The life insurance sector has experienced a series of regulatory and taxation changes (ULIP taxation, non-linked products taxation, EOM regulations, and surrender charges) over the past few years, which have constrained the outlook of the industry.
As a result, Motilal Oswal states that valuations in this sector have undergone significant corrections.
“Regulations pertaining to surrender charges have had the most profound impact. However, with the finalization of these regulations, the associated uncertainty has
diminished. Management commentary on the implications of these changes has largely neutral to marginally negative,” said Motilal Oswal in its report.Moreover, it is anticipated that any rate cuts by the Reserve Bank of India (RBI) will make long-term guaranteed products more attractive again.Looking ahead, the domestic brokerage firm believes that the forthcoming regulations, such as risk-based solvency and IFRS, are expected to positively influence financials by releasing capital that can be utilized for growth and for retaining a larger share of business, particularly in the protection segment.
Here are the top picks of the domestic brokerage firm in the sector:
LIC: Buy| Target price: Rs 1,300| Upside potential: 25%
Small-ticket policies have the highest surrender rates, but customer behavior under the new surrender charges regime remains unpredictable, making it difficult to take specific actions. All options, including adjusting commission structures and product designs, are being considered.
HDFC Life: Buy| Target price: Rs 900| Upside potential: 22%
The company anticipates a 100 bp impact on new business margins from higher surrender payouts, offset by commission deferment and clawbacks. Product competitiveness will improve under new surrender charge norms, with minimal margin impact for HDFC Life as policies won’t be made paid-up upon surrender.
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SBI Life: Buy| Target price: Rs 2,250| Upside potential: 18.6%
SBI Life expects a minimal impact (less than 1%) from surrender charges due to its conservative assumptions and product mix. No commission changes are planned for new products, and the impact will be offset by growth in protection and annuity products.
ICICI Prudential Life: Buy| Target price: Rs 890| Upside potential: 18.5%
The company launched ICICI Pru GPP Flexi with Benefit Enhancer, offering 100% money-back on premiums and a level-based commission structure, which has been well received. A trail-based commission for ULIPs has also gained acceptance. Regulatory changes won’t impact margins, as only 17% of the portfolio is affected.
Max Financial Services: Neutral| Target price: Rs 1,080| Downside potential: 3.4%
Surrender charges may impact VNB margins by 100-200bp, but management plans to spread the effect across customers, distributors, and shareholders. Despite this, VNB growth guidance remains unchanged due to expected higher premium growth. Max expects the life insurance industry to take 3-6 months to adjust to the new surrender charge regulations.
(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)