ANALYSIS. SBI stake sale in insurance arm done at healthy valuation

Taking its strategy of monetising non-core assets forward, SBI, on Friday, approved the sale of its 3.9 per cent stake in SBI Life Insurance.

The deal, valuing the life insurance business at a whopping ₹46,000 crore, has provided a good benchmark that will prep the pitch for listing the company in 2017.

Unlike conglomerates in the financial services space, such as Bajaj Finserv or Reliance Capital, whose insurance subsidiaries account for a substantial portion of their earnings, banks such as SBI derive only a small portion of their overall earnings from the insurance business.

Nonetheless, for banks that have stakes in leading insurance players, the value unlocking can be significant. The current deal for SBI, for instance, pegs the value of the insurance business at 3.5 times its embedded value as of March 2016. Considering that deals in the past have taken place at one to three times the embedded value, SBI has raked in a good price for its stake sale.

Embedded value is a measure used to value a life insurance business which, among other parameters, takes into account the future earnings of the company.

SBI Life Insurance ranks second among private players on an RWRP (retail weighted received premium) basis. RWRP is the sum of the first year premiums on regular premium policies and 10 per cent of single premiums.

Its net profit grew 5 per cent to ₹428 crore in the six months ended September 2016. After going through a series of regulatory changes since 2010, private sector players in particular have regained significant market share in the last two years, driven by healthy demand for unit-linked products (ULIPs).

SBI Life has a balanced mix between traditional policies and ULIPs. SBI Life also has a comprehensive multi-distribution model, which is critical to drive growth, given the push nature of the product.

Valuations have run up sharply across deals in the last one year, particularly after the Insurance Bill was passed (which increased the FDI limit from 26 per cent to 49 per cent).

Bank of India’s stake sale in Star Union Dai-ichi Life, for instance, happened at 3.8 times the embedded value. Also, the deal structure of the HDFC Life and Max Life merger, pegged the valuation of the two insurance players and the combined entity (4.3 times the embedded value) at a premium to past deals in the life insurance space.

However, the recently concluded listing of ICICI Prudential Life Insurance — the first by an Indian insurance company — did not go down well with investors.

At the upper end of the price band of ₹300-334, the IPO valued ICICI Pru Life at ₹47,857 crore or 3.4 times its embedded value as of March 2016. The stock is trading at ₹294, much below its IPO price.

Hence, it needs to be seen if valuations (based on the current deal) sustain for SBI Life, when it gets listed on the market next year.

COMMENT NOW