Over the past few months, Christopher Wood, global head of equity strategy at Jefferies churned exposure to Indian stocks in his Asia ex-Japan portfolio for long-only absolute-return investors. The global investor bought SBI Life Insurance and HDFC Life Insurance, which now account for 5 per cent and 4 per cent weight in the above-mentioned portfolio.
The recent proposals came like a bolt from the blue for the life insurance companies when the Budget introduced an optional regime for personal income tax (I-T), which while lowering rates, took away most exemptions and deductions that individual taxpayers could avail. This, in turn, could impact sales of insurance products.
A knee-jerk reaction saw stocks of private life insurers - HDFC Life, SBI Life, ICICI Prudential Life (I-Pru Life) and Max Financial Services (holding company of Max Life Insurance) plunge 6–13 per cent at the bourses on Saturday. Monday, however, saw a partial recovery in these counters.
In the current tax regime, Unit-linked insurance plans (ULIPs) qualify for an exemption/deduction up to Rs 150,000. According to reports, a comparative analysis of the optional new and original income tax regimes illustrates that the older tax regime (on availing of all deductions) creates a lower tax liability than the one proposed. A large part of the ULIP sales happens in the fourth quarter — often linked to personal income tax planning. This portion of ULIP demand now comes under a long-term shadow, analysts say.
The Indian insurance industry is primarily savings oriented and though growth in the protection business has been strong, its share in total new business remains low. Typically, the second-half of the fiscal is business-heavy owing to increased focus on tax-saving investments (however, this skewness has been declining), and this may drive softness in industry sales if individuals migrate to the new tax regime.
"With all the exemptions gone, we believe the sale of savings products will be moderately impacted. I-Pru Life and SBI Life have higher proportion of ULIPs at 69 per cent/70 per cent (on APE basis), while HDFC Life and Max Life ULIPs’ share is relatively lower. However, I-Pru Life focuses on an affluent customer base and has higher average ticket size of Rs 159,000 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," says a note on the sector by Motilal Oswal Securities.
Santanu Chakrabarti and Vinayak Agarwal of Edelweiss Securities, however, feel the ULIP tax advantage, still holds water, although marginally diminished. The bigger issue, according to them, is the clear enunciation of the policy intent to move towards an exemption-free income tax regime over time. “What this exactly signifies for long-term ULIP and overall annual premium equivalent (APE) growth prospects of life insurers depends not only on insurers’ current ULIP dependence, but also on how much of their business comes from smaller-ticket tax planning-driven ULIPs,” they point out.
Another negative for the insurers, according to analysts, is the removal of dividend distribution tax (DDT) and making dividends taxable in the hands of recipients, which they feel will result in higher tax rates for life insurers.
“This will likely have an adverse impact on the embedded value (EV) and value of new business (VNB), thereby impacting margins. Dividend income forms a significant proportion of the overall PBT ranging between 24-37 per cent for FY19 under the shareholders account. According to the sensitivity analysis disclosed by insurance companies, the change in tax rate to 25 per cent (from around 14 per cent currently) negatively impacts the VNB in the range of 8-20 per cent, while EV would see an impact in the range of 4-12 per cent,” the Motial Oswal report says.
That said, most brokerages will maintain a positive view on the sector from a long-term perspective, though they caution that these stocks could remain range-bound and volatile in the near-term.