The insurance sector was among the biggest gainers of GST 2.0. Rather, the insured were the biggest beneficiaries, as the tax rate on premiums was slashed from 18 per cent to zero. But, bizarre as the ways of the bureaucracy are, the move hurt the insurers. Earlier, they were allowed to refund or adjust the 18 per cent GST paid on commissions and brokerages to the distributors and agents.
Now, the Government has refused the refunds. It withdrew the Input Tax Credit (ITC) that allowed it. Caught in a tax quagmire, private insurers found a win-win solution. They passed on the premiums’ benefit to the insured, and the extra tax burden on commissions to the agents. Most insurers issued notices that commission rates will be revised downwards by 18 per cent to align with the tax changes.
As one of the private insurers explained to a newspaper, GST on commissions is an additional cost, which will impact the finances of the insurers, their profitability, as well as Expenses of Management (EOM), which is a cap imposed by the regulator on an allowable percentage as an insurer’s operational costs and commissions. The company added that ITC would not be available for other expenses such as rewards, and corporate costs allowed by the regulator.
Agents and distributors have revolted that this will skew their payments, which will impact the spread of insurance covers across the country. Distributors will now be interested in selling policies, where the rewards, minus the 18 per cent GST, are the highest. Hence, unviable schemes, especially targeted at low-level and mid-level households may take a back seat. Give to Peter, take from Paul.
Given this context, one can analyse the financials and operations of ICICI Lombard General Insurance Company, which is a steady compounder in the country’s general insurance space. When it comes to earnings growth, brokerage houses, who track the insurer, hold a constructive stance. One of the reasons is that the company delivered a mixed, yet resilient, Q1-FY26 performance. Net earned premium (NEP) grew 14 per cent year-on-year (YoY) to `51.4 billion, driven by steady gains in motor and health portfolios.
Gross written premium inched up two per cent YoY to `81 billion, which reflected the cautious stance on motor insurance, and the accounting transition under the 1/n rule. While underwriting losses stood at `2.9 billion, the bottom line was boosted by robust investment income, which surged 16 per cent above estimates. Thanks to this, Profit After Tax (PAT) rose 29 per cent YoY to `7.5 billion, which exceeded the analysts’ expectations by 25 per cent.
According to a recent report by Motilal Oswal, the combined ratio, a key profitability indicator, remained elevated at 102.9 per cent, up 0.6 percentage points YoY. The claims ratio was 73 per cent, while the commission ratio increased to 16.8 per cent due to the pricing pressure in group health and commercial lines. Now GST will play a role on this front. Expense ratio was stable at 13.2 per cent.
As mentioned above, investment income remained the key earnings lever. The investment book expanded nine per cent YoY to `554.5 billion, yielding 2.32 per cent during the quarter. “Driven by strong growth in investment income, (and) backed by capital gains of `3.8 billion, the insurer logged ` 7.47 billion PAT, growing 28.7 per cent YoY, significantly ahead of estimates,” felt the analysts of Emkay Research, who wrote a recent report. Return on equity for Q1 this fiscal improved to 20.5 per cent, up 140 basis points YoY, while the solvency ratio strengthened to 2.7× (from 2.56×).
ICICI Lombard emphasises profitable growth over market share, maintaining underwriting discipline. “The management remains focused… driving value creation,” states the Emkay report. Retail health insurance remains a standout performer. According to Motilal Oswal, this was “supported by new customer acquisition, and strong traction in its ‘Elevate’ product.’” Prudent risk selection, diversified portfolio, and strong distribution network reinforced its dominance.
Motilal Oswal expects PAT to grow 23 per cent in FY26, and 15 per cent in FY27, aided by “stable improvement in profitability with combined ratio improving to 101.2 per cent by FY27.” The firm benefits from steady capital efficiency, and consistent investment leverage (3.7×). EPS (Earning Per Share) is projected to grow 23 per cent in FY26, with book value per share to rise from `290 to `337.
Apart from the GST imbroglio, the insurance sector’s near-term environment is challenging. “The landscape remains tough due to pricing aggression in the motor and group health segments, whereas the fire segment has seen pricing discipline,” warned Emkay Research. The regulatory 1/n norm (which spreads premium recognition across the policy tenure) has muted growth. Weak credit disbursal weighed on the growing group benefits business.
Analysts expect gradual recovery in growth and margins. Emkay Research forecasts six per cent premium growth in FY26, but this was before GST 2.0. Motilal Oswal maintains a ‘Buy’ rating with a target price of `2,400. Emkay Research has an ‘Add’ rating with a target price of `2,100. The price was `1,911.6 on October 3. There is possibly a 20 per cent upside, as per Motilal Oswal. But one is not sure of the impact of the double-edged GST 2.0.