Life insurance scrips fall on tax concern

There is a concern that the tax rate may increase to 25 percent from 14.3 percent


Shares of life insurance companies fell 3-5.5 per cent 3-6 percent intraday Thursday as tax rate for insurance companies may increase to corporate tax rate level.

SBI Life Insurance Company, HDFC Standard Life Insurance Company,ICICI Prudential Life Insurance Company and Max Financial Services(Max Life) shares fell on the concern that the tax rate may increase  to 25 percent from 14.3 percent,

The Finance Ministry has constituted a task force for redrafting the direct tax law. The task force will submit its report within the next six months.

A note from  Kotak this morning highlighted that there is a proposal to increase tax rate of insurance companies to the corporate tax rate from the 14.3 percent currently.

Kotak said increase in tax rate would have one time impact on embedded value (EV) and going forward lower NBAP (new business achieved profit) margins.

However, Arijit Basu, MD & CEO of SBI Life Insurance said even if there is a increase in the tax rate, over the long-term it won't impact the fortunes of insurance companies.

All insurance companies will eventually adjust to any change in the tax structure, said Basu, adding that the committee has been given six months to submit their proposal to the Finance Ministry. So, it is yet too early to comment on the impact, he added.

One will also have to see how it will be implemented --- the time frame and whether it will be one-time transition or happen over period of time, said Basu.

Whatever decision the government takes is not necessarily in interest of the companies but will be in interest of the policy holders, he said. The government will also consider the view of the companies if they are unable to give the best deal to the consumers before taking final decision on this, he added.


Notably, the FY09 direct tax code had two proposed changes with respect to life insurance companies:

-Income from insurance for policyholders to be considered under the EET method (i.e. insurance income should be taxable) unless premium payable is less than 5 percent of sum assured i.e. sum assured should be 20X of premium.

With focus on selling more protection policies, Kotak believes that it may not be a challenge for life insurance companies to package and sell higher component of protection in their ULIPs.

- Life insurance companies should pay income tax at corporate tax rates (proposed at 25 percent) as compared to current practice of 14.3 percent.

If tax rate increases to 25 percent from 14.3 percent, Kotak estimates EV and RoEV (return on embedded value) of HDFC Life, ICICI Life and Max Life assuming 7-9 percent lower FY2017 EV and 13-17 percent decline in NBV margins.

At 14:04 hours IST, the stock price of SBI Life Insurance Company was down 3.05 percent at Rs 670.05, ICICI Prudential Life Insurance Company down 4.12 percent at Rs 378.30, HDFC Standard Life Insurance Company was down 5.11 percent at Rs 375 while Max Financial Services was down 3.10 percent at Rs 566.75 on the BSE.