Insurance stocks gain on IRDAI’s surrender value rollback; brokerages turn positive

HDFC Life, Life Insurance Corporation of India (LIC), ICICI Prudential Life Insurance, Max Financial Services and SBI Life gained up to 5 percent on March 26 intra-day deals after the Insurance Regulatory and Development Authority of India (IRDAI) left surrender values for non-linked and linked policies unchanged.

Brokerages see the status quo as a huge relief for life insurers and expects them to maintain profitability, without any major pressure on margins.

Analysts at Kotak Institutional Equities reiterated a “buy” call on all listed life players, betting on their inexpensive valuations as the big uncertainty over surrender penalty is behind.

“The current market prices imply long-term premium growth of 3-7 percent for private life insurers.  Max Life is best placed at the current juncture, SBI Life remains a steady ship,” they said.

Life insurers had raised concerns about IRDAI’s December 2023 proposal, which suggested introduction of threshold premiums and higher surrender values for endowment policies.

Surrender value is the amount paid by the insurance company to the policyholder upon terminating the policy before the maturity date.

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The move would have led to around 75 percent decline in surrender profits of non-par products and 140-200 basis points (bps) impact on private life insurers’ margins, analysts at Kotak said.

Under the final IRDAI guidelines, which will take effect from April 1, the surrender values for life insurance policies are expected to largely remain the same or even lower if policies are surrendered within a period of three years. For life insurance policies surrendered between fourth to seventh year, surrender value may see a minor increase.

Analysts at Emkay Global, too, expect listed life insurers to grow in teens and maintain their margins in the mid-20s. Without this development, life insurers would have struggled to handle higher surrender charges for customers who let their policies lapse, they said. They would also have to face the challenge of providing benefits to policyholders who keep their policies active, keeping profitability in mind.

“We maintain our positive view on listed life insurers, backed by their franchise strength and favourable valuation. We prefer ICICI Prudential, Max Financial, and SBI Life from the pack,” Emkay Global analysts said.

On other hand, global brokerage firm Morgan Stanley expects HDFC Life to perform better in the near-term. “The final surrender value norms seem manageable given they are largely unchanged versus existing norms,” they said.

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