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1H ends on a positive note; multiple tailwinds for 2HFY26!

VNB margin expansion in 2QFY26; GST impact on profitability

* As mentioned in our recent sector update (Insuring a stronger 2H!), we expect the life insurance industry to enter 2HFY26 with significant tailwinds, including: 1) the GST waiver, 2) the anticipated rate-easing cycle driving stronger non-par and annuity growth; and 3) an improving mix towards protection and non-par. The early signs of the same were visible during 2QFY26.

* APE growth softened after mid-teen growth in Jul’25 as buyers delayed purchases following the GST exemption announcement, resulting in ~9% YoY growth in 2QFY26. Among the listed players, MAXLIFE witnessed the fastest growth of 16% YoY. However, the sector rebounded with a 19% YoY growth in Oct’25, reflecting strong momentum post the GST exemption.

* A higher non-par mix, increased sum assured, and rising rider attachments supported broad-based VNB margin expansion and absolute VNB growth across listed players, with MAXLIFE reporting the fastest growth (+25% YoY). While the loss of input tax credit (ITC) impacted the VNB margin during the quarter, insurers are making efforts to achieve normalcy in the medium term via distribution realignments and operational efficiency.

* Across the board, the product mix is shifting towards non-par savings, annuity, and protection, driven by customer preference for guaranteed solutions amid moderating interest rates and greater risk awareness. Rider attachments and higher sum-assured offerings are further strengthening the unit economics of ULIPs. The gap in the protection segment provides headroom for growth, with an additional boost from the GST exemption, which can also aid VNB margin expansion.

* Following 2QFY26 results, the companies have broadly maintained guidance for APE. The loss of ITC may potentially lead to a further drag on the VNB margin in 2HFY26, considering no changes in the commission structures. However, the impact is expected to be <1% on EV. Our preferred pick in the space is MAXLIFE with a one-year TP of INR2,100 (premised on 2.3x Sep27E P/EV) and HDFCLIFE with a one-year TP of INR910 (premised on 2.4x Sep27E P/EV).

Growth recovery expected post GST exemption; slight impact on VNB

* MAXLIFE: Early signs of strong demand are visible, particularly in protection products. The company reported 17% YoY growth in APE for Oct’25. With a 10% APE growth in 2HFY25, we expect the momentum to sustain. The loss of ITC led to a 60bp impact on VNB margin in 1HFY26, and management expects a 300– 350bp drag on a run-rate basis without any changes to commissions or any other actions. However, commission negotiations are ongoing, and other operating efficiencies are expected to help offset the impact.

* HDFCLIFE: The company posted retail protection growth of 50% post-GST exemption. While it witnessed a 7% YoY growth in APE for Oct’25, given the low base of 2HFY25 (APE growth of 10.6%), we expect recovery to follow. For 1HFY26, VNB margins were hit by 50bp due to loss of ITC, and management expects an impact of 3% for the full year on a gross basis, which is expected to be mitigated in 2-3 quarters through operational adjustments and distributor realignments.

* SBILIFE: The company reported a strong 19% YoY growth in APE for Oct’25, and we expect this momentum to sustain given the low 2HFY26 base of 8% APE growth. A 70-80bp impact on VNB margin was reported in 1HFY26 owing to the loss of ITC. For 2HFY26, management estimates an additional 20-30bp margin impact, though overall profitability should remain stable as product mix optimization and operational efficiencies begin to reflect.

* IPRU Life: Given the high base, IPRU has underperformed the industry over the past few months. The company reported a 9% YoY growth in APE for Oct’25, and we expect the trend to sustain as the base becomes favorable in 2HFY26 (2HFY25 APE growth of 7.6% vs 1HFY25 growth of 27%). VNB margin will be affected temporarily in 2HFY26 due to the loss of ITC, but management expects to see recovery through higher volumes and absolute VNB growth.

* LIC: LIC was the worst hit in 2HFY25, resulting in a 16% fall in APE, given the commission changes and new product introduction post surrender charges regulations. Considering that, there has been a sharp recovery in sales, with management expressing confidence that this momentum will sustain in the coming quarters. The company reported a 30% YoY growth in APE for Oct’25. It has already factored in the loss of ITC, which represents <0.5% impact on EV. This impact will potentially be offset by higher business volumes and cost optimization measures over time.

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