New tax norm to hurt insurers; stocks attractive for the long run: Analysts

Analysts expect stocks to remain under pressure in the near-term as the government's new tax regime push, with no tax saving deductions, could hurt demand for insurance products

Insurance-related stocks have significantly weakened since the Budget proposed to tax income from traditional policies with an annual premium of over Rs 5-lakh. Shares of HDFC Life, SBI Life, ICICI Prudential (ICICI Pru), Max Financial (owner of Max Life), Life Insurance Corporation (LIC), General Insurance Corporation and New India Assurance have lost 3-19 per cent so far since February 1. In comparison, the NSE Nifty has been up around 0.6 per cent during this period. 

Going ahead, analysts expect the underperformance to continue in the near-term as the government’s new tax regime push, with no tax saving deductions, could hurt demand for insurance products. The pain in these counters, they believe, will not last long and long-term investors should consider accumulating the stocks given the recent selloff.  

“As the new tax regime starts to take shape, the old regime will fade out in one-two years. This means the incentive to buy life insurance plus investment products reduces, which is a key negative for the sector as life insurance has always been sold with a purpose of tax benefit. The tax norm on high-value policies can hit life insurers' embedded value (EV) by 5-15 per cent. But, our long-term view is positive on the sunrise sector as penetration will continue to grow,” said Aditya Shah, founder and chief investments officer, JST Investments.

From a valuation standpoint, analysts say the budget proposal has accelerated the de-rating in these stocks, which was already ongoing for the last one-two years. HDFC Life, SBI Life and ICICI Prudential, for instance, are currently trading at FY24 P/EV (price to EV) multiples of 2.3x, 1.9x and 1.4x, respectively, down from the FY22 multiples of 3.5x, 2.9x and 1.9x.

Shah of JST Investments, though expects the valuation to bottom out soon, while those at JM Financial said they would be buyers in the current correction.

Near-term pain

The new tax norm, analysts say, is expected to impact the top-selling policies–participating (par) and non-par savings categories the most (non-ULIPs or unit linked insurance plans). 

The two segments drive 30-60 per cent of the annualised premium equivalent (APE), which is a common sales measure, and 30-65 per cent of the value of the new business (VNB) of companies under Jefferies’ coverage.

“A 20 per cent cut in premiums for par and non-par products in FY24 will see Max Life and HDFC Life take an adverse decline of 13 per cent each in APE and 15 per cent and 14 per cent, respectively, in VNB. The fall in APE/VNB will be lower for SBI Life and ICICI Prudential at 7/8 per cent and 6/10 per cent, respectively,” estimate Prakhar Sharma and Vinayak Agarwal of the brokerage.

Those at PhillipCapital, however, believe that insurers have enough levers to mitigate the impact as they can issue multiple products across family members, reduce ticket size and target mass affluent customers.

That said, experts see volumes to likely be strong for the next two months as companies aggressively push high-ticket non-par policies (with premium above Rs 5 lakh) in the sunset period ahead of the deadline of March 31. Moreover, the street’s focus, analysts said, will now be to understand the loss of business in the next fiscal and investments needed to boost lower ticket business over the medium-term, which may exert pressure on margins, as per Kotak Institutional Equities.

Emkay Global expects the high-value policy tax norm to affect the 10 per cent premium base of HDFC Life and Max Life, and the 5 per cent base of SBI Life and ICICI Pru.

“On a net basis, 15 per cent of the overall premium for these players could be under severe growth risk, leading to a 3-4 per cent hit to growth expectations. We downgrade HDFC Life to hold, and uphold our buy rating on SBI Life, Max Financial and ICICI Pru, on undemanding valuations, implying relatively-lower value to the future,” it said. CLSA has also reduced the target price by 25-35 per cent, downgrading all four stocks.