintaining a balance between unit-linked, participating and nonparticipating products. In addition, the protection product portfolio is aimed at expanding with particular emphasis on credit life protection products. The company plans to reduce its focus on group products due to the inherent competitive nature of the business and high guarantee obligations related to such products. Exhibit 2: Product mix NBP (SBI Life) Exhibit 21: Comparison of product mix - NBP (FY17) FY15 FY16 FY17 Linked Non-Linked SBI Life HDFC Standard ICICIPru Max Life Bajaj Allianz Life Linked Non-linked In FY17, participating products, non-participating protection products, other non-participating products and unit linked products contributed crore, 96 crore, crore and crore, respectively, representing 16.89%, 1.48%, 2.66% and 78.97%, respectively, of individual NBP. In the group products business, group protection (credit life) has been a key focus area while NBP from these products has increased by 15.6% from crore in FY16 to crore in FY17. SBI Life s liability profile reflects diversified individual product portfolio with participating products, non-participating protection products, other non-participating products and unit-linked products accounting for 23.42%, 2.25%, 9.6% and 64.73%, respectively, of policyholders reserves as of March 31, 217. Focus on persistency ratios In FY17, 13th month and 61st month persistency ratios were at 81.7% and 67.18%, respectively. In FY15, FY16, and FY17, 13th month persistency ratio was at 79.27%, 8.69% and 81.7%, respectively, showing a gradual improvement. In FY15, FY16, and FY17, 49th month persistency ratio was 64.54%, 76.9% and 62.46%, respectively. The decline in FY17 is primarily attributable to a decline in share of single premium. The 61st month persistency ratio was at 4.65%, 53.78% and 67.18%, respectively. The increase in 61st month persistency ratio was achieved by increasing its focus on customer satisfaction on all aspects of business operations, including quality of distribution and superior customer satisfaction. SBI Life s business performance and profitability is dependent on ensuring high proportion of renewals of policies at the end of their terms Page 14

15 (%) and persistency ratios reflect the company s ability to retain customers in this competitive market. Therefore, the company has introduced a number of initiatives to improve persistency of existing policies, including data analytics. Within the operational framework, the company s dedicated renewal business vertical continues to focus on collection of renewal premiums and servicing policyholders. Exhibit 22: Comparison of 13th and 61st month persistency (FY17) SBI Life HDFC Standard Life ICICIPru Max Life Bajaj Allianz 13th month 61th month Expansive distribution with pan-india bancassurance, high agent productivity SBI Life has developed a multi-channel distribution network comprising an expansive bancassurance channel, including State Bank of India (the largest bancassurance partner in India). In addition, a large and productive individual agent network comprising agents (as of July 31, 217) as well as other distribution channels including direct sales and corporate agents, brokers, insurance marketing firms and other intermediaries are utilised for distribution. As of July 31, 217, the company had 83 branch offices in 29 states and seven union territories across India, set up primarily for an agency network. The company also makes significant direct sales, primarily comprising sale of group products, as well as standardised individual products sold through online offerings. In addition, the company also has tie-ups with 53 corporate agents and 121 insurance brokers as of July 31, 217. These partners are supported by dedicated sales team comprising business development managers and area managers. Page 15

16 (%) (%) Exhibit 23: Channel-wise individual new business premium for industry Exhibit 24: Individual new business channel mix (FY17) FY7 FY8 FY9 FY1 FY11 FY12 FY13 FY14 FY15 FY16 FY17 Individual Agents Corporate Agents Banks Corporate Agents Others Brokers Direct Selling SBI Life HDFC Std Life ICICIPru Max Life Bajaj Allianz Individual Agents Corporate Agent - Banks Others In FY17, SBI Life collected the highest amount of NBP generated by private life insurers in India both through the bancassurance channel as well as through individual agent network. In addition, it has also developed long standing institutional relationships with large corporate with respect to group life insurance products, particularly for group protection (others) and Group FM products. 1) Pan India bancassurance network State Bank of India is the largest bancassurance partner in India and provides SBI Life with a large distribution network and significant technology support. SBI Life has also been licensed the use of the SBI logo pursuant to the SBI Trademark Licensing Agreement. They also have bancassurance partnerships with 17 regional rural banks, and more recently with the Punjab & Sind Bank and South Indian Bank. Bancassurance contributed 47.82%, 54.43% and 53.3% of NBP in FY15, FY16 and FY17, respectively. Individual NBP contributed by bancassurance channel increased at a CAGR of 46.72% from crore in FY15 to crore in FY17, compared to a CAGR of 27.2% for private life insurers in India during the same period. 2) High agent productivity SBI Life s exclusive individual agent network contributed 32.85%, 27.47% and 22.31%, respectively, of total NBP in FY15, FY16 and FY17, respectively. As of July 31, 217, the company had over individual agents. Individual NBP contributed by individual agents has increased at CAGR of 13.24% from crore in FY15 to crore in FY17, compared to CAGR of 9.39% for private life insurers in India during the same period (Source: Crisil Report). The company s individual agent network generated NBP of 2,34,51 from individual products per agent, reflecting highest productivity among all private life insurers in India in FY17. Relatively higher productivity of sales agents was largely contributed by established brand, strong sales management practices, an attractive rewards and recognition programme, technology driven sales platforms, effective sales support and training provided to agents. Page 16

17 (%) (%) ( lakhs) (%) Exhibit 25: Comparison of agent productivity (FY17) Exhibit 26: Geographic distribution of individual NBP (FY17) SBI Life HDFC Standard Life ICICIPru Max Life Bajaj Allianz SBI Life HDFC Standard Life ICICIPru Max Life Bajaj Allianz Agent productivity Top 1 states Top 5 states Total cost and operating expense ratios reduced overtime Total costs consist of commission expenses and operating expenses. The commission ratio was at 3.73% for SBI Life while operating expenses ratio was at 7.83% in FY17. Commissions increased 9.67% from crore in FY16 to crore in FY17. This increase was primarily due to an increase in NBP by 42.74% and an increase in renewal business premium by 24.69% YoY in FY17. Operating expenses relating to insurance business increased 11.17%, from crore in FY16 to crore in FY17. This increase was primarily due to an increase in business promotion expenses and employee remuneration and welfare benefits expenses. Among top five private insurers, the operating expense ratio has improved substantially in the past five years, as players reassessed productivity of various distribution channels and their operating efficiency post FY1. SBI Life had the lowest operating expense ratio (as of FY17) followed by ICICI Prudential Life Insurance. The operating expense ratio for SBI Life declined substantially from 9.1% in FY15 to 7.83% in FY17. Exhibit 27: Expense ratio SBI Life Exhibit 28: Comparison of expense ratios FY FY15 FY16 FY SBI Life HDFC Standard Life ICICIPru Max Life Bajaj Allianz Commission ratio Operating Expense ratio Commission ratio Operating Expense ratio Second highest AUM in industry SBI Life reported AUM of 97,736.6 crore in FY17, of which equities constituted 23.19%, government securities constituted 46.28% and corporate bonds constituted 21.89%. As of March 31, 217, SBI Life was the second highest among top five private life insurers (in terms of total premium in FY17) in India. AUM has grown to crore as on June 3, 217. Page 17

18 (%) (%) Exhibit 29: Net investment income and yield on AUM SBI Life crore FY15 FY16 FY17 Q1FY18 With Interest, Amortisation, Dividends and Realized gains / losses Investment Income Yield Investment Income Yield Investment Income Yield Investment Income Shareholders Funds % % % 17 1.% Participating Funds % % 11, % % Non-Participating Funds 1, % 2, % 2, % % Linked Funds 5, % 3, % 4,7 11.% 1,3 1.% With Interest, Amortisation, Dividends and Realized and Unrealized gains / losses Shareholders Funds % % % % Participating Funds 1, % % 1, % % Non-Participating Funds 3, % 2,37 8.3% 3, % 1, % Linked Funds 7, % 31.6% 5, % 1, % Yield Robust financial position supported by high operating efficiencies SBI Life was profitable within the first five years of operations. It has demonstrated consistent profitability since FY1 and declared dividends every year since FY12. In addition, it has maintained solvency ratio at over 2x in the last five fiscals, which was at 2.4x as of March 31, 217, compared to IRDAI mandated solvency ratio of 1.5. Since FY8, no additional capital was raised by the company. NBP, gross written premium and new business annualised premium equivalent increased at CAGR of 35.45%, 27.8% and 36.59%, respectively, in FY15-17, while their individual rated premium increased at 37.9% CAGR in the same period. Based on embedded value report issued by the independent actuary, embedded value was crore as of March 31, 217 and VNB margins were at 15.6%. In the last three fiscals, the company has reported average RoE of 2.14%. Exhibit 3: Solvency ratio (FY17) Exhibit 31: Three year average RoE SBI Life HDFC Standard Life ICICIPru Max Life Bajaj Allianz SBI Life HDFC Standard Life ICICIPru Max Life Bajaj Allianz Page 18

19 Key risks and concerns Termination of or any adverse change in bancassurance agreement Bancassurance represents SBI Life s largest distribution channel. In FY15, FY16 and FY17, the bancassurance channel contributed 51.8%, 6.7% and 64.7%, respectively, of its new business premium (NBP) from individual products. In particular, the company has entered into bancassurance arrangements with its promoter, State Bank of India (SBI). In FY15, FY16 and FY17, NBP generated through SBI represented 38.3%, 42.7% and 41.5%, respectively. The bancassurance distribution channel benefits from inherent cost efficiencies resulting in lower cost of sales and greater profitability. Thus, termination of or any adverse regulatory changes could restrict company s ability to further grow the business. Higher concentration of NBP generated by a certain category of products In FY17, unit-linked products (ULIP) represented 79% of SBI Life s New Business Premium (NBP) earned from individual product business and 79.2% of new business annualized premium equivalent in individual segment. Any adverse regulatory or market development that affects sales of Ulip could materially impact business. Further, if growth of Ulip or pure protection products is not as anticipated, the company s value of new business and profitability would be adversely impacted. If unit linked funds underperform their respective benchmarks, the company may be unable to market these products in the future and may be in a disadvantageous position as compared to competitors. Any adverse change in relationships with promoter and BNP Paribas Cardiff SBI Life benefits from its relationship with SBI and BNP Paribas Cardiff, in particular drawing from their established brand equity and goodwill among customers. This relationship has enabled the company to enhance brand, access specialist industry expertise, grow its business and maintain market position. SBI is the largest bancassurance partner in India and provides SBI Life with a large distribution network and significant technology support. SBI Life have also been licensed the use of the SBI logo pursuant to the SBI Trademark Licensing Agreement. Thus, any adverse change in continuing relationship with SBI and BNP Paribas Cardiff may adversely impact the company s performance. Changes in regulatory environment The company is subject to a complex regulatory framework in India. The laws and regulations or the regulatory environment may change at any time. In particular, any adverse change in IRDAI policies, including with respect to investment or provisioning or rural and social sector obligations, may result in inability to meet such increased or modified regulatory requirements or could require company to increase coverage to relatively riskier segments and increase the cost of compliance with such changing regulations. Inability to control operating and other expenses The company s products are priced based on assumptions for expenses it expects to incur. These assumptions for expenses include policy acquisition cost, infrastructure related costs, employee costs, policy maintenance cost and other support costs. Expenses may be higher than expected due to changes in regulations, competition dynamics, distributor pressures, and other factors. The bancassurance expenses may increase owing to the IRDAI mandated non-exclusive arrangements with banks and insurance companies. In addition, since a significant portion of expenses are fixed, in the event future sales are lower than expected, expenses may not decrease in proportion, or at all, which could adversely impact the company s profitability and business prospects. Page 19

20 Financial Summary Exhibit 32: Policyholders Account ( Crore) FY13 FY14 FY15 FY16 FY17 Premiums earned - Net Income from Investments Other income Contribution from the Shareholders' account Total 14, , , , ,277.6 Commission Operating expenses Benefits paid (Net) Change in valuation of policy liabilities Others Provision for tax Surplus/(deficit) after tax Transfer to Shareholders' account Exhibit 33: Shareholders Account ( Crore) FY13 FY14 FY15 FY16 FY17 Amounts transferred from Policyholders' account Income from investments Total , ,64.5 Expenses other than insurance Contribution to Policyholders' account Others Profit before Tax Provision for tax PAT Exhibit 34: Balance Sheet ( Crore) FY13 FY14 FY15 FY16 FY17 Sources of Funds Share capital Reserve and surplus Credit/[debit] fair value change account Networth Policyholders' funds Funds for Future Appropriations Total Liabilities Applications of Funds Shareholders investments Policyholders investments Asset held to cover linked liabilities Loans Fixed assets - net block Deferred tax asset Net current assets Debit Balance in Profit & Loss Account (Shareholders' account) Total Assets Page 2

21 Exhibit 35: Key Ratios (Year-end March) FY13 FY14 FY15 FY16 FY17 Valuation No. of Equity Shares (Crore) Diluted EPS ( ) NAV ( ) IEV ( crore) NA NA NA NA P/E P/NAV P/IEV NA NA NA NA 4.2 Efficiency Ratios (%) Premium Management expenses incl commission as a % Return Ratios and capital (%) Return on Net worth Return on Embedded value NA NA NA NA 23. Solvency Ratio Persistency Ratio (%) 13th Month th Month th Month th Month th Month Page 21

22 RATING RATIONALE ICICIdirect.com endeavours to provide objective opinions and recommendations. ICICIdirect.com assigns ratings to its stocks according to their notional target price vs. current market price and then categorises them as Strong Buy, Buy, Hold and Sell. The performance horizon is two years unless specified and the notional target price is defined as the analysts' valuation for a stock. Strong Buy: >15%/2% for large caps/midcaps, respectively, with high conviction; Buy: >1%/15% for large caps/midcaps, respectively; Hold: Up to +/-1%; Sell: -1% or more; Pankaj Pandey Head Research pankaj.pandey@icicisecurities.com ICICIdirect.com Research Desk, ICICI Securities Limited, 1st Floor, Akruti Trade Centre, Road No 7, MIDC, Andheri (East) Mumbai 4 93 research@icicidirect.com Page 22

23 ANALYST CERTIFICATION We /I, Kajal Gandhi, CA, Vasant Lohiya, CA and Vishal Narnolia, MBA, Research Analysts, authors and the names subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect our views about the subject issuer(s) or securities. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report. Terms & conditions and other disclosures: ICICI Securities Limited (ICICI Securities) is a full-service, integrated investment banking and is, inter alia, engaged in the business of stock brokering and distribution of financial products. ICICI Securities Limited is a Sebi registered Research Analyst with Sebi Registration Number INH99. ICICI Securities is a wholly-owned subsidiary of ICICI Bank which is India s largest private sector bank and has its various subsidiaries engaged in businesses of housing finance, asset management, life insurance, general insurance, venture capital fund management, etc. ( associates ), the details in respect of which are available on ICICI Securities is one of the leading merchant bankers/ underwriters of securities and participate in virtually all securities trading markets in India. We and our associates might have investment banking and other business relationship with a significant percentage of companies covered by our Investment Research Department. ICICI Securities generally prohibits its analysts, persons reporting to analysts and their relatives from maintaining a financial interest in the securities or derivatives of any companies that the analysts cover. 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Non-rated securities indicate that rating on a particular security has been suspended temporarily and such suspension is in compliance with applicable regulations and/or ICICI Securities policies, in circumstances where ICICI Securities might be acting in an advisory capacity to this company, or in certain other circumstances. This report is based on information obtained from public sources and sources believed to be reliable, but no independent verification has been made nor is its accuracy or completeness guaranteed. This report and information herein is solely for informational purpose and shall not be used or considered as an offer document or solicitation of offer to buy or sell or subscribe for securities or other financial instruments. Though disseminated to all the customers simultaneously, not all customers may receive this report at the same time. ICICI Securities will not treat recipients as customers by virtue of their receiving this report. Nothing in this report constitutes investment, legal, accounting and tax advice or a representation that any investment or strategy is suitable or appropriate to your specific circumstances. The securities discussed and opinions expressed in this report may not be suitable for all investors, who must make their own investment decisions, based on their own investment objectives, financial positions and needs of specific recipient. This may not be taken in substitution for the exercise of independent judgment by any recipient. The recipient should independently evaluate the investment risks. The value and return on investment may vary because of changes in interest rates, foreign exchange rates or any other reason. ICICI Securities accepts no liabilities whatsoever for any loss or damage of any kind arising out of the use of this report. Past performance is not necessarily a guide to future performance. Investors are advised to see Risk Disclosure Document to understand the risks associated before investing in the securities markets. Actual results may differ materially from those set forth in projections. Forward-looking statements are not predictions and may be subject to change without notice. ICICI Securities or its associates might have managed or co-managed public offering of securities for the subject company or might have been mandated by the subject company for any other assignment in the past twelve months. ICICI Securities or its associates might have received any compensation from the companies mentioned in the report during the period preceding twelve months from the date of this report for services in respect of managing or co-managing public offerings, corporate finance, investment banking or merchant banking, brokerage services or other advisory service in a merger or specific transaction. ICICI Securities or its associates might have received any compensation for products or services other than investment banking or merchant banking or brokerage services from the companies mentioned in the report in the past twelve months. ICICI Securities encourages independence in research report preparation and strives to minimize conflict in preparation of research report. ICICI Securities or its associates or its analysts did not receive any compensation or other benefits from the companies mentioned in the report or third party in connection with preparation of the research report. Accordingly, neither ICICI Securities nor Research Analysts and their relatives have any material conflict of interest at the time of publication of this report. It is confirmed that Kajal Gandhi, CA, Vasant Lohiya, CA and Vishal Narnolia, MBA Research Analysts of this report have not received any compensation from the companies mentioned in the report in the preceding twelve months. Compensation of our Research Analysts is not based on any specific merchant banking, investment banking or brokerage service transactions. ICICI Securities or its subsidiaries collectively or Research Analysts or their relatives do not own 1% or more of the equity securities of the Company mentioned in the report as of the last day of the month preceding the publication of the research report. Since associates of ICICI Securities are engaged in various financial service businesses, they might have financial interests or beneficial ownership in various companies including the subject company/companies mentioned in this report. It is confirmed that Kajal Gandhi, CA, Vasant Lohiya, CA and Vishal Narnolia, MBA, Research Analysts do not serve as an officer, director or employee of the companies mentioned in the report. ICICI Securities may have issued other reports that are inconsistent with and reach different conclusion from the information presented in this report. Neither the Research Analysts nor ICICI Securities have been engaged in market making activity for the companies mentioned in the report. We submit that no material disciplinary action has been taken on ICICI Securities by any Regulatory Authority impacting Equity Research Analysis activities. This report is not directed or intended for distribution to, or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction, where such distribution, publication, availability or use would be contrary to law, regulation or which would subject ICICI Securities and affiliates to any registration or licensing requirement within such jurisdiction. The securities described herein may or may not be eligible for sale in all jurisdictions or to certain category of investors. Persons in whose possession this document may come are required to inform themselves of and to observe such restriction. ICICI Securities Limited has been appointed as one of the Book Running Lead Managers to the initial public offer of SBI Life Insurance Company Limited. This report is prepared on the basis of publicly available information. Page 23