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Insurance in GST 2.0 – The Road Ahead

In our earlier note (GST 2.0 in insurance – Do not miss the wood for the trees) we had argued that the changing regulatory landscape is a persistent phenomenon in the Insurance sector. We also stated that investors should ignore the transient noise and focus on long-term value creation by franchises that have brand and distribution scale-led cost efficiencies, as they are likely to be winners in the medium term. Notwithstanding the positive long-term impact of this move (ie GST exemption) on Health and Life Insurance industry growth, the near term will see Life and Health insurers taking the hit from loss of Input Tax Credit (ITC) before the cost and pricing of products. In Life, the near-term impact will be pronounced in ULIP; however, the saving grace here is that in overall VNB terms, ULIP has a relatively lower contribution, given its low VNB margin profile. In Individual Health, ~5% of premiums as an ITC loss are not absorbable by SAHIs and, soon, the commission and pricing of products will need to be adjusted for this. Overall, we see the pricing and distribution cost adjustment to play out in Q4, and Q3 shall see some negative impact on VNB margin (as also on the combined ratio for SAHIs). The relative lackluster performance of Insurance stocks, following the 15-Aug GST announcements, appears to be pricing-in the near-term uncertainties – of GST ITC loss and muted growth outlook in Sep-Oct 2025, while ignoring the franchise strength of these listed insurers. Based on the risk-reward, we prefer SBILIFE, HDFCLIFE, and MAXF. Valuations have turned considerably attractive for LICI and IPRU, as they already price in growth challenges.

GST exemption a long-term positive, albeit still some near-term niggling issues

The removal of GST on Individual Life and Health Insurance is a step in the right direction for making insurance affordable and addressing the issue of lack of coverage or undercoverage. However, the GST exemption on premiums does not completely remove the burden of GST, as input services in Insurance (Commission and other non-salary Operating expenses) remain within the ambit of GST. Insurers will now not have the GST on premiums for setting off the ITC of GST paid on these services.

Near-term profitability impact on ULIP and Retail Health, more pronounced

Given the product construct of Par Savings and the recent increase in bond yields leading to VNB margin expansion in Non-par ceteris paribus, the ITC loss impact on VNB margins of Par and Non-par savings should be minimal in the near term. The ITC loss should have some impact on VNB margin of Retail Protection, due to the ITC loss seen before the prices are adjusted over the medium term. The impact on ULIP becomes more pronounced, as ULIP is already a product with lower VNB margin and, hence, the impact of ITC loss will require adjustments to the RIY (Reduction in Yield or the difference between Gross Yield and Net Yield) and Distributors’ commissions. Given that a large number of life insurers, except SBILIFE, have limited room to increase RIY owing to regulatory limits, the ULIP will require life insurers to further reduce the payouts. Similarly, given the operating margins in Retail Health Insurance, this ~5% of premium as a GST ITC loss will be difficult to absorb by insurers and will require repricing of the product and reduction in distributor commission. All these adjustments, however, will happen at an unhurried pace; and for a large part of Sep-Oct 2025, the prices of most life and health insurance products are likely to be almost similar to those in Aug-25.

Large listed players better-placed

Ever since Indian insurers were listed, about 8-9 years ago, the sector’s regulatory landscape (including direct and indirect taxation) has been consistently evolving, especially in times like the Covid-19 delta wave, which caused a historic upheaval. Amid all this, private life insurers have maintained their track record in delivering consistently strong EV, VNB, and AUM compounding (Exhibit 4) during all, 3Y, 5Y, as well as 8Y, periods. Given the importance of brand and distribution, along with fixed operating costs, these private leaders have a strong advantage and have leveraged their brands and distribution to deliver scale with cost-efficiencies, thus driving profitable growth. The GST ITC losses put higher pressure on smaller sub-scale franchises, as against which the listed sector leaders are relatively better positioned. We prefer SBILIFE (BUY), HDFCLIFE (BUY), and MAXF (ADD). Despite the near-term growth challenges, valuations for IPRU (ADD) and LICI (ADD) have turned favorable.

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