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Insuring a stronger 2H!

Upgrade Max Financials to a BUY; prefer HDFCLIFE as well

* We believe that the life insurance sector in India is entering 2HFY26 with significant tailwinds, including 1) the GST waiver, which, while creating near-term margin pressures from loss of input tax credit (ITC), should structurally aid penetration; 2) the anticipated rate-easing cycle, which will be a driver for stronger non-par and annuity growth; and 3) improving mix towards protection and non-par, which will drive VNB margin expansion.

* A product mix shift was observed in 1QFY26 towards non-linked categories, with ULIP share declining 460bp/360bp/600bp YoY for IPRU/SBILIFE/MAXFIN. We expect this trend to accentuate going forward, with interest rates declining and customers looking to lock long-term interest rates.

* VNB margins improved 10-260bp YoY in 1QFY26 across private players, led by higheryielding non-par and protection, offsetting ULIP softness. We expect the momentum to get stronger in 2HFY26, aided by 1) a favorable mix away from ULIPs, 2) non-par/ annuity accretion, and 3) a low base, as 2HFY25 margins were diluted by revised surrender charge norms. However, 2QFY26 numbers will be hit as ITC is not available, and any action to counter the same will be implemented in due course.

* The GST waiver improves affordability and penetration, though insurers face short-term margin pressure from the ITC loss. EV impact remains contained (54% YoY), steady agency expansion, and management’s guidance of 24-25% margins in FY26, along with potential structural upside from the reverse merger, reinforce our conviction. We value MAXLIFE at 2.2x FY27E EV and adjusting for 80% stake of Max Financials, we arrive at a TP of INR2,000.

* We also prefer HDFCLIFE within the space, given its strong track record of delivering consistent growth across regulatory changes and healthy profitability (VNB margins of 25%+ and RoEV of 16.3%).

GST exemption boosts affordability; EV impact limited (<~1%)

* While exemption improves affordability but puts pressure on margins via ITC loss, insurers expect EV impact to be limited (<1%) through cost optimization, product repricing/relaunches, and selective cost absorption.

* HDFCLIFE: Sees <0.5% EV impact; expects higher affordability to boost demand and be VNB accretive.

* SBILIFE: Guides for <0.2% EV impact; views reform as supportive of “Insurance for All by 2047”.

* MAXLIFE: Expects <1% EV impact; highlights affordability gains and reduced protection gap.

* IPRU LIFE: Anticipates ~1% EV impact, expecting stronger growth and penetration.

* LIC: Projects <0.5% EV impact; expects business volume and VNB growth.

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