Mumbai: Stocks of insurers, life insurers in particular, were hot cakes for investors on Dalal Street till Friday. Finance Minister Nirmala Sitharaman changed that at one stroke in the Union Budget.
The government unveiled a new, optional income-tax regime in Budget, offering lower income-tax rates for not availing any exemption, something that worked as life blood for the life insurance industry for long.
That left domestic life insurers into a state of shock. Also, insurers enjoyed tax benefits on dividend income received on policyholders’ investments, offering them a lower effective levy than the corporate tax rate. With dividend income no longer tax-exempt, margins and embedded value (EV) will now get affected.
Over last two sessions, shares of ICICI Prudential Life have slipped 12.94 per cent, while peers HDFC Life and SBI Life have fallen 5.66 per cent and 8.19 per cent respectively.
“Beyond the obvious impact of removing the tax exemption on insurance buying under the alternate personal tax system, the Budget sent a strong message to the insurers to shift their sales pitch away from tax-exempt instruments and towards savings and protection solutions. To us, HDFC Life and ICICI Prudential Life look better placed than SBI Life,” Jefferies analysts said in a note on Monday.
“The removal of the dividend distribution tax benefit will affect margins of IPRU & HDFC Life, with a one-off impact on EV,” they said.
Most of the industry premium enjoys tax advantage currently, but the risk lies in the part which is largely motivated by tax benefits – lower ticket-size unit-linked insurance plans (ULIPs) and par-savings products primarily.
Other analysts, however, do not expect a deep impact.
“Given that the alternate personal tax system does not benefit individuals with incomes more than Rs 15 lakh or the ones who are claiming a large part of 80C/HRA/standard deduction, the impact on growth for insurers may not be that large,” they argue.
Jefferies analysts said taking regular pay-savings products with less than Rs 50,000 ticket size as a proxy of tax-motivated insurance purchases, ICICI Prudential Life & HDFC Life are better placed.
As a percentage of absolute new business, this segment constitutes around 20 per cent for SBI Life vs around 5-10 per cent for ICICI Prudential Life and HDFC Life.
Many felt the provisions were not as harsh as perceived, even as longer-term risk loomed. “Based on our calculations, we do not see any near-term impact from this measure on insurance sales, as the low threshold of total deductions (including employers’ contribution to provident fund) ranging from Rs 1.3-3.3 lakh for gross income levels of Rs 7.5 lakh to 2 crore, a salaried taxpayer (ITR1 type) will be indifferent between the old and new tax regime,” JM Financial analysts said in a note on Monday.
JM analysts said given the long-term nature of insurance products catering to both savings and mortality risk cover needs of individuals, the impact on their appeal will be limited.
“However, the finance ministry has indicated its intention to do away with all exemptions in the medium- to long- term, which if implemented can be an overhang for the insurance sector as tax benefits remain among the top reasons for insurance purchase,” they said.
Kotak Institutional Equities believes the removal of 80C benefit may pose risk to new business volumes of life insurance companies. “We, however, believe the section has increasingly become less relevant as a sales pitch by insurance agents. The limit of 80C was stable at Rs 1 lakh between FY2005-13 and increased to Rs 1.4 lakh in FY2014, not keeping pace with rising income levels,” they said.
Motilal Oswal Financial Services said the removal of major exemptions/deductions under the new tax regime could adversely impact the sale of life insurance companies, as typically Q4 of every financial year is business-heavy owing to an increased focus on tax-saving investments.
“However, this skewness seems to have declined over the past few years with the proportion of premium being underwritten in the fourth quarter to total premium showing declining trends for all listed insurers, barring Max Life,” they added.
Source: Economic Times
