China insurance tax threatens sales as Prudential and AIA slide

Returns on Hong Kong products could lose some advantage over mainland options.

A new 20% personal income tax on offshore insurance policies narrows the yield gap between domestic Chinese and Hong Kong savings products, potentially weighing on short-term sales. 

However, Jefferies Equity Research said the tax enforcement provides long-term regulatory clarity for major insurers including Prudential and AIA Group.

The tax levy, reported by Caixin Global, targets both dividend payouts and interest earned on prepaid premiums. 

Following the news, Prudential’s London-listed shares fell by up to 13% intraday before recovering to close down 6%. AIA Group Limited (1299 HK) subsequently dropped 8% at the Hong Kong open before settling 6% lower, matching Prudential’s drop. 

In subsequent London trading, Prudential regained ground to trade down 4% overall since the report, with analysts expecting AIA to follow suit.

Jefferies views the market sell-off as overdone, noting that market arbitrage quickly began closing the valuation gap between the two insurers.

Jefferies contends that by explicitly taxing offshore policies, Chinese authorities have effectively acknowledged their legitimacy. 

This reduces the long-standing tail risk of a complete cross-border regulatory ban on insurance sales.