Max Financial Services Ltd Q2 FY2023 Concall Summary

Key Takeaways

• Proprietary channels drove growth while banca reset: Offline and online proprietary channels grew 21% and 35% respectively, offsetting a 7% banca decline as the full impact of open architecture played out.
• Margins expanded on structural product improvements: New business margin rose 140 bps YoY to 26.7%, driven by margin uplift across every product line from design changes and repricing, not just mix shift.
• Axis Bank counter share stabilized after the open-architecture shock: Share fell 28–30% but has held steady for nine months, giving management confidence it can be maintained, though no contractual floor exists.
• Transaction approvals remain the overhang: Management is hopeful for MSI approval within weeks and Sumitomo swap approval in the near future, but declined to answer valuation questions, citing ongoing regulatory discussions.
• What to watch next quarter: Whether the banca counter-share base effect fully runs off by Q3-end as guided, the pace of new bank partnership contributions, and any regulatory movement on the MSI transaction.

Proprietary Channel Strength

• Offline proprietary growth: Grew 21%, powered by a 15% improvement in active advisor productivity, 15% growth in top advisor count, and 31% growth in life advisor activation, all driven by simplification and positive changes in advisor rewards programs.
• Online proprietary growth: Grew 35%, driven by deeper penetration into existing customer segments and entry into new segments including NRI, home maker, and self-employed.
• Online savings surge: Launch of an industry-first short-term savings product with best-in-class returns led to 100% growth in the savings run rate and enabled the online savings portfolio to grow 7x year-on-year in H1 FY23.
• Direct customer acquisition: Frontline sales productivity improved 14% alongside headcount growth of 23%, strengthening the direct acquisition engine.
• Short-term digital product economics: The new short-term digital plan carries attractive rates and is a good shareholder IRR product, though its margin profile may be slightly lower; it is part of a portfolio strategy targeting Millennials and savvy consumers.

Banca Channel Reset

• Banca de-growth: The banca channel de-grew 7% in H1 FY23 due to the full-blown impact of open architecture and general slowness in banking channels as banks focused on building their liability business.
• Counter share loss: When open architecture is implemented, incumbents typically lose 30–40% of counter share; Max Life lost close to 28–30%.
• Counter share stability: Counter share has remained at the same levels for the last nine months, giving management confidence in sustainability, though no contractual floor exists with Axis Bank.
• Base effect timeline: The base impact of counter share is expected to run off by the end of Q3 FY23.
• Axis Bank channel investment: Manpower investment in the Axis Bank channel is ramping up as planned and will continue; the benefit will amplify when business volumes start slowing.
• Protection counter share anomaly: Max Life's counter share on protection sold in the Axis Bank channel is higher than the average 70% despite its pricing being higher than competitors.
• Bank ecosystem headwind: Across banks there has been a slowdown in focus toward life insurance as the focus on deposits has increased; credit picking up has propelled the need for more liabilities, and for some time there may be a bigger impact on the life insurance space.

Tripathy: "It's very common that when an open architecture gets implemented the incumbents loses anywhere between 30% to 40% of the counter share. In our case we lost about close to 28% to 30% as the full-blown open architecture comes in."

Margin & Product Mix

• Margin expansion: New business margin expanded 140 bps year-on-year to 26.7%, driven by an increase in profitable product mix resulting from product innovation across new categories.
• Structural product improvement: The margin expansion is not primarily a mix story; every product line saw margin improvement because of new product categories launched in H2 last year, including participating design, protection repricing, and non-PAR savings design, all of which underwent structural margin improvement.
• Non-PAR savings mix: Non-PAR savings stood at 36% of individual APE in H1, with success in annuities (up 86%) sitting in the non-PAR line; management expects the non-PAR mix to remain fairly steady and stable, range-bound at current levels.
• Retail protection growth: Retail protection grew 11% in Q2 and saw 22% sequential growth from Q1 to Q2, driven by a foray into the self-employed segment with two new plans featuring frictionless onboarding.
• Protection demand moderation: Protection growth was lower than anticipated, largely because of demand moderation after COVID fear abated in consumers' minds; management reaffirmed the long-term opportunity given severe underpenetration.
• Annuity business growth: Annuity business grew 86% in H1 FY23, strengthened by enhanced annuity offerings with flexibility in premium payment terms and extended entry ages, plus the commencement of the Max Life Pension Fund Management business.
• New business strain: Strain increased because of reserving requirements of the non-PAR design, specifically the annuity design where strain is higher, and the non-PAR long-term income mix; the increase in expenses is not the reason for added strain.

Distribution Expansion

• New bank partnerships: Tied up with Tamilnad Mercantile Bank and signed an MoU with a Small Finance Bank, name to be disclosed later; both will be open architecture counters.
• Offline broker ecosystem: Entered into agreements with Bluechip, Muthoot, Turtlemint, NJ, and Vkover in the offline insurance broker ecosystem.
• New partnership scale: Compared to Axis Bank or Yes Bank, these new bancassurance partnerships will be small counters; the approach is to increase the bouquet of bancassurance relationships, and both will add to distribution muscle.
• Pension fund ecosystem: Set up the pension fund management business for NPS; Max Life Insurance is already an annuity service provider, and the company has applied for a POP license to become a full-suite provider in the NPS space.
• Expense investment continuing: The expense increase trend line will continue as the company invests in distribution, including own branch offices, proprietary channel resources, and non-proprietary channel resources; the Q2 expense ratio increased to around 19%, in line with the stated objective.

Operating Metrics & Financials

• Consolidated PAT: Consolidated PAT stood at INR130 crore, up 56%, largely due to lower tax expenses in the corresponding period.
• VNB growth: Value of new business grew 7% to INR586 crore.
• Opex ratio: Policyholder opex to GWP ratio improved to 15.1% from 15.5% last year, as opex increased 9% but gross written premiums increased at a higher rate.
• Non-operating variance: Negative INR545 crore, largely because of interest rate movements (around INR502 crore), described as transitory in nature because the portfolio is hold-to-maturity.
• Persistency: 13th month persistency of regular limited pay premium policies at 84% and 61st month at 50%, more or less stable; Max Life's 13th month persistency ranked number one on a number-of-policies basis for Q1 FY23.
• NPS improvement: Overall company NPS improved 2 points from 49 in March 2022 to 51 in September 2022.
• Group term life decline: Sharp decline year-on-year because last year was a COVID year with higher pricing to corporates; as mortality normalized, pricing to corporates reduced.
• Q1 to Q2 margin improvement: The historical pattern of margin improvement from Q1 to Q2 is because Q1 is lower on sales volume and Q2 is higher, with expense allocation methodology on an actual basis, not from specific changes in margin profile or pricing.

Singh: "Bulk of it around INR502 crore is because of interest rate movements which you are aware it's transitory in nature because generally our portfolio is all hold to maturity."

Transaction & Regulatory Overhang

• IRDAI penalty: IRDAI issued a penalty of INR3 crore for alleging non-compliance on certain items of its approvals; Max Life paid the penalty while maintaining its belief of not having committed any wrongdoing, stating it wants to move forward with the transaction.
• MSI transaction timeline: Management is very hopeful that over the next few weeks approval for the MSI transaction should come through; the first part of the transaction must happen in this financial year.
• Sumitomo swap approval: Management is very hopeful that in the reasonably near future approval should be secured, but is yet to hear from IRDAI.
• Axis Bank balance 7% stake: The company will file for approval subsequent to the MSI transaction; it is highly likely the application will be made this financial year, but it is hard to commit to completion this financial year.
• Transaction pricing: Management is committed to moving ahead with the transaction using the same methodology that was followed earlier.
• Valuation questions deflected: When asked about widely different price points in recent transactions and whether they should be open to investigation, management stated it is a transaction in a private company using legally permissible valuation techniques and that regulators and the ecosystem should decide.

Tripathy: "We have gone public to communicate to everybody that we don't believe that there is a wrongdoing. But at the same time we want to move forward with the transaction. And hence we have paid the penalty."

Guidance & Commitments

Key Metrics