SBI Life winning valuation game

The stock of SBI Life Insurance Co., India’s largest private life insurer by market capitalization, has gained 18% over the past year.

- Manish Joshi [e-mail]

In contrast, HDFC Life Insurance Co. and ICICI Prudential Life Insurance Co.—the second and third largest—have declined 10% and 9%, respectively, and hit fresh 52-week lows on Tuesday.

The divergence is being driven by differences in valuation and growth trajectories.

Valuing life insurers is challenging.

Earnings per share (EPS) or reported profit after tax does not fully capture performance, as costs are recognised upfront while profits from policies accrue over several years.

Instead, economic profit—or value of new business (VNB)—is a more relevant metric. VNB is used to derive the Price/VNB ratio, similar to the price-to-earnings (P/E) ratio.

Despite its stock outperform-ance, SBI Life remains the cheapest among peers.