fbpx

SHARE THIS TO

Facebook
Twitter
LinkedIn


The current interest aside, analysts believe that repeating growth in FY24 won’t be an easy task for life insurers.

On February 1, listed life insurers saw their valuations erode by more than 10 percent as the Union Budget brought in tax rules that would shave off a big part of their business growth. Investors believed that the stellar growth trajectory of the industry was now a thing of the past and so valuations should come down.

Since April, though, life insurance shares have gained, in a sign that the earlier expectations of growth deceleration were overdone. Shares of the largest life insurer, Life Insurance Corporation of India (LIC), have risen nearly 1 percent. ICICI Prudential Life Insurance Company Ltd’s stock has gained nearly 2 percent, while Max Financial Services Ltd has gained roughly 1 percent. HDFC Life Insurance Company Ltd and SBI Life Insurance Company Ltd have gained more than 3 percent.
So, what has changed for investors to be nibbling on life insurance stocks now? The answer: another change in tax rules and a returning optimism on growth.

Tax lost is tax gained

In the budget, the government had proposed that the proceeds of insurance policies with premiums in excess of Rs 5 lakh would be taxed in the hands of the holder. Further, the centre made the new tax regime, which removes almost all exemptions, as the default tax regime from 2023-24 onwards. To be sure, shifting to the new tax regime remains optional, but the government’s intent cannot be ignored.

These rules, which took effect on April 1, were seen as hurting business growth for the life insurance companies. After all, India’s life insurers relied on deep-pocketed clients who invested lumpy amounts to avail of tax exemptions.
But on April 1, another tax rule change took effect. The government removed the indexation benefit on debt mutual funds by bringing all of them under the marginal tax rate. Analysts at Kotak Institutional Equities believe that some of the investment into these debt funds could now reflow into insurance policies with a smaller premium size. “Notably, income from non-linked insurance policies below Rs 0.5 million of the annual premium remain(s) tax-free; hence, we believe that some incremental flows from debt mutual funds may be directed to such policies. This will help offset the impact of the slowdown in high ticket (over Rs 0.5 million) policies,” they wrote in the April 21 note.

Further, there are mitigating tactics that can help insurers bypass the tax exemption rule. “The INR500k annual premium limit for tax breaks on traditional (par/non-par) products is seen as relevant to a small section of potential demand, given mitigations are possible (for example, splitting the premium between spouses in the same family),” wrote Santanu Chakrabarti, analyst at BNP Paribas India in a note.

A stronger March

Listed life insurers lived up to the expectations of investors in the January-March quarter. SBI Life reported 11 percent growth in total annualised premium equivalent and profitability metrics, such as value of new business. And its margins beat Street expectations. HDFC Life, too, reported healthy growth metrics but the acquisition of Exide Life resulted in an increase in expense ratios.

That said, analysts believe that repeating growth in FY24 won’t be an easy task for life insurers.

The outsized business growth in the March quarter was expected as life insurers made last-ditch efforts to sell as many large-sized policies as possible before the tax changes took effect. The 59 percent surge in the ticket size of policies for the month of March shows this last-minute dash. For HDFC Life, this rush contributed to 35 percent of premiums in March.

Even so, listed life insurers exceeded market expectations of business growth for the quarter. Analysts at Morgan Stanley pointed out that the 38 percent year-on-year growth in retail weighted received premium (RWRP) for the industry and 56 percent for private life insurers was much stronger than expectations. Data from the industry regulator showed that private sector life insurers reported 53 percent business growth for March, taking the overall growth for FY23 to 24 percent, on an annualised premium equivalent basis.

Further, management guidance on growth in FY24 has been optimistic amid emerging concerns over the tax rule impact. Chief executives of life insurers have asserted that tax exemptions are no longer the driving factor for life insurance policies.

All this is contributing to the interest among investors in life insurance stocks.

Future imperfect

The growth in FY23 may have exceeded expectations but the outlook for FY24 is still cloudy. This explains why the gains in life insurance stocks have so far been modest. Further, investors are awaiting the fourth-quarter earnings of insurers such as SBI Life, LIC and HDFC Life in the coming weeks. The results of ICICI Prulife, which released its Q4 earnings on April 20, show that investors’ assumptions on profitability and growth have been met.

Meanwhile, the impact of the tax rule changes on life insurers will be fully visible only in the second half of FY24. Insurers are already putting in place mitigating measures through changes in pricing and the product mix. How much they will be able to reverse the impact on growth will be keenly monitored.
Chakrabarti of BNP Paribas pointed out that current valuations reflect the concerns surrounding growth. “We continue to believe that current market prices reflect the fear of both a near-term revenue decline as well as a reduction in TAM (total addressable market),” he said.

Most analysts expect insurance stocks to be under pressure in FY24 given the growth concerns. At the same time, valuations look appealing for some after the sharp post-budget erosion. Re-rating triggers, though, are slim and should be visible two quarters down.




Source link

Welcome

Your Total Points

[mycred_total_points]