New tax proposal drags life insurance

What's Buzzing 

The Union Budget has proposed to tax proceeds from maturity of traditional insurance policies of an assessees with aggregate annual premium contribution of Rs 5 lakh and above, effective from April 2023. 

Context 

The new proposal is aimed to bring traditional policies under the tax net with proceeds pertaining to incremental aggregate contributions above threshold. Under the proposal, payouts related to contribution in excess of threshold will be taxed. However, tax exemption of section 10(10D) is proposed to continue for proceeds upon death. Notably, annuities and unit linked (annual premium of Rs 2.5 lakh) are already been taxed. 

Our Perspective 

Management commentary 

1) According to media reports, HDFC Life is likely to witness an impact of 10-12% on topline and 5% on profits due to changes proposed in budget

2) As per exchange filing, ICICI Pru said that Annualised Premium Equivalent (APE) product mix was well diversified at 41.4% unit linked, 19.7% protection, 6.3% annuity, 4.0% group funds and 28.6%. Share of business of non-unit linked policies with annual premium of above Rs 500,000 is ~6% of total APE for 9MFY23

3) As per exchange filing, Max Life indicated a well-diversified product mix across products and customer segments with share of non-unit linked policies with annual premium of above Rs 5,00,000 is ~9% of individual APE for 9MFY23 and was ~6% for FY22 while impact on VNB anticipated to be lower 

Factors not in favour

1) Removal of tax exemption on high contribution on traditional plans is seen to impact wallet share of HNI customer

2) Further, steps towards new tax regime without exemptions remain an overhang for long term growth prospects 

Factors in favour

1)   Large population base with lower insurance penetration and density, which enables to sustain long term growth

2)   While bringing large ticket traditional insurance policies under tax net remains a drag, from customer perspective, other investment avenues are also taxable, thereby providing no relative advantage

3) Large product suite with innovation & product and strategy restructuring to minimise the adverse impact

In our view, a higher impact is expected for players with higher contribution of non-linked business (HDFC Life and Max Financial) followed by SBI Life and ICICI Prudential Life insurance. Though steps undertaken by insurers are to be seen ahead, the recent correction in the stocks seems to have factored in the negatives.