SBI LIFE INSURANCE

LIFE/HEALTH INSURANCE | INDIA | 26 OCTOBER 2018 09:17 CET | CONTACT: VISHAL RAMPURIA 1/7

Q2 FY 2019 RESULTS

Investment thesis
• In H1, NBPs rose a healthy 30% y/y to INR55.7bn driven by
broad-based growth with good showing at its individual sav- Stock rating (relative) Buy
ings business (+10% y/y), group NBPs (+84% y/y) and protec- New price target INR 770.00
tion NBPs (+142% y/y). These were somewhat offset by the Previous price target INR 820.00
digitisation-led disruption in its processes (rolled out in May
Closing price* INR 563.40
2018). Compared to FY 2018, the NBP share of its protection
Return potential 36.67%
business improved 6ppt to 11%, while ULIPs edged down 7ppt
MSCI ESG rating** -
to 49% in H1.
• It has consistently delivered superior operating performance, MSCI ESG Controversies -
with industry-leading NBP growth (a CAGR of 26% over FY Risk rating Low
2015-FY 2018), improving persistency ratios (PRs; 13-month:
83.2% in H1 FY 2019 vs. 73.6% in FY 2015), a low-cost struc- * as of 25 October 2018
ture and a highly productive agency force, leading to an uptick ** as of 30 September 2018
in the reported VNB^ margin to 17.3% in H1 FY 2019 com- Company profile
pared with 16.2% in FY 2018. Incorporated in 2001, SBI Life Insurance Company Limited (SBI
• Life insurance players are poised to benefit from secular tail- Life) is a joint venture between State Bank of India (SBI; Buy,
winds – favourable demographics, rising income levels and a Price/Target: INR249.7/380.0; a 62% stake) and BNP Paribas
large protection gap, with penetration at 2.8% of GDP^ vs. a Cardif (not listed; 22% stake), an insurance subsidiary of BNP
median of 3.5% for emerging economies. Given SBI’s strong
Paribas**. SBI Life is a leading private insurer in India, with a
footprint (activation is 59%), a productive agency channel,
market share of ca. 19% in new business premiums (NBPs) and
strong brand and solid capital position (solvency ratio [SR]:
22% in individual-rated premiums among private sector players
221% at end-Q2 FY 2019), we believe SBI Life is well placed to
in H1 FY 2019. The company offers a range of life insurance,
tap this multi-year growth opportunity. We maintain Buy with
a price target of INR770 (EV^ + 20x VNB H1 FY 2021). savings and pension products, mainly through its bancassurance
(banca) tie-up with its parent SBI, a strong network of over
H1 and Q2 FY 2019 results and key highlights 113,000 agents and through other corporate brokers/
• APE^ growth accelerated to 14% y/y in Q2 to reach INR23.9bn intermediaries. At end-Q2 FY 2019, SBI Life had AUM^ of
vs. the subdued 2% y/y seen in the prior quarter, taking APE INR1.3trn. The company has a fairly diversified NBP mix, with
growth in H1 to 10% y/y. This y/y growth in Q2 was led by shares of ULIP^/PAR^/Non-PAR/Protection of 49%, 14%, 26%
ULIPs (+22% y/y) and robust performance in its individual pro- and 11%, respectively, in H1 FY 2019.
tection business. The share of protection on an APE basis im- Performance (listed since Oct 2017)
proved 1.4ppt q/q and 1.6ppt y/y to 5.9%.
INR
• The adjusted VNB margin (for the effective tax rate) in H1 ex-
panded 80bps to 19.2% vs. FY 2018 on a better protection mix, 800
given a shift in credit protection products towards single pre-
750
mium products from regular premium. The reported VNB mar-
gin was at 17.3% (FY 2018: 16.2%). 700
• Persistency improved across most cohorts in H1, with its 13-
month, 37-month and 49-month PRs up 20bps, 1.0ppt and 650
50bps to 83.2%, 71.0% and 64.4%, respectively, vs. FY 2018.
• The cost ratio improved 130bps y/y to 12.0% in H1 on better 600
operating expenses (-80bps y/y to 7.8%) and the commission
ratio (-60bps y/y to 4.1%). H1 net profits were up 12% y/y to 550
INR6.0bn (Q2: +11% y/y to INR2.5bn).
500
• AUM grew 5% q/q to INR1.26trn by end-Q2. SR improved Oct 17 Oct 18 Oct 19
7ppt q/q to 221% vs. the 150% regulatory requirement. SBI Life Insurance Price targe t

Guidance 1 month 3 months 6 months 12 months

• Management expects premium growth to improve in the sea- Absolute return -0.47% -14.60% -26.46% -15.90%
sonally strong H2, and as per its earlier guidance, it targets to
achieve APE growth of ca. 25% y/y in FY 2019. Source: FactSet, Julius Baer
^ AUM – assets under management, ULIP – Unit-Linked Insurance Plan, PAR – Participating Busi-
ness, VNB – value of new business, GDP – gross domestic product, EV – embedded value, APE -
annualised premium equivalent (based on the effective tax rate)
** Covered by Bank Julius Baer & Co. Ltd., Zurich

Julius Baer Equity Research | Please find important legal information at the end of this document.
EQUITY RESEARCH | SBI LIFE INSURANCE | 26 OCTOBER 2018 2/7

SWOT ANALYSIS

Strengths Sales segmentation (FY 2018)

• Largest private life insurer in India, with a leading market share By product mix
of ca. 19% in NBP generated among private-sector players in
FY 2018
• Strong distribution network, with an expansive banca channel ULIP (55.7%)
(largely through SBI) and a growing agency force with superior
productivity PAR (18.5%)
• Benefits from a well-diversified product mix, low-cost struc- Group Savings (18.4%)
ture, improving persistency ratios and a strong capital position
Weaknesses Protection (5.5% )

• Higher share of ULIPs in its product mix (FY 2018: 56% of Non-PAR (1.9%)
NBP) than peers; ULIPs are low-margin-yielding; sales growth
is susceptible to capital market performance
• Minimal contribution from direct channel to NBP (a mere 1%-
2%) owing to a sub-scale digital presence
Opportunities By channel mix

• Significant headroom for growth given untapped SBI branches

Bancassurance (62.0% )
and low penetration of life insurance in India, with a large pro-
tection gap
• Expansion of its direct/digital sales channel to mitigate distri-
bution risks and further enhance cost efficiency Agency (25.0%)

Threats
• Slowdown in economic growth or slower-than-expected re-
Others (13.0%)
forms, which could negatively impact life insurance sales
• The industry is regulated by the IRDA^. Unfavourable tax re-
forms or regulatory changes and increasing price competition
from existing/new private insurance players are added threats
• Any increase in the tax rate (14.5%) would have an adverse im- Source: FactSet
pact on the company's earnings in the short to medium term
^ IRDA – Insurance Regulatory and Development Authority

FACTS & FIGURES

Consensus rating Financials

Buy Hold Sell 2017 2018 2019E* 2020E*
18 analyst(s) 0 analyst(s) 0 analyst(s) Sales (INRm) 291,675 349,086 358,014 441,775
Net income (INRm) 9,547 11,504 13,480 15,534

Consensus target (INR) 794.44 ROE (%) 18.56 19.05 17.88 17.61

Consensus target return potential (%) 41.01 EPS (INR) 9.55 11.50 13.41 15.64
EPS growth (%) 13.15 20.42 16.59 16.66
Market capitalisation (INRbn) 561.15
P/E (x) - 59.11 41.49 35.57
Free float (%) 34.00
P/B (x) - 10.32 7.36 6.30
Beta 0.48
Dividend yield (%) - 0.30 0.47 0.56
Average Daily volume (m) 0.43
52-week high (INR) 766.10
52-week low (INR) 511.60 * Estimates
Exchange National Stock Exchange of India - Implies not available/not meaningful
Ex-dividend date 3 April 2018 Source: FactSet

Results date -
Standard & Poor’s rating -
ISIN INE123W01016
EQUITY RESEARCH | SBI LIFE INSURANCE | 26 OCTOBER 2018 3/7

CHARTS & FINANCIAL DETAILS

12-month forward P/E (Nov 2017 - present) 12-month forward P/B (Nov 2017 - present)
P/E (x) P/B (x)
55 11

50

9
45

40
7
35

30 5
Nov 17 Mar 18 Jul 18 Nov 17 Mar 18 Jul 18

+/- 1 Standard de viation Forward P/E (x) +/- 1 Standard de viation Forward P/B (x)

Average (x) Average (x)

Source: FactSet Source: FactSet

Peer valuation Earnings per share versus performance

Estimates P/E (FY 2020)
INR INR
60
800 15.5
15.0
40 750
14.5
700
14.0
20
650 13.5
13.0
600
0 12.5
ICICIPRULI-
500271-IN

540777-IN*
SBILIFE-NSE

550
12.0
NS E

500 11.5
Nov 17 Mar 18 Jul 18

Estimates P/E ( FY 2020) Average Share price (l.h.s.) Ne xt 12 months' EPS (r.h.s.)
* Not covered, Julius Baer offers no recommendation and does not provide
any advice on potential risks
SBILIFE-NSE-SBI Life Insurance, 500271-IN-Max Financial Services, ICI-
CIPRULI-NSE-ICICI Prudential Life Insurance, 540777-IN-HDFC Standard
Life Insurance Source: FactSet
Source: FactSet

Valuation ratios (x)

2016 2017 2018 2019E* 2020E*

P/E - - 59.11 41.49 35.57

P/B - - 10.32 7.36 6.30

P/S - - 2.68 1.55 1.26

P/embedded value - - 3.53 2.49 2.11

* Estimates
- Implies not available/not meaningful
Source: FactSet
EQUITY RESEARCH | SBI LIFE INSURANCE | 26 OCTOBER 2018 4/7

IMPORTANT LEGAL INFORMATION

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Details of Associates
Name of the Entity: Julius Baer Capital (India) Private Limited (a subsidiary of JBWA)
Nature of Business: RBI registered Systemically Important non deposit taking Non-Banking Finance Company

IMPRINT

Authors:
Vishal Rampuria, Equity Analyst, vishal.rampuria@juliusbaer.com 1)

1) This analyst is employed by JBWA, which is regulated by the Securities & Exchange Board of India (SEBI). The analyst has obtained
the requisite certification as mandated by SEBI under the SEBI (Research Analyst) Regulations, 2014.

APPENDIX

Analyst certification
The analyst hereby certifies that the views discussed in this report accurately reflect his/her personal and unbiased independent views
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Analyst/Relatives Entity/Associates
any financial interests in the company covered in this report (subject company) and na- No No
ture of such financial interest
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of the month immediately preceding the date of publication of the research report
any other material conflict of interest at the time of publication of the research report No No
received any compensation from the subject company in the past twelve months
 for investment banking or merchant banking or brokerage services or investment ad- No No
visory or depository or distribution from the subject company in the last twelve
months
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been engaged in market making activity for the subject company No No

The views expressed by the Research Analyst in this report are his/her independent/unbiased views and is not influenced by the other
Division of JBWA.
EQUITY RESEARCH | SBI LIFE INSURANCE | 26 OCTOBER 2018 5/7

Any other specific disclosures

SBI Life Insurance
No specific disclosures.

Terms and abbreviations

CAGR Compound an- Consensus Consensus rating indicates the ana- Consensus The consensus target is the average
nual growth rate rating lysts' opinions on the security. It target price to which analysts expect the se-
shows the number of analysts cover- curity to rise.
ing the security and the breakdown
between Buy, Hold and Sell ratings.

DCF Discounted cash EBIT Earnings before interest and taxes EBITDA Earnings before interest, taxes, depre-
flow ciation and amortisation

EPS Earnings per EV Enterprise value FCF Free cash flow

share

FY Fiscal year MV Market value P/B Price-to-book value

P/CF Price to cash P/E Price-to-earnings ratio P/S Price to sales

flow

PEG P/E divided by ROA Return on Assets ROE Return on equity

year-on-year EPS
growth

Equity rating allocation as of 26/10/2018

Buy 84.1% Hold 15.9% Reduce 0%

Recommendation history:
Please refer to the following link for more information on the recommendation history:
www.juliusbaer.com/recommendation-history

Rating system for Equity Research (Stock Rating)

Buy Expected to outperform the NIFTY 50 Index by at least 5% in the coming 12 months, unless otherwise stated.
Hold Expected to perform in line (±5%) with the NIFTY 50 Index in the coming 12 months, unless otherwise stated.
Reduce Expected to underperform the NIFTY 50 Index by at least 5% in the coming 12 months, unless otherwise stated.

Frequency of equity rating updates

An update on Buy-rated equities will be provided on a quarterly basis. An update for Hold and Reduce-rated equities will be provided
semi-annually or on an adhoc basis.

Risk rating system for global Equity Research

The risk rating (High/Medium/Low) is a measure of a stock’s expected volatility and risk of losses in case of negative news flow. This
non-quantitative rating is based on criteria such as historical volatility, industry, earnings risk, valuation and balance sheet strength.

MSCI ESG Rating

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methods. There are three steps to the method: 1) identification of key issues for each sector 2) evaluation of risks and how they are
handled within the company 3) drawing up ratings to qualify the ESG risks not identified. The MSCI ESG Rating is expressed on a
seven-point scale and they range from CCC (worst) to AAA (best).
EQUITY RESEARCH | SBI LIFE INSURANCE | 26 OCTOBER 2018 6/7

MSCI ESG Controversies

MSCI ESG Controversies analyses & monitors ESG controversies and breaches of ESG criteria or global rules such as the UN Global
Compact principles. MSCI uses the following indicators: human rights and society, employment rights and the supply chain, company
organisation, environment and clients.
Flag Flag description
A red flag indicates recent very serious and/or extremely widespread controversies on a particular issue. Such a flag is also as-

sessed when the problems are systemic or repetitive or indicate wilful negligence.
 An orange flag indicates ongoing severe controversies on a particular issue when the problems are systemic or repetitive.
 A yellow assessment indicates significant concern, where the impact on the relevant stakeholders is high.
 No evidence of major and/or systematic problems.

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