Insurance recommendations changed: JM Financial prefers HDFC Life and Max Financial Services following revisions in GST rates for insurance sector
The 56th GST Council meeting, chaired by Finance Minister Nirmala Sitharaman, has decided to exempt all individual life and health insurance policies from Goods and Services Tax (GST), effective from September 22. This policy shift could alter pricing, demand, and profitability dynamics across the insurance sector.
Previously, consumers were paying 18% GST on health and term life plans, while endowment and annuity products attracted rates between 1.8-4.5%. With the GST exemption, premiums will become cheaper for policyholders, potentially improving insurance penetration in an underinsured market. This could lead to a surge in demand for insurance stocks, particularly for listed insurers like Life Insurance Corporation, HDFC Life, and SBI Life, during the festive season.
Insurers like LIC, HDFC Life, and Axis Max Life, which derive more than 50% of their annual premium equivalent (APE) from traditional plans, stand to benefit the most from the GST exemption. JM Financial views the GST exemption as a positive surprise, particularly for traditional savings products in the life insurance sector. According to JM Financial, the exemption on savings plans can help insurers offer higher returns to customers.
HDFC Life, for instance, has shown a positive trend in the stock market for individual life and health insurance since the abolition of GST on these products. The improved affordability and appeal to customers likely boosted policy sales and investor confidence. After September 22, 2021, this trend stabilized with sustained growth reflecting market adaptation and continued demand.
JM Financial believes that the GST exemption benefits companies like Max Financial Services and HDFC Life, which are strong in the traditional business. The research firm projects an annual VNB growth of 18% on a compounded basis between FY25-FY28 for HDFC Life, trading at 2.2x FY27e EVPS.
However, the GST exemption could have a double-edged sword effect for insurers. While it could increase demand, it may also decrease their revenue due to the lower premiums. This could impact the overall profitability of the insurance sector, although the extent of this impact remains to be seen.
The GST exemption on insurance policies marks a significant policy shift that could alter the landscape of the insurance sector. As consumers benefit from cheaper premiums and potentially improved insurance penetration, insurers will need to adapt to this new environment to maintain profitability and growth.
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