IPO Update SBI Life Insurance Company Ltd. - to its only listed peer ICICI Prudential Life Insurance Company ... is the sole public sector life insurance company ... SBI Life Insurance Company Ltd. ICICI

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<ul><li><p>IPO Update </p><p>IPO UPDATE </p><p>Salient features of the IPO: SBI Life Insurance Company Ltd. (SLIC) is the Indias largest private </p><p>life insurer in terms of new business premium (NBP) generated in each fiscal year, since FY10. </p><p> The issue is totally OFS, so the company will not receive any proceeds from the IPO. </p><p>Key competitive strengths: One of the largest private life insurer with a consistent track record </p><p>of rapid growth Significant brand equity and pre-eminent promoters Expansive multi-channel distribution with pan-India bancassurance </p><p>channel and high agent productivity Sustainable business model </p><p>Risk and concerns: Subdued economic activities Change in government and regulatory policies Unexpected rise in insurance claims Rise in the interest rate Intense competition Valuation &amp; recommendation: </p><p>At the higher price band of Rs. 661 per share, SLICs share is valued at a FY17 Price/Indian Embedded Value (P/IEV) multiple of 4.2x, which is at a premium to its only listed peer ICICI Prudential Life Insurance Company Ltd. (trading at a P/IEV of 3.8x). </p><p>Below are few key observations of the issue: As per Swiss Re report, the protection gap in India stood at 92% (i.e. </p><p>USD 8.5tn) in 2014, which was much higher compared to other Asian countries. This means that for USD 100 of insurance protection requirement, only USD 8 was actually insured in 2014, thereby indicating absence of insurance for a large part of population. </p><p> Indias life insurance penetration stood at 2.7% in 2016 as compared to global penetration level of 3.5%. The size of Indian life insurance has grown by 17% CAGR over FY01-17 and is anticipated to grow at 11-13% CAGR over FY17-22. </p><p> Among the private life insurers, SLIC has a market share of 20.7% in individual rated premium among private life insurers in India and 11.2% of the entire life insurance industry in India during FY17. Moreover, the company has also issued the highest number of individual life policies annually among the top five private life insurers in India since FY14. </p><p> The company is a cost effective insurer and has an operating expenses ratio of 7.8% as compared to the average of 13.7% of the other dominant players. This efficiency can be attributable to its highly productivity of the agents, increased focus on bancassurance, effective utilization of the distribution channels etc. </p><p> Over FY13-17, SLIC has consistently maintained a solvency ratio of over 2x, as compared to the regulatory requirement of 1.5x. Additionally, it has maintained an average 13th month persistency ratio of around 73% over FY13-17. In FY17, the 61st month persistency ratio of 67.2% was highest among the top five private life insurers in India. </p><p> In Dec. 2016, SLIC has sold a minority stake of 3.9% to two investors for a consideration of Rs. 18bn. At an FY16 IEV of Rs. 130bn and an P/IEV of 3.5x, the firm was valued to around Rs. 455bn. Currently, at the higher price band, the company is demanding a valuation of Rs. 700bn, i.e. an P/IEV of 4.2x on an FY17 IEV of Rs. 161.8bn. The demanded valuation is at a steep premium of around 54% to the Dec. 2016 transaction and the demanded P/IEV of 4.2x is too higher as compared to the trading range of 3.5-4.4x of ICICI Prudential Life Insurance Company Ltd. We feel that steep valuation has left limited room for price appreciation for the retail investors. </p><p>Thus considering the above observations, we assign a Subscribe with Caution rating for the issue. We feel that that the investors can enter in this script at a lower price post listing and can hold it for a long period for better returns. </p><p> 1 </p><p>Recommendation Subscribe with Caution </p><p>Price Band (Rs.) Rs. 685 - 700 per Share </p><p>Face Value (Rs.) Rs. 10 </p><p>Shares for Fresh Issue (mn) </p><p>Nil </p><p>Shares for OFS (mn) 120mn Shares </p><p>Fresh Issue Size (Rs. mn) N/A </p><p>OFS Issue Size (Rs. mn) Rs. 82,200 - 84,000mn </p><p>Total Issue Size (Rs. mn) Rs. 82,200 - 84,000mn </p><p>Bidding Date 20th Sept. 22nd Sept. 2017 </p><p>Reserved for Employees (mn Shares) </p><p>2mn Shares </p><p>Reserved for State Bank of India Ltd. Shareholders (mn Shares) </p><p>12mn Shares </p><p>MCAP at Higher Price Band </p><p>Rs. 700,000mn </p><p>Book Running Lead Manager </p><p>JM Financial Institutional Securities Ltd., Axis Capital Ltd., BNP Paribas, Citigroup Global Markets India Pvt. Ltd., Deutsche Equities India Pvt. Ltd., ICICI Securities Ltd., Kotak Mahindra Capital Company Ltd. and SBI Capital Markets Ltd. </p><p>Registrar Karvy Computershare Pvt. Ltd. </p><p>Sector/Industry Life Insurance </p><p>Promoters State Bank of India and BNP Paribas Cardif S.A. </p><p>Pre and Post - Issue Shareholding Pattern </p><p>Pre - Issue Post - Issue </p><p>Promoter and Promoter Group </p><p>96.1% 84.1% </p><p>Public 3.9% 15.9% </p><p>Total 100% 100% </p><p>Retail Application Money at Higher Cut-Off Price per Lot </p><p>Number of Shares per Lot 21 </p><p>Discount for Eligible Employees (Rs.) </p><p>Rs. 68 per Share on the Offer Price </p><p>Application Money Rs. 14,700 </p><p>Analyst </p><p>Rajnath Yadav </p><p>Research Analyst (022 - 6707 9999; Ext: 912) </p><p>Email: rajnath.yadav@choiceindia.com </p><p>19th Sept. 2017 </p><p>SBI Life Insurance Company Ltd. </p></li><li><p>IPO Update </p><p>IPO UPDATE 2 </p><p>About the issue: SLIC is coming up with an initial public offering (IPO) with 120mn shares (fresh issue: Nil; OFS shares: 120) in offering. The </p><p>offer represents around 12% of its post issue paid-up equity shares of the company. Total IPO size is Rs. 82,200 - 84,000mn. </p><p> 2mn shares are reserved for eligible employees and the discount is Rs. 68 per share on the offer price. </p><p> 12mn shares are reserved for the shareholders of State Bank of India Ltd. </p><p> Net issue comprises of 106mn shares, representing 10.6% of the post issue paid-up equity shares of the company. The issue will open on 20th Sept. 2017 and close on 22nd Sept. 2017. </p><p> The issue is book building with a price band of Rs. 685 - 700 per Share. </p><p> 50% of the net issue shall be allocated on a proportionate basis to qualified institutional buyers, while rest 15% and 35% </p><p>is reserved for non-institutional bidders and retail investors, respectively. </p><p> The issue is totally OFS, so the company will not receive any proceeds from the IPO. </p><p> Its promoter holds almost 96.1% stake in the company and post IPO this will come down to 84.1%. Public holding will increase from current 3.9% to 15.9% post IPO. </p><p>Source: Company RHP </p><p>Pre and Post Issue Shareholding Pattern (%) </p><p> Pre Issue Post Issue (at higher price band) </p><p>Promoter &amp; Promoter Group (%) 96.1% 84.1% </p><p>Public 3.9% 15.9% </p><p>Tentative IPO Process Time Line </p><p>Date </p><p>Anchor Investor 19-Sept-2017 </p><p>Offer Opens on 20-Sept-2017 </p><p>Offer Closes on 22-Sept-2017 </p><p>Finalization of Basis of Allotment 27-Sept-2017 </p><p>Unblocking of ASBA Account 28-Sept-2017 </p><p>Credit to Demat Accounts 29-Sept-2017 </p><p>Listing on Stock Exchanges 03-Oct-2017 </p><p>Source: Company RHP </p></li><li><p>IPO Update </p><p>IPO UPDATE 3 </p><p>Company Introduction: SLIC is the Indias largest private life insurer in terms of NBP generated in each fiscal year, since FY10. It has also increased its market share of NBP generated among private life insurers in India, from 15.9% in FY15 to 20% in FY17. Over FY15-17, the companys NBP increased by 35.5% CAGR, which is the highest among the top five private life insurers (in terms of total premium in FY17) in India. In FY17, SLIC enjoyed a market share of 20.7% in individual rated premium among private life insurers in India and 11.2% of the entire life insurance industry in India. Between FY15-17, its individual rated premium increased by 37.9% CAGR, which is the highest among the top five private life insurers in India. The company has also issued the highest number of individual life policies annually among the top five private life insurers in India since FY14. Based on the IEV report issued by the Independent Actuary, its IEV was Rs. 165,379mn as of 31st Mar. 2017. Its value of new business (VNB) was Rs. 10,368mn in FY17 while value of new business margin (VNBM) was 15.4%. Present value of NBPM was 3.8% in FY17. SLIC was established as a joint venture between the State Bank of India Ltd. (SBI) and BNP Paribas Cardif S.A. (BNPPC; an insurance holding company incorporated under the laws of France) in 2001. As of 31st Mar. 2017, SBI was the Indias largest commercial bank in terms of deposits, advances and number of branches. Following its recent merger with certain of its associate banks and a non-affiliate bank, with effect from 1st Apr. 2017, SBI had 24,017 branches and 195 international offices in 36 countries and more than 420mn customers. BNPPC is an insurance subsidiary of BNP Paribas, with operations across 36 jurisdictions internationally and is among the leading credit life insurance businesses globally. As of 31st Jul. 2017, SLIC had a comprehensive product portfolio of 37 individual and group products (of which eight products are group products), including a range of protection and savings products to address the insurance needs of diverse customer segments. Its individual products include participating products, non-participating protection products, other non-participating products and unit-linked products, which contributed 10.8%, 0.9%, 1.7% and 50.4%, respectively, of its NBP in FY17. The company has developed a multi-channel distribution network comprising an expansive bancassurance channel, including SBI, the largest bancassurance partner in India, a large and productive individual agent network comprising 95,177 agents as of 31st Jul. 2017, as well as other distribution channels including direct sales and sales through corporate agents, brokers, insurance marketing firms and other intermediaries. In FY17, it collected the highest amount of NBP generated by private life insurers in India both through the bancassurance channel as well as through an individual agent network. The company has also developed a long standing institutional relationships with large corporates with respect to its group life insurance products. In FY17, SLIC had 13th month and 61st month persistency ratios of 81.1% and 67.2%, respectively. Its 61st month persistency ratio was the highest among the top five private life insurers in India. In FY17, its mis-selling ratio of 0.2% was the lowest among the top five private life insurers in India, while its grievance disposal rate was 99.96%. SLICs death claims settlement ratio improved from 92.3% in FY15 to 98% in FY17. The company has consistently maintained its solvency ratio at over 2x in each of the last five fiscal years, compared to the IRDAI mandated minimum solvency ratio of at least 1.5x. Competition: SLIC competes with a number of other companies in the life insurance business, and face intense competition from public and private sector insurance companies in India. It competes for business on the basis of a number of factors, including product features, price, coverage offered, quality of customer service, distribution networks, relationships with brokers and agents, brand recognition, size of operations and financial strength ratings. The company competes principally with Life Insurance Corporation of India (LIC) in the public sector, with ICICI Prudential Life Insurance Company Ltd., HDFC Life Insurance Company Ltd., Max Life Insurance Company Ltd. and Bajaj Allianz Life Insurance Ltd. in the private sector. LIC is the sole public sector life insurance company in India, and enjoys competitive advantages in the Indian insurance market due to its large customer base, extensive nationwide agent network and strong brand recognition. </p></li><li><p>IPO Update </p><p>IPO UPDATE 4 </p><p>Company Introduction (Contd): In 2015, the IRDAI introduced corporate agency guidelines that allow banks to collaborate with up to three life insurance companies with respect to bancassurance distribution. This resulted in increasing competition for bancassurance partners among private sector life insurance companies. SLIC competes with other established private sector life insurance companies as well as relatively newer entrants in the industry to attract new bancassurance partners and maximize its share of business from existing bancassurance partners which have option to promote life insurance products from more than one insurance company. Its individual agent network continues to be a significant distribution channel and it competes with its peers to attract talent for new individual agents and maintaining a strong relationship with its existing agents. Additionally, products offered by the life insurance sector also competes with other financial services products. In the area of savings-oriented insurance products, SLIC competes with mutual fund companies, bank fixed deposits and the governments small saving schemes. The following table sets forth SLICs market share (among private life insurers in India) for the periods indicated in terms of total NBP, individual rated premium and number of new policies issued for individual products: </p><p>Source: Company RHP </p><p>The following table sets forth SLICs market share among all life insurers (including LIC) in India for the periods indicated in terms of total NBP, individual rated premium and number of new policies issued for individual products: </p><p>Source: Company RHP </p></li><li><p>IPO Update </p><p>IPO UPDATE 5 </p><p>Company Introduction (Contd): Financial performance: SLIC premium earned increased at a 19.2% CAGR over FY13-17 to Rs. 208,524.5mn in FY17. Its assets under management (AUM) increased by 17.1% CAGR to Rs. 1,013,287.4mn in FY17. As of 31st Mar. 2017, its AUM was the second highest among top five private life insurers in India. Its profit after tax increased at a 10.9% CAGR from Rs. 6,301.1mn in FY13 to Rs. 9,546.5mn in FY17. The company turned profitable within the first five years of its operations and has declared dividends every year since FY12. Given below is the snapshot of the financial performance: </p><p>Source: Company RHP </p><p>Source: Company Presentation </p><p>FY13 FY14 FY15 FY16 FY17 Q1 FY18 CAGR (%) Y-o-Y (%) </p><p>Premiums Earned (Net) 103,453.0 107,019.4 127,800.0 156,654.5 208,524.5 37,625.9 19.2% 33.1% Total Income 149,755.3 173,694.2 231,864.9 191,197.2 302,775.1 63,883.7 19.2% 58.4% Total Expenses (142,407.5) (165,574.2) (224,838.1) (184,751.0) (296,231.5) (61,288.4) 20.1% 60.3% Surplus / (Deficit) 7,347.7 8,120.0 7,026.7 6,446.3 6,543.6 2,595.3 -2.9% 1.5% Reported PAT 6,301.1 7,277.5 8,148.7 8,441.0 9,546.5 3,134.5 10.9% 13.1% </p><p>Cash Flow from Operating Activities 11,299.6 1,664.4 27,114.9 57,779.4 85,251.2 7,592.0 65.7% 47.5% </p><p>13th Month Persistency Ratio Based on Number of Policies (%) </p><p>68.5% 71.7% 74.0% 72.7% 73.3% 73.9% 486 bps 65 bps </p><p>Solvency Ratio 2.2 2.2 2.2 2.1 2.0 2.1 Restated EPS (Rs.) 6.3 7.3 8.1 8.4 9.5 3.1 10.9% 13.1% Restated DPS (Rs.) 0.5 1.0 1.2 1.2 1.5 31.6% 25.0% Restated BVPS (Rs.) 27.4 33.6 40.6 47.3 55.5 58.8 19.3% 17.3% RoE (%) 25.7% 23.9% 22.0% 19.2% 18.6% 5.5% (710) bps (65) bps </p><p>Source: Company Presentation </p></li><li><p>IPO Update </p><p>IPO UPDATE 6 </p><p>Competitive Strengths: One of the largest private life insurer with a consistent track record of rapid growth Significant brand equity and pre-eminent promoters Expansive...</p></li></ul>