Motilal Oswal sector of the week: Life insurance; check stocks, target here

India's life insurance industry is set to deliver resilient growth, improve profitability, and strengthen cash flow visibility over the long term, Motilal Oswal said

India's life insurance sector is entering the second half of the financial year 2025-16 (FY26) with strong tailwinds, supported by regulatory reforms, a favourable interest rate outlook, and a meaningful shift in product mix. 

 

While short-term pressures from the GST waiver and loss of input tax credit (ITC) may weigh on margins in Q2-FY26, the structural drivers for growth remain intact.

 

The anticipated rate-easing cycle is expected to be a key catalyst. With the 10-year government security yield easing to 6.5 per cent in September 2025 from 7.0 per cent a year ago, guaranteed non-par and annuity products are becoming more attractive relative to deposits and small savings schemes. This trend is likely to accelerate premium growth and strengthen persistency ratios, reducing policy surrenders in a lower-yield environment.

 

   

Sector performance in Q1FY26 highlighted these shifts, with Value of New Business (VNB) margins expanding across private players by 10–260 basis points year-on-year (Y-o-Y), supported by a pivot away from market-linked ULIPs toward higher-yielding non-par and protection products. Overall, private players reported robust VNB margins in the 20-27 per cent range, with growth in non-par contributions and protection products offsetting softness in ULIPs.

 

A structural rebalancing is underway with ULIP shares declining sharply in 1QFY26, while non-par, annuity, and protection segments gained ground. This transition reflects both regulatory changes and evolving customer preferences, as policyholders seek long-term rate lock-ins amid a declining interest rate cycle. The GST waiver, while pressuring near-term margins, is expected to enhance affordability and penetration over time, further widening the customer base.

 

Distribution strength remains another pillar of growth. Bancassurance continues to be a dominant channel, supported by expanding partnerships, while agencies are witnessing steady productivity gains, and digital adoption is rising across the sector. Together, these factors are creating a more diversified, margin-accretive channel mix.

 

Looking ahead, the sector appears well-positioned for a stronger 2HFY26. Margin recovery is expected as the impact of ITC loss normalises, aided by cost optimisation, repricing, and deeper protection plan penetration. With regulatory reforms, supportive macro conditions, and product diversification, India’s life insurance industry is set to deliver resilient growth, improve profitability, and strengthen cash flow visibility over the long term.

Max Financial - Target price: ₹2,000

Max Financial is poised for above-industry growth, supported by strong bancassurance traction, a resilient agency channel, and a favourable product mix. In 1QFY26, new business momentum was industry-leading, with double-digit growth in both APE and VNB. 

 

The company's non-par savings mix, at 33 per cent of APE, remains among the highest in the industry, while protection stood at 23 per cent, reinforcing resilience amid market-linked volatility. VNB margins expanded sharply to 20.1 per cent (+260bps Y-o-Y), the fastest among peers, aided by product mix shifts and rising rider penetration. The GST waiver is set to further boost affordability and insurance penetration. 

 

Management expects margins in the 24-25 per cent range in FY26, driven by continued traction in non-par, protection, and new launches. A potential reverse merger of Max Life into Max Financial is viewed as a key structural catalyst, with scope to simplify corporate structure, unlock synergies, and support long-term re-rating.

HDFC Life - Target price: ₹910

HDFC Life is maintaining steady growth momentum, supported by a balanced product portfolio and a well-diversified distribution model. The product portfolio remains well-diversified, with ULIPs contributing 33 per cent of APE, par products rising to 27 per cent on new launches, and non-par savings at 17 per cent, which is expected to recover to mid-20 per cent levels through FY26. 

 

Credit Protect is gaining traction with higher disbursements, improved attachment rates, and entry into new lending segments. APE growth is expected to accelerate to 17 per cent Y-o-Y in H2FY26, aided by the GST exemption and normalisation after last year’s pent-up ULIP demand. 

 

On the distribution front, bancassurance contributed 60 per cent of APE, supplemented by strong agency momentum with 23,000 new additions, while broker growth surged 141 per cent Y-o-Y, underscoring the strength of its multi-channel franchise. With improving persistency and AUM expansion, HDFC Life is positioned for consistent compounding in earnings and embedded value.