GST changes, ITC removal may have weighed on insurers' profitability in Q2

Analysts see 50-150 bps VNB margin compression for life insurers and sustained combined ratios for general insurers after GST rate changes and ITC removal

The change in goods & services tax (GST) rates, implemented last month, and the removal of input tax credit (ITC) are likely to weigh on life and general insurance companies’ profitability in the second quarter (July-September) of 2025-26 (Q2FY26), according to analysts.

 

Insurance companies have passed on the entire benefit of GST cuts to consumers and are likely to split the impact of removal of ITC with distributors.

 

The profitability of life insurance companies — measured by the value of new business (VNB) margin — is likely to be impacted by multiple factors, including product mix changes, GST ITC loss on expenses, and rise in yields.

 

Analysts say there could be 50-150 basis points (bps) year-on-year (Y-o-Y) compression in VNB margins of private companies.

 

According to analysts at Kotak Institutional Equities, “ITC loss for life insurance companies will be about 165-400 bps of VNB margins; we consider an increase in expenses due to the loss of ITC distribution commissions and operating expenses, without assuming any sharing of burden with distributors or customers.”

 

The annualised premium equivalent (APE) of the life insurers is expected to be muted due to base effect during the quarter.

 

“Among private listed players, Axis Max Life is likely to emerge as the growth leader, followed by HDFC Life and SBI Life while IPRU Life is expected to post an APE decline, largely attributable to weakness in the retail business. LIC, too, is projected to report an APE contraction in Q2FY26, against a high base driven by strong channel-driven sales in September 2024,” according to a report by Emkay Global Financial Services.

 

According to estimates by analysts at Emkay, SBI Life Insurance — the leading private life insurer — is expected to report a VNB margin of 26.5 per cent in Q2FY26 as against 26.9 per cent in Q2FY25. Its margin in Q1FY26 was 27.40 per cent. 

 

HDFC Life Insurance’s margin is likely to be 23.9 per cent as opposed to 24.3 per cent. In Q1FY26, the margin of the insurer stood at 25.1 per cent. ICICI Prudential Life Insurance’s margin might be 23.6 per cent, up from 23.4 per cent in Q2FY25. Its margin in Q1FY26 was 24.5 per cent.

 

Axis Max Life Insurance’s margin is expected to be 24.1 per cent as opposed to 23.6 per cent. The margin of the insurer in Q1FY26 was 20.1 per cent.

 

Similarly, state-owned LIC’s margin is likely to expand to 18 per cent from 17.9 per cent in the same quarter last year. “LIC witnessed strong growth in retail APE in September 2024 due to the channel-push prior to the implementation of the new surrender regulations,” analysts said. LIC’s margin in Q1FY26 was 15.4 per cent.

 

For general insurers, the combined ratio is expected to stay elevated due to higher claims ratio despite operational efficiencies. Lower the combined ratio, higher is the profitability of the companies. General insurers continue to face growth headwinds due to weaker new vehicle sales in Q2FY26, and the ongoing impact of the 1/N regulation. Also, no hike in motor third party (TP) is likely to stress the segment. Nevertheless, combined ratios are expected to show marginal improvement, supported by better claims ratio.

 

In its report, Emkay said: “Combined ratios are expected to remain elevated, although a marginal Y-o-Y improvement is anticipated on the back of a better claims experience. Profitability, however, should be supported by healthy investment income, driving robust profit after tax (PAT) growth.”

 

Analysts at Emkay estimated ICICI Lombard General Insurance’s combined ratio to be 104 per cent as opposed to 104.5 per cent in Q2FY25. Star Health Insurance’s combined ratio is expected to be around 102.4 per cent as against 103 per cent, and Go Digit General Insurance’s is expected to be 111 per cent as against 112.1 per cent.