Sector Update | 05 September 2024
Sector Update | Financials
Life Insurance
Recommendation Summary
Reco Target Upside
HDFCLIFE BUY
900
20
SBILIFE
BUY
2,250
18
IPRU
BUY
890
17
LIC
BUY
1,300
22
Max
Neutral 1,080
-3
Concerns behind, strong outlook ahead
Top picks HDFCLIFE, SBILIFE
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, 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 been neutral to marginally negative.
Our discussions with agents and distribution partners indicate that the enhanced
liquidity of products under new surrender charges regime has emerged as a
compelling selling point, potentially facilitating an increase in the average ticket size.
Moreover, we anticipate that any rate cuts by the Reserve Bank of India (RBI) will
make long-term guaranteed products more attractive again. Notably, protection
products—encompassing both credit protection and individual protection—are
gaining traction, which should help mitigate any adverse effects stemming from
surrender charges.
Looking ahead, 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.
In light of these insights, we maintain a positive outlook on the life insurance sector
and recommend BUY ratings for HDFCLIFE, SBILIFE, IPRULIFE, and LIC, whereas we
have a Neutral rating on MAXFIN.
Surrender value regulations, managements guide for stability post some hit
IRDAI released a consultation paper on surrender charges in Nov’23, followed by a
structure in Mar’24 and the final regulations in Jun’24. This sequence of events led
to significant uncertainty regarding the final outcome and the impact of
implementation. While the final regulations have been announced and
implemented from Oct’24, the impact will depend on factors such as: 1) the share of
non-linked business, 2) assumptions with respect to persistency built into the extant
VNB, 3) changes in commission constructs post implementation, and 4) changes in
IRRs post implementation. The key takeaways from management interactions on
surrender charges are as follows:
HDFC Life
Anticipate a gross impact of approximately 100 bp on the company's new
business margin due to higher surrender value payable on early exit; impact is
limited due to a balanced approach to business
Deferment and clawback for commissions may be used for offsetting the impact
of new surrender charges
Product competitiveness will increase with new surrender charge norms; some
calibration in IRRs can be expected
Under the new surrender charges, instead of making the policy paid-up if a
customer surrenders, the impact on HDFCLIFE’s margin will be minimal
Research Analyst: Prayesh Jain
(Prayesh.Jain@MotilalOswal.com)
Research Analyst: Nitin Aggarwal
(Nitin.Aggarwal@MotilalOswal.com)
|
Muskan Chopra
(Muskan.Chopra@MotilalOswal.com)
Investors are
5 September 2024
advised to refer
through important disclosures made at the last page of the Research Report.
1
Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital.
 Motilal Oswal Financial Services
Sector Update | Financials
The actual experience of surrenders is negligible, based on which the
assumptions factor in close-to-zero surrenders, implying that HDFC has not been
factoring in any surrender profits after the customer pays the first renewal
premium; additionally, the persistency experience is strong and improving
across cohorts
The only impact is in year one, where the experience is quite good, and the
assumptions are also conservative for that year; the experience of lapse or exit
in the first year is even lower than the assumption
SBI Life
Under surrender charges, SBILIFE expects a very low impact (much lower than
1%), owing to its product mix and conservative assumption on surrenders
For new products, SBILIFE is not planning any commission changes for
distributors
The impact of surrender charges will be more than offset by a favorable product
mix (pick up in protection and annuity)
IPRU Life
Even before the revised surrender value norms came into effect, IPRU launched
ICICI Pru GPP Flexi with Benefit Enhancer, which provides customers the option
to receive 100% money back of premiums paid any time. The commission
structure in this product is more level-based, while keeping the overall lifetime
payment at a similar level. The product has been well accepted in the market
segments where it was launched.
IPRU has also experimented with a trail-based commission on the ULIP platform,
seeing acceptance by distributors in the market segment where it has been
launched. It believes that by aligning the interests of all the three stakeholders,
namely customers, shareholders, and distributors, it will be able to absorb any
impact that may arise due to changes in regulations.
There will not be any impact on margins due to surrender guideline changes
from 1st October (that side of the business is only 17% of the portfolio).
Max Financials
Surrender charges are likely to impact VNB margins by 100-200bp for the
company. Management will distribute the impact among all stakeholders,
namely customers, distributors, and shareholders.
On the margin front, management maintains the same VNB growth guidance
despite surrender charges, as higher premium growth will offset the margin hit.
Max believes that the entire life insurance industry will take 3-6 months to settle
as the impact of surrender charges regulations on VNB margins remains
dynamic.
LIC:
The highest surrendering in policies is seen with small ticket sizes.
The customer behavior under the new surrender charges regime cannot be
predicted yet and, hence, deciding on specific measures is difficult.
All measures are on the table, including altering commission structures (trail-
based or clawback) and product constructs.
5 September 2024
2
 Motilal Oswal Financial Services
Sector Update | Financials
Exhibit 2:
Impact of 10% reduction in persistency on EV
EV FY23
1.9%
1.1%
0.3%
0.1%
0.6%
0.4%
-0.2%
-0.9%
HDFC Life
SBI Life
ICICI Pru
Max Fin
LIC
0.3%
0.1%
EV FY24
Exhibit 3:
Impact of 10% reduction in persistency on VNB
VNB FY23
3.8%
3.4%
0.6%
0.3%
5.1%
3.6%
0.7%
0.5%
VNB FY24
0.4%
-0.4%
HDFC Life
SBI Life
ICICI Pru
Max Fin
LIC
Source: Company, MOFSL
Source: Company, MOFSL
For HDFC Life and LIC, the impact is on VNB Margin
While product constructs will undergo a change, the commission constructs will
also need a rework. Managements have indicated that while individual agents can
be shifted to trail-based structure vs. the current model of large upfront
commissions, corporate agents (including banca partners) and brokers can have
clawback clauses built into the contracts.
Our discussion with individual agents reveal the following:
The liquidity of the product enhances after the new surrender value norms,
which will allow them to pitch for higher ticket sizes
Unless trail-based commissions are significantly lower than the overall payout
during the tenure of the product, agents will not be deterred from selling life
insurance products.
Trail commissions will drive them to work toward making customers persistent
and offer better propositions, such as loan against policy and paid-up policy.
Additionally, based on past experience with MF and other financial products where
trail commissions have been implemented, we have not seen any material impact
in volumes.
Commission structures will be altered
Strong growth in YTDFY25, granular strategy driving NOP growth
HDFCLIFE/SBILIFE/IPRU/MAXLIFE/LIC have reported total APE growth of
29%/15%/17%/28%/16%, respectively. Although the growth has been on a low
base of FY24, it has been higher than street estimates built at the beginning of
the fiscal.
The growth momentum is expected to sustain over the medium to longer term,
given the investments in distribution built over the past couple of years to
deepen the reach. We note that the agency count of
HDFCLIFE/SBILIFE/IPRU/MAXLIFE/LIC have been higher by
58%/78%/7%/81%/9% since Mar’22.
The investments have resulted in a strong individual non-single policy count in
YTDFY25 with HDFCLIFE/SBILIFE/IPRU/MAXLIFE/LIC reporting growth of
26%/1%/13%/28%/6%, respectively.
5 September 2024
3
 Motilal Oswal Financial Services
Sector Update | Financials
Exhibit 4:
Strong industry growth despite a series of
regulations
Private
60.0%
40.0%
20.0%
0.0%
-20.0%
LIC
Industry
Exhibit 5:
Private players continued to report strong
outperformance
HDFC Life
ICICI Prudential
100.0%
60.0%
20.0%
-20.0%
-60.0%
SBI Life
Max Life
Exhibit 6:
HDFCLIFE product mix
ULIP
7%
31%
34%
24%
Par
6%
33%
30%
26%
Non Par Savings
4%
45%
27%
19%
Source: IRDAI, MOFSL
Term
5%
30%
23%
35%
Annuity
6%
35%
16%
38%
Exhibit 7:
ICICIPRU product mix
Linked
Annuity
5%
4%
16%
17%
31%
48%
28%
48%
Non Linked
Group Funds
6%
17%
37%
36%
Source: IRDAI, MOFSL
Protection
11%
17%
26%
43%
11%
18%
17%
51%
Source: IRDAI, MOFSL
Source: IRDAI, MOFSL
Exhibit 8:
SBILIFE product mix
ULIP
Protection
12% 0%
11%
5%
42%
12% 0%
14%
3%
45%
Par
Annuity
11%
22%
6%
55%
3%
Non Par Savings
Group Savings
3%
3%
8%
11%
19%
16%
4%
4%
60%
61%
Exhibit 9:
Max Life product mix
ULIP
14%
30%
19%
37%
Par
Non Par
13%
29%
20%
37%
Protection Annuity
5%
6%
6%
8%
44%
13%
27%
28%
18%
35%
Group
5%
10%
22%
13%
39%
Source: IRDAI, MOFSL
Source: IRDAI, MOFSL
Exhibit 10:
LIC product mix
ULIP
28%
2%
65%
1%
Par
29%
0%
66%
1%
Non Par
32%
1%
62%
2%
Protection
33%
7%
55%
2%
Annuity
42%
7%
44%
4%
Group
Source: IRDAI, MOFSL
5 September 2024
4
 Motilal Oswal Financial Services
Sector Update | Financials
Interest rate cuts drive multiples for life insurers
During the previous interest rate cycle (Jan’19 to May’20 repo rate cut of
250bps), the average growth rate for the Life Insurance industry until May’22
(repo rate was stable for two years) was 14% (considering a period of sharp
decline in times of COVID and taxation change of ULIPs). Within the same
period, the deposit growth was 10%.
We note that during this period, the valuations of life insurers went through a
re-rating with peak 1-year forward P/EV for
HDFCLIFE/SBILIFE/IPRU/MAXLIFE/LIC at 5.6x/3.0x/2.9x/3.3x vs.
4.0x/2.2x/1.8x/1.9x at the beginning of the rate cut cycle.
Exhibit 12:
Impact of 100bp rate cut on VNB
VNB FY23
VNB FY24
Exhibit 11:
Impact of 100bp rate cut on EV
EV FY23
3.4%
3.3%
EV FY24
3.8%
3.7%
0.8%
0.7%
0.0%
-0.3%
0.7%
1.0%
10.9%
4.8%
2.6%
2.1%
0.8%
0.2%
-2.3%
-7.4%
HDFC Life
SBI Life
ICICI Pru
Max Fin
-3.8%
-7.7%
LIC
HDFC Life
SBI Life
ICICI Pru
Max Fin
LIC
Source: Company, MOFSL
Source: Company, MOFSL
For HDFC Life and LIC, the impact is on VNB Margin
Exhibit 13:
Sans the impact of COVID, premium growth has been strong in interest rate cut
trends
Repo rate
8.00
6.00
4.00
2.00
-
Pvt players Ind APE growth
150%
100%
50%
0%
-50%
Source: RBI, IRDAI, MOFSL
5 September 2024
5
 Motilal Oswal Financial Services
Sector Update | Financials
Exhibit 14:
Until COVID, life insurers went through a significant re-rating (1-yr fwd P/EV)
HDFC Life
7.2
5.4
3.6
1.8
-
IPRU
SBILIFE
MAXFIN
Source: Bloomberg, Company, MOFSL
Maintain positive stance on the industry, HDFCLIFE & SBILIFE top picks
We remain constructive on the Life Insurance industry given the positive
tailwinds from regulatory actions. Both IFRS and risk-based solvency would be
favorable and release capital for further growth of the industry.
We upgraded our recommendation on HDFCLIFE in May’24, and since then, the
stock has delivered 32% return, outperforming Nifty by 20%. We believe HDFC
LIFE is well poised for strong growth ahead, led by 1) product innovation; 2)
push in the HDFC Bank channel, especially with new branches; 3) significant
agency count additions over the past two years; and 4) strong RoEV of 16-17%.
We upgrade our target FY26 P/EV multiple to 3.0x and value the stock at
INR900, maintaining BUY.
Exhibit 15:
HDFCLIFE valuation summary
INR b
APE
% YoY
VNB
% YoY
VNB Margin (%)
EV
RoEV (%)
EV/Share (INR)
P/EV
VNB/Share (INR)
P/VNB
Solvency (%)
FY21
83.7
13.0
21.9
13.9
26.1
266.2
28.9
266.2
6.1
10.2
74.1
201.1
FY22
97.6
16.6
26.7
22.4
27.4
329.4
12.9
329.4
4.9
12.4
60.5
175.6
FY23
133.4
36.7
36.7
37.4
27.5
395.1
31.5
395.1
4.1
17.1
44.1
203.2
FY24
132.9
(0.3)
35.0
(4.7)
26.3
474.5
20.1
474.5
3.4
16.3
50.0
186.6
FY25E
157.7
18.6
40.6
16.0
25.8
553.9
16.7
553.9
2.9
18.9
39.9
179.7
FY26E
186.1
18.0
48.5
19.5
26.1
645.0
16.5
645.0
2.5
22.5
33.3
179.1
Source: Company, MOFSL
5 September 2024
6
 Motilal Oswal Financial Services
Sector Update | Financials
SBILIFE continues to be a consistent performer and remains one of our top
picks, considering 1) deep penetration expected in SBI channel; 2) least impact
of surrender charges, given the low dependence on non-linked business; 3) best-
in-class expense ratio with limited risk from higher commissions to SBI; and 4)
best-in-class RoEV. We maintain a BUY rating with a 1-yr Fwd P/EV multiple of
2.7x to reach a fair value of INR2,250.
Exhibit 16:
SBILIFE valuation summary
INR b
APE
% YoY
VNB
% YoY
VNB Margin (%)
EV
RoEV (%)
EV/Share (INR)
P/EV
VNB/Share (INR)
P/VNB
Solvency (%)
FY21
114.7
6.9
26.6
19.8
23.2
333.8
27.0
364.0
5.2
26.6
71.7
214.7
FY22
142.9
24.6
37.0
39.1
25.9
396.1
18.7
396.3
4.8
37.0
51.6
204.8
FY23
168.4
17.9
50.7
37.0
30.1
460.4
16.2
460.4
4.1
50.7
37.6
215.4
FY24E
197.5
17.3
55.5
9.5
28.1
582.5
26.5
582.6
3.3
55.5
34.4
196.5
FY25E
229.9
16.4
63.5
14.3
27.6
710.4
21.9
710.4
2.7
63.5
30.1
188.6
FY26E
271.3
18.0
76.1
19.9
28.1
856.2
20.5
856.3
2.2
76.1
25.1
181.1
Source: Company, MOFSL
ICICIPRU is witnessing strong growth in premiums, albeit on a low base of FY24.
Sustaining this growth, especially from agency and ex-ICICI banca partners, will
drive significant re-rating. Further, the company has been a pioneer in exploring
new product and commission constructs. We maintain our BUY rating with 1-
year price target of INR890 on 2.1x FY26E P/EV.
Exhibit 17:
ICICI Pru valuation summary
INR b
APE
% YoY
VNB
% YoY
VNB Margin (%)
EV
RoEV (%)
EV/Share (INR)
P/EV
VNB/Share (INR)
P/VNB
Solvency (%)
FY21
64.6
(12.5)
16.2
1.3
25.1
291.1
26.4
202.3
3.7
11.3
67.2
216.8
FY22
77.3
19.7
21.7
33.5
28.0
316.3
8.7
219.8
3.4
15.1
50.4
204.5
FY23
86.4
11.7
27.6
27.7
32.0
356.4
12.7
247.7
3.1
19.2
39.4
208.9
FY24E
90.5
4.7
22.3
(19.5)
24.6
423.3
18.8
294.3
2.6
15.5
49.0
192.0
FY25E
111.6
23.4
27.4
22.8
24.5
507.1
19.8
352.5
2.2
19.0
39.9
185.0
FY26E
129.5
16.0
31.7
16.0
24.5
609.0
20.1
423.3
1.8
22.1
34.4
178.5
Source: Company, MOFSL
5 September 2024
7
 Motilal Oswal Financial Services
Sector Update | Financials
MAX FIN will be the worst hit in terms of surrender charges, given their
relatively higher dependence on the non-par segment. Additionally, with five
partners at Axis Bank channel and a challenging C/D ratio at Axis Bank, future
growth will need to be driven primarily through the agency channel. We believe
these factors will keep the valuation under check. We maintain a neutral stance
with a 1-year price target of INR1,080 (2.1x FY26E P/EV).
Exhibit 18:
Max Fin valuation summary
INR b
APE
% YoY
VNB
% YoY
VNB Margin (%)
EV
RoEV (%)
EV/Share (INR)
P/EV
VNB/Share (INR)
P/VNB
Solvency (%)
FY21
49.6
19.5
12.5
39.2
25.2
118.4
18.6
274.3
5.1
36.2
48.2
202.2
FY22
55.9
12.7
15.3
22.3
27.3
141.8
19.8
328.6
4.2
44.3
39.4
200.5
FY23
62.5
11.8
19.5
27.6
31.2
162.6
14.7
377.0
3.7
56.5
30.9
192.7
FY24
74.3
19.0
19.7
1.2
26.5
194.9
19.9
451.9
3.1
57.2
30.5
172.0
FY25E
88.5
19.0
21.2
7.6
24.0
232.4
19.2
538.8
2.6
61.5
28.4
195.0
FY26E
104.4
18.0
26.1
22.9
25.0
277.9
19.6
644.2
2.2
75.6
23.1
190.0
Source: Company, MOFSL
LIC has returned to reporting growth in premiums and expects a double digit
growth in FY25. This growth is driven by new product launches in the non-par,
protection, and ULIP segments. Investments in technology continue with the
launch of Ananda 2.0. VNB Margins increased YoY and the company expects to
reach 20% margins in the medium term. We maintain our BUY rating with a 1-
year price target of INR1,300 on SOTP with life insurance business valued at 0.8x
FY26E P/EV.
Exhibit 19:
LIC valuation summary
INR b
APE
% YoY
VNB
% YoY
VNB Margin (%)
EV
RoEV (%)
EV/Share (INR)
P/EV
VNB/Share (INR)
P/VNB
Solvency (%)
FY21
455.9
(5.0)
41.7
9.1
956.1
105.6
151.2
7.1
6.6
162.3
154.6
FY22
503.9
10.5
76.2
82.8
15.1
5,414.9
466.4
856.1
1.2
12.0
88.7
176.2
FY23
566.8
12.5
91.8
20.5
16.2
5,822.7
7.5
920.6
1.2
14.5
73.6
184.5
FY24
569.7
0.5
95.8
4.4
16.8
7,273.7
24.9
1,150.0
0.9
15.2
70.6
187.2
FY25E
660.4
15.9
112.3
17.1
17.0
8,107.3
11.5
1,281.8
0.8
17.7
60.2
197.6
FY26E
713.2
8.0
128.4
14.4
18.0
9,024.2
11.3
1,426.7
0.7
20.3
52.7
201.4
Source: Company, MOFSL
Investment in securities market are subject to market risks. Read all the related documents carefully before investing
5 September 2024
8
 Motilal Oswal Financial Services
Sector Update | Financials
Explanation of Investment Rating
Investment Rating
BUY
SELL
NEUTRAL
UNDER REVIEW
NOT RATED
Expected return (over 12-month)
>=15%
< - 10%
< - 10 % to 15%
Rating may undergo a change
We have forward looking estimates for the stock but we refrain from assigning recommendation
-
-
-
-
-
-
*In case the recommendation given by the Research Analyst is inconsistent with the investment rating legend for a continuous period of 30 days, the Research Analyst shall be within following 30 days take
appropriate measures to make the recommendation consistent with the investment rating legend.
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Sector Update | Financials
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