Brokerages feel the new tax regime would have modest impact on insurance companies' sales
As the Finance Minster announced an optional new income tax regime in the Budget 2020, the insurance stocks tanked on February 1. These stocks rebounded on February 3.
Shares of Max Financial, which holds Max Life, gained 8.65 percent intraday on February 3 (against 12.8 percent fall on Budget day), ICICI Prudential rose 1.69 percent (against correction of 10.93 percent), HDFC Life gained 1.80 percent (against fall of 6 percent) and SBI Life was up 3.12 percent (against decline of 10 percent).
The new regime has new salary slabs with lower tax rates, but comes with a rider - these slabs will be applicable without any exemptions (such as HRA, interest on home loan, investments under 80C and mediclaim insurance, among others).
Insurers fear the new regime may impact their sales of tax saving products, including life insurance, ULIPs.
Brokerages feel the new tax regime would have modest impact on insurance companies' sales as majority of tax payers will remain with old regime which balances their savings and tax outgo. But if the government makes it compulsory in future then there would be a risk for these firms.
"The removal of major exemptions/deductions under the new tax regime could adversely impact the sale of life insurance companies, as typically the Q4 of every fiscal 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 4th quarter to total premium showing declining trends for all listed insurers, barring Max Life," Motilal Oswal said.
"This reflects the changing consumer behaviour in buying insurance for the right reasons, such as life protection and planning their cash flows for retirement/emergencies, rather than just for tax-saving purposes. Though some tax payers might shift to the new tax regime, with increasing consumer awareness, we expect the impact to be modest," it added.
The Indian insurance industry is primarily savings oriented (around 85 percent total business) and though growth in the protection business has been strong, its share in total new business annual premium equivalent (APE) remains low across insurers.
With all the exemptions gone, Motilal Oswal believes the sale of savings products will be moderately impacted. "We note that ICICI Prudential and SBI Life have higher proportion of ULIPs at 69/70 percent (on APE basis) while HDFC Life and Max Life ULIPs' share is relatively lower," it said.
However, ICICI Prudential focuses on an affluent customer base and has higher average ticket size of around Rs 1,59,000 compared to other players that may not be as prone to moving to the new tax regime owing to higher tax liability in the absence of all exemptions, it added.
JM Financial also said based on its calculations, the brokerage did not see any near term impact of the new tax regime on insurance sales given the low threshold of total deductions (including employers' contribution to PF etc.) ranging from Rs 0.13-0.33 million (Rs 1.3-3.3 lakh) for gross income levels of Rs 0.75-2.0 million (7.5-20 lakh) (exhibit 3) at which a salaried tax payer (ITR1 type) will be indifferent between the old and new tax regime.
Hence, given the long-term nature of insurance products catering to both the savings and mortality risk cover needs of individuals, the brokerage sees limited impact on their appeal.
However, the finance ministry has indicated an intention to do away with all exemptions in the medium-long term which if implemented can be an overhang for the insurance sector given tax benefits remain among the top reasons to purchase insurance, JM Financial feels.
In addition, the Finance Minister abolished dividend distribution tax (DDT) for corporates but dividend remains taxable in the hands of recipients.
In the case of insurance companies, brokerages see the limited impact of DDT if corporates maintain the same dividend payout ratio.
"The removal of DDT will result in higher effective tax rate (ETR) for life insurers, which will adversely impact embedded value (EV), value of new business (VNB) margins and shareholder earnings for insurers, more so for those that are ULIP-heavy. We further note that if corporates maintain the same dividend payout ratio then the impact will be relatively limited as insurance companies will pay tax at a lower rate of around 14.5 percent," Motilal Oswal said.
After recent corrections in stocks prices, brokerages feel stocks look attractive but they bet on ICICI Prudential amongst them.
Motilal Oswal believes that while the structural story for the insurance sector is intact, the near-term stock performance may remain volatile until clarity emerges. "We maintain buy rating on ICICI Prudential and neutral on HDFC Life."
JM Financial, which also has ICICI Prudential as a top pick, feels recent price correction in life insurance stocks offers an attractive investment opportunity. The brokerage expects long-term structural drivers such as robust nominal GDP growth, favourable demographics, and financialisation of savings to lead to healthy 16 percent industry APE CAGR over FY19-22.
At 12:59 hours IST, Max Financial Services was up 6.6 percent at Rs 470.75, SBI Life Insurance Company up 2.01 percent at Rs 912 and HDFC Life up 0.55 percent at Rs 565.90 on the BSE, but ICICI Prudential Life Insurance Company was down 2 percent at Rs 446.15.
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