Little cheer for financial services; insurance companies left high and dry

For the financial services sector, the Union budget 2023 was a mixed bag. Investors in stocks of banking and non-banking financial firms heaved a sigh of relief as the budget did not throw any negative surprises. On the flipside, shares of insurance companies took a deep knock. Among the losers were HDFC Life Insurance Co. Ltd, ICICI Prudential Life Insurance Co. Ltd (IPRU) and SBI Life Insurance Co. Ltd whose stocks slumped by 8%-12% on Wednesday.

This steep reaction was not without a reason.

The government’s move to tax the maturity proceeds from life insurance policies, excluding unit linked insurance policies (ULIPs), with aggregate premium of over 5 lakh has not sat down well with investors. Recall that for ULIPs, tax exemption was removed for policies with annual premium exceeding 2.5 lakh in FY21-22 budget.

The amendment dilutes the attraction of top-selling products – non-participating and participating versus banks, said analysts at Jefferies India in a report. These two products form 30-60% of annualized premium equivalent (APE) for companies under the broking firm’s coverage.

This means high-value savings products which drive business of insurers would face the heat. For instance, HDFC Life had about 33% of its total APE from non-participating policies in the nine-month period ended December. The company’s revenue is expected to be adversely impacted to the extent of 10-12%, said Vibha Padalkar, managing director & CEO, HDFC Life, in an interview with CNBC-TV.

On the other hand, “While IPRU does not explicitly provide the share of non-participating savings guaranteed product in APE, our qualitative understanding is that IPRU is a relatively recent entrant in this area and its share of this business would be relatively lower compared with other listed private sector life insurers,” said Shivaji Thapliyal, head of research and lead analyst, Yes Securities.

That said, there are still some grey areas that investors would seek clarity on. For instance, it is not clear whether the entire proceeds will be taxed or only the gains. “If the entire proceeds is taxed, then it will be big negative as it will involve taxing the principal as well, but if only gains/ returns are taxed then impact should be manageable,” added the Jefferies report.

A bright spot, however, is that the maturity proceeds on death of the policyholders, are still exempt. What’s more, given that the amendment is effective on new policies from 1 April 2023, there is a likelihood of a surge in insurance premiums in February and March.

While this would augur well for Q4FY23 earnings of insurers, the way ahead could be challenging. This is because another pressure for insurance stocks is feared to emerge from the government’s push towards the new tax regime. This scheme does not provide tax deductions for premium paid as is the case with the old tax regime. As such, insurance policy volumes are estimated to take a beating. All in all, insurance stocks are likely to be under pressure, at least in the near term.

Meanwhile, the government’s massive capital expenditure outlay of 10 trillion, would also benefit banks, said analysts. Secondly, the budget announcement with respect to withdrawal of tax exemption on life insurance proceeds from policies with premium over 5 lakh is also a plus for this sector. “This can narrow the tax arbitrage between term deposits with banks (on marginal rate of 25-30%) and insurance policies (nil tax),” said Jefferies.

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