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Minimal impact of surrender charge regulations

Our top picks: HDFC Life and SBI Life

* During 3QFY25, the life insurance industry witnessed APE growth of ~8% YoY, driven by ~22% YoY growth reported by private life insurers, while LIC witnessed a decline of ~17% YoY. For 9MFY25, the industry and private insurers grew 14% and 20% YoY, respectively. HDFCLIFE/IPRU/MAXFIN/SBILIFE delivered better-than-industry growth of 12%/28%/13%/17% YoY.

* VNB performance was mixed for listed companies in 3QFY25. While IPRU and SBILIFE posted double-digit VNB growth of 19% and 11%, respectively, HDFCLIFE’s VNB growth was 9% YoY. VNB for MAXFIN was flat. For LIC, the decline in APE led to a 27% YoY fall in VNB.

* On a YoY basis, VNB margin for the industry remained under pressure due to a higher proportion of ULIPs in the product mix and the impact of revised surrender value regulations. However, changes in the commission payout structure and the realignment of prices of non-par products, along with declining bond yields, resulted in sequential margin improvements for few players. The shift in the product mix toward higher-margin non-linked products like non-par, annuity and protection can also contribute to VNB margin recovery.

* During 3QFY25, ULIPs maintained YoY growth momentum, as their contribution increased by 250-1250bp across players. HDFCLIFE witnessed 110bp decline in ULIP contribution. The share of retail protection has started improving, but credit life continues to be under pressure. Innovative non-linked products are in the pipeline for players across the industry, which should boost sales of higher-margin products.

* The agency and bancassurance channels continued to dominate the distribution channel, with their contributions remaining largely stable YoY. The contribution from brokers, digital and direct channel improved, and insurers are making investments to enhance their digital platforms.

* Following the 3QFY25 results, we have broadly maintained our APE growth estimates but have increased our VNB margin assumptions, factoring in a shift in the product mix toward non-linked products and favorable commission payout structures to tackle surrender value regulations.

Tackling surrender value changes strategically

* Life insurers took several measures to offset the impact of the new surrender charge-related regulations. The key one is the alteration in commission structures, proposing 1) reductions in commissions, 2) a clawback clause linked to persistency, and 3) a deferred commission payout linked to persistency.

* Moreover, the companies lowered their IRRs in certain products, creating a balance between the stakeholders (distributors, customers and company) to absorb the hit of the new regulations.

Management guidance as below:

* HDFC Life expects a marginal impact of 10-30bp in FY25.

* SBI Life expects a marginal impact on margins.

* IPRU Life: Renegotiated commission structures with 95% of its distributors and expects a marginal impact.

* MAX Life: Recorded a 100bp margin impact in 3QFY25.

* LIC: Minimal impact on margins due to product and commission restructuring.

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