Beyond Q2 net profit fall, SBI Life gives more bang for buck
17/10/2019
Mumbai: Investors seldom like it when the business they invest in fail to show profit growth.
So what explains the fact that SBI Life Insurance Co Ltd’s stock gained over 4% in morning trade today despite the insurer reporting a 48% year-on-year fall in net profit for the September quarter?
There are a handful of reasons. First off, if an insurance company is not making profits, it means it is getting more business. For insurance companies, costs of acquiring business are upfront while pay-offs or profits come staggered. Investors like it the most when prospects of future profits rise rather than present profits.
Therefore, investors found it more important that SBI Life reported an increase of 34% in its new business premium much of which was driven by a broad based growth in most product categories. The winning point of course was that margin friendly protection business continued to grow at a fast pace.
In other words, its products continued to fly off the shelves with term plans getting most of the demand. Protection products are similar to no-frills bank accounts and generate high margins for insurers. The share of protection and annuity products in the total portfolio is now 18% for SBI Life. Growth in non-participatory savings products zoomed.
What this means is that SBI Life will get more bang for every buck in the coming quarters.
For the September quarter too, the life insurer continued to do well on profitability metrics.
The value of new business margin was 20.2% slightly higher than analysts expectations. The value of new business rose 33% from a year ago.
So does this mean that SBI Life’s costs increased considering its business grew at a brisk pace?
It is worth noting that the life insurer has access to a large branch network of its parent, State Bank of India (SBI). Analysts at Jefferies India Pvt Ltd consider this a unique advantage the insurer has. “SBI Life's business done through SBI bank was 25 basis points of SBI's deposit base, vs IPRU's (ICICI Prudential Life Insurance Co) new business with ICICI Bank at 80 bps," the brokerage firm said in a note.
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