Largest non-bank promoted private life insurer with diversified product mix: We upgrade Max Financial Services (MFS) to Buy with a TP of R375. MFS is the first Indian listed company exclusively focused on life insurance via its 68% stake in Max Life Insurance (MLIC). MLIC is the largest non-bank promoted life insurance company in India, with an individual weighted premium market share of 8.9% for 11MFY16 among private players. Its focus on traditional policies combined with an efficient agency force and strong bancassurance tie-ups should enable it to grow at faster rates than its peers, leading to market share gains. Agency productivity for Max Life is better than peers’ and persistency is among the best in the industry, which should lead to better profitability.
Diversified product mix should allow MLIC to grow faster than peers
MLIC has always strived to maintain a balanced product mix—its present mix is 24% ULIP and 76% non-linked. Max has indicated that it would like to keep its share of ULIP at 25-30%; over the past five years, the share of ULIP has been more than 30% in only three quarters. We believe that this product mix should enable MLIC to clock premium growth higher than that of the private sector and thus gain further market share.
Strong bancassurance and productive agency force are key strengths
Life insurance companies with strong bancassurance partners are market leaders and MLIC’s tie-ups with Axis Bank and Yes Bank give it an edge over non-bank promoted companies. In Feb ’16, Axis bought a 4.99% stake in MLIC. While there have been some investor concerns over the discount given to Axis for this deal, we believe this transaction should help cement a strong relationship and the benefits should accrue to MLIC over many years to come. Also, a strong and efficient agency channel differentiates MLIC from its peers and enables it to maintain a higher share of traditional products.
Max Life valued on appraisal value; estimates now factor in the demerger
Our estimates now factor in the demerger of the erstwhile Max India. While earlier estimates reflected all the businesses of the erstwhile Max India, our new estimates reflect only the 68.01% stake of MFS in MLIC. We value MLIC using appraisal value. Key assumptions: FY17 APE growth 18%, NB margin 20% and NB multiple 15.8x. We also add cash on the books of MFS to its 68.01% stake in Max Life to arrive at our MFS TP of R375. Key risks: adverse regulatory changes and rising competition in life insurance.
Life insurance business valued using appraisal value
We value Max Life using appraisal value methodology—embedded value + structural value.
For 1HFY16 the company reported a new business (NB) margin of 20.2%. We expect NB margins to remain largely stable and estimate a NB margin of 20% over the next couple of years.
We expect private sector growth of 15% for FY17e and expect Max Life to deliver better-than-industry growth given its strong product and distribution mix. Consequently, we factor in APE growth of 18% in FY17E.
We use a new business (NB) multiple of 16.0x, calculated using a two-stage Gordon growth model, for calculating structural value. Our valuation of Max Life translates into 2.3x FY17E P/EV.
We separately add back the dividends paid by Max Life as the EV considered in our Max Life valuation is post-dividend EV. We also add the cash on the books of MFS to arrive at our target price of R375 for MFS.
Max Life is the largest non-bank promoted private life insurer
In terms of individual APE, Max Life had a market share of 9.7% among private players in FY15 and 8.9% in 11M FY16.
While it has lost some market share in FY16 due to strong growth at PNB Metlife and Kotak Life and weak growth in its own business, Max remains the largest non-bank promoted private life insurance company.
Premium growth was muted in 9MFY16 but is improving now
Max Life premium growth for 9MFY16 was weak at -1.9% y-o-y, compared to +13% y-o-y for the private sector. We believe that this was driven by multiple factors. Firstly, during this period equity markets were buoyant, suggesting that bancassurance partners may have been focused more on selling equity mutual funds. Secondly, we believe that during this period the equity stake deal between Max Life and Axis Bank was under discussion, which would have had some impact on sales via Axis Bank branches.
There has been significant improvement in growth momentum over the last two months (Jan ’16 and Feb ’16 growth was +20% y-o-y, and +33% y-o-y,). With the Axis Bank equity transaction behind us, we believe that growth trends in FY17 should be much better than those in FY16.
Solvency ratio–higher than the regulatory requirements
Max Life has high solvency at 402% as of Dec ’15 (vs. a regulatory requirement of 150%). Thus, it does not need any fresh capital and is likely to pay out most of the incremental profits as dividends.
Some of the excess capital could be utilised for potential M&A. Max has indicated in the past that it is open to acquisitions at reasonable valuations provided that the deal brings strong bancassurance partnerships.
Product mix – focus on traditional policies
Max Life continues to focus on maintaining a higher share of traditional policies compared to its peers. Strong agency distribution and bancassurance tie-ups and a good suite of traditional products have enabled the company to achieve this product mix.
For 3QFY16 the product mix was participating 66%, non-participating 10% and ULIP 24%.
Stake sale to Axis Bank helps cement strong bancassurance partnership
In May 2010 MLIC entered into a bancassurance relationship with Axis Bank for the first time; the agreement was renewed in Feb 2016.
On 29 Feb 2016, MFS and its joint venture partner Mitsui Sumitomo Insurance Co. (MSI) collectively sold a 4.99% equity stake in Max Life to Axis Bank. Of this, MFS sold a 3.99% stake to Axis Bank for an aggregate consideration of R765.6m.
Following this transaction, the shareholding of Max Life is as follows: MFS (68.01%), MSI (25%) and Axis Bank (5.99%).
We believe that this transaction helps Max Life to cement its partnership with a strong bank franchise like Axis Bank. Bancassurance now contributes ~52% of sales for Max Life (most of this coming from Axis Bank), compared to only 4% in FY10 before this agreement.
IRDAI regulations now allow banks to tie up with more than one insurer. Even if Axis Bank were to start selling products for other insurers at a later date, we believe that Max will still be better off as Axis Bank employees are already familiar with Max products and have been selling them for more than five years now. Also, in such a scenario MLIC could tie up with some of the other banks that have captive insurance companies.
Strong agency channel is a key strength for Max Life
Agency distribution has historically been a key strength of Max Life vis-à-vis its peers as the company believes advisory-based sales are best suited for life insurance. It has made significant investments in the recruitment, training and development of its agency force.
Agency accounted for 32% of new business premiums in 9MFY16, compared to 28% in FY15 and 70% in FY10 (there was no tie-up with Axis Bank until FY10).
Over the past 2-3 years the net number of agents outstanding has declined marginally; the focus has been on recruiting and retaining more productive agents, which has helped push up the overall efficiency of the channel.