Tax on high-value policies, composite license issue to guide life insurance sector in next one year

Post the recent budget 2023 announcement of withdrawing taxation exemption on high ticket insurance policies, all eyes are on how strong the premium growth numbers will be in the last months of the fiscal. The February business data showed divergent growth trends for retail annual premium equivalent (APE) with private insurance players reporting 18 percent growth and Life Insurance Corporation (LIC) a decline of 3 percent.

Expectantly, the retail APE growth was led by ticket size growth as opposed to the quantum of policies sold. The overall average ticket size for regular premium policies grew by 32 percent whereas the policy count was down 15 percent. This ticket size led growth should be seen in the context of a likely pre-booking of high-ticket (>Rs 5 lakh) non-ULIP policies in the month of February and March.

Analyst estimates suggest that this growth trend is likely to continue in March and the companies will see a premium growth of anywhere between 15 percent to 40 percent compared to the 5-10 percent growth same time last year. However, the number that needs to be monitored is the number of policies sold.

With all the negative sentiments around the budget announcement, few amendments that can work in the favour of the sector are issuing composite business license and regulations on limits on expense of management. The composite business licence will facilitate open access to the company to operate in any kind of business and simplifying the existing regulations on commission expense and expense of management (EoM) gives companies more flexibility on their commission pay out structures.

However, the real question is that will these amendments outweigh the negative impact brought on from the budget announcement. Life Insurance stocks have corrected anywhere between 11-23 percent since the budget day. Almost all of them are now at their 52-week lows.

When you see their valuations that is price/embedded value on a 1 year forward basis and compare it to pre-budget levels – it has corrected quite a bit. HDFC life seeing the most correction(3.8x vs 2.2x ), followed by SBI Life (2.9x vs 2.0x) and Max Financials(2.0 vs 1.2x).