Life insurers' shares plunge on proposed change in direct tax law

Mumbai: Shares of life insurance companies plunged today after the finance ministry constituted task force to redraft direct tax law including higher corporate tax for companies and taxing insurance income.

Listed life insurers saw shares decline- ICICI Prudential Life 3.81%, SBI Life 3.49% and HDFC Life 5.43% on the BSE due to likely negative impact of change in tax law on their embedded value and new business margins.

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

As per the proposed draft, income from insurance for policyholders to be considered under the EET method that is insurance income should be taxable unless premium payable is less than 5% of sum assured i.e. sum assured should be 20X of premium.

Second, life insurance companies should pay income tax at corporate tax rates proposed at 25% as compared to current practice of 14.3%.

"Increase in tax rate will have one time impact on EV and going forward lower NBAP margins," said Kotak in a report. We estimate EV and RoEV of HDFC Life, ICICI Life and Max Life assuming 7-9% lower FY2017 EV and 13-17% decline in NBV margins."