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MOSL: FINANCIALS – INSURANCE-Impact of budgetary announcements on Life Insurers; Premium growth may moderate

FINANCIALS - INSURANCE: Impact of budgetary announcements on Life Insurers

** In the Union Budget 2020, the government removed all major exemptions under the new tax regime, which is likely to take away one of the key incentives that drives the sale of Life Insurance products. This resulted in a steep stock price correction for insurers. The correction was especially more for the ones with a higher mix of the savings business (MAXLIFE, ICICIPRU and SBILIFE corrected in the range of 10-14% while HDFCLIFE corrected by ~6%).

** 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.

** Moreover, the removal of Dividend Distribution Tax (DDT) and the move of making dividend taxable in the hands of recipients will result in higher Effective Tax Rate (ETR) for life insurers, particularly for those that are ULIP-heavy. However, if corporates maintain the same payout ratio, the impact will be relatively limited.

** The government’s proposal to list LIC will also be a significant event to monitor. LIC accounted for 61%/71% of total new business on weighted/un-weighted basis as at 9MFY20; its share in industry AUM stood at 78% (INR27.6t) as at FY19. Listing of LIC will help improve transparency and disclosure standards for the entire life insurance industry and will attract investors to participate in wealth creation in a sector that has delivered one of the best returns last year.