HDFC Life, Max Financial, SBI Life, ICICI Pru: Insurance shares that will gain after final guidelines on surrender values

Life insurance stocks, especially HDFC Life Insurance Company Ltd and Max Financial Services Ltd, are in focus on Tuesday following IRDAI's notification of the final guidelines on product regulations. These final guidelines, analysts noted, were relaxed on guaranteed surrender value limits that were indicated in the draft regulations, which may result in negligible impact on life insurance companies, ending the overhang on life insurance stocks.

"The surrender charge regulation was a key overhang for the sector as the impact of exposure draft was to the tune of 300-500bp on VNB margins of the non-par segment. Resultantly, the impact on Max Life and HDFC Life was expected to be higher given their relatively higher dependence on the segment. With this concern now behind, these stocks could outperform in the near term. However, structurally we remain positive on SBI Life Insurance Company," Motilal Oswal Securities said.

The draft note had introduced the concept of ‘threshold premium’ for the calculation of guaranteed surrender value for non-linked insurance products. However, as per the latest publication, the calculation of surrender value for non-linked products (for both PAR and non-PAR) is to remain in-line with the extant regulations as given in the June 2019 circular, Nomura India said.

"Under the new regulations (which are similar to existing regulations), all individual non- linked non-single premium products shall acquire a guaranteed surrender value on the payment of the premium for at least two consecutive years," it said.

Nomura said the decision is expected to mitigate ambiguity within the sector and could prompt a positive upswing. Insurers with significant exposure to non-linked products, particularly HDFC Life and Max Financial are expected to react more favourably to this development, it noted.

"As the big overhang has now been cleared, we reiterate a low ask rate in reverse valuations and our BUY view on the sector," said Kotak Institutional Equities.

The Insurance Regulatory and Development Authority of India (IRDAI) has notified new product regulations that include guidelines for revised guaranteed surrender value (GSV) of life insurance policies. The draft regulation, released in December 2023, was punitive raising GSV to 75-100 per ecnt of premiums paid. Final notified guidelines are relaxed and most products fall within the guidelines; hence, the impact on product profitability would be minimal, Kotak said.

"GSV for policies of three insurance companies with ticket size of Rs 1,00,000 is 30 per cent for policies surrendered in year 2, increasing to 50 per cent by year 4 and 70-75 per cent by year 8. This is broadly in line with the final guidelines, the brokerage said. Max Life is best placed at the current juncture while SBI Life remains a steady ship, Kotak said.

Emkay Global said that beyond the noise of regulatory turbulence, the listed life insurance companies are well-positioned to grow in teens and maintain their VNB margins in the mid-20s, with some of the variation driven by the product mix changes and (un) favourable distribution mix.

"Against this backdrop, the EV compounding or operating RoEV of the listed private life insurers will be in a narrow range of 15-18 per cent, leading to a narrow P/EV multiple range. With the structural drivers of life insurance remaining intact, we maintain our positive view on the listed life insurers, backed by their franchise strength and favourable valuation. We prefer ICICI Prudential Life Insurance Company Ltd, Max Financial Services and SBI Life in our pecking order," it said.