Prior to ICICI Prudential Life’s IPO in September 2016, Max Financial Services (holding company of Max Life Insurance) was a market darling. It gained prominence in July 2017, when the street was buzzing with the possibility of a merger between HDFC Life Insurance and Max Life. It couldn’t happen and three years later he struck a much smaller deal with Axis Bank. These are significant events because whenever there has been a massive revaluation of the stock, it has been led by these corporate actions. That’s not to say that Max Life Insurance as a franchise is any less powerful. In fiscal year 2019, when, with the exception of HDFC Life, no larger player had a significant share of pure protection plans, Max Life came close with 10% of the share of these products in his overall profile. While the number increased to 18% in June FY23 (Q1), a faster increase occurred in savings products.
While the general industry trend has moved more towards these plans than protection plans due to market conditions, the shift in dynamics has affected Max Life more than others for two reasons. Until fiscal 2020, the stock was trading at more than 5 times the one-year futures price to intrinsic value (P/EV). The Street gave the stock these ratings, due to its strength on the protection side and its retail-focused business relative to its peers. But as some of these factors fade, this has an impact on valuations.
With nearly 22% of the value of new business margins (NBV) through fiscal 2019, it was among the most profitable life insurance companies. But slowly it’s losing that badge given that peers were also at 27% plus VNB margin range in FY22. of an exercise to compensate for its activity. With the top three life insurers, this is not so much the case.
The stock is trading at 2.7x estimated FY23 P/EV is undervalued relative to its peers and at a good discount to its previous multiple of 5x. Although the changed trading dynamics may make it difficult for the company to quickly recoup its premium valuations, we would recommend existing investors hold the stock for now as the relative weakness against peers appears to be captured in the stock price. Max Financial stock.
The range of products
In FY17, the share of participating products (PAR) in APE or annual premium equivalent was 54% and 30% of premiums came from unit-linked insurance plans (ULIP). In FY22, the mix changed significantly. The contribution of PAR fell to 20%, while the share of ULIP increased slightly to 37%. What has changed significantly is the combination of PAR-free products and protection. The protection share increased from 7% in FY17 to 13% in FY22, while the non-PAR share increased exponentially over this period from 9 % to 29%.
While it can be said that almost all insurers are trying to reduce exposure to PAR products including LICs and non-PAR (savings) products have seen strong growth especially in the last two years, for Max Life, the impact of these changes alters its basic business model. Additionally, the share of retail business, particularly on the protection side, appears to be uneven, with the number dropping from 10% in the first quarter of FY22 to 7% in the first quarter of FY23. In fact, in the first quarter, the share of personal protection fell below the levels of fiscal 2020. Among all, protection plans show the highest profitability, while that of savings products is also high, and others such as PARs and ULIPs are relatively low in terms of profitability. While the current product mix may be favorable in terms of VNB margins, this may not be sustainable in the long term.
Second, even as the big players spread their growth evenly across all quarters of a fiscal year, Max Life’s model remains focused around the JFM or January, February, March model. This is quite visible in the movement of VNB margins, which tend to peak in the JFM or Q4 of a fiscal year. For example, in FY22, when the blended margin was 27.3%, 200 basis points (bps) higher than a year ago, through the December quarter, it was not close to the average for the year as a whole. The fourth quarter VNB margin of 31.9% boosted profitability. This exposes the company to potential risk of changes in income tax rate structures, as generally high capital inflows during the JFM period are associated with tax planning and relief. Second, with a 27% share of non-PAR revenue in Q1 FY23, the company is at risk of market value losses in FY23 as this book may incur hedging costs. Since the products are returned, in a scenario of rising interest rates, this puts pressure on businesses to maintain yield. With increasing competitive intensity in the non-PAR segment, it might also increase investment risks for companies.
Max Life’s strength has always been its superior bancassurance network, although it is not the only bank-run (or lender-run) life insurance company among the top players. However, from 71% of APE through the banca channel in FY17, the share fell to 65% in the first quarter of FY23, despite strengthening its ties with Axis Bank.
Axis Bank accounts for more than 60% of Max Life’s banca business, but has come under pressure recently due to bank constraints. Meanwhile, its proprietary channel’s share has grown and the company plans to increase it to 35% in the future (see chart). Being an expensive exercise, its impact on margins could be around 200 basis points in FY23. While this may be a one-time cost, the change in thought process could hurt profitability in the interim.
As mentioned earlier, the downside risks related to the factors mentioned above seem to have been priced in for the time being. Existing investors can hold the shares at these valuations. He can at best be a market player.
Expecting the stock to outperform its peers or the broader market from now on can be a long shot.
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