Motilal Oswal Financial Services has maintained 'Buy' rating on MAX Financial Services with a target price of Rs Rs 1,200 per share. MAX Life Insurance (MAXLIFE) is among the top five private insurer and the only non‐bank sponsored life insurer among the listed players with market share of 15.6%, as per sum assured. MFS holds 72% stake in MAXLIFE (the only subsidiary that it operates).
Investment rationale
Improving Product mix: MAXLIFE has increased its focus on Non-PAR and Protection segments, the share of which has increased to ~44% in FY21 v/s ~16% in FY17 as Protection/Non-PAR savings grew by 40%/58% CAGR over FY17-21. The share of Non-PAR savings increased faster to 30% in FY21 v/s 18% in FY20, with the launch of a new product 'Smart Wealth plan'. This segment’s share will continue to remain between 25%-30% as it offers better ability to hedge through the FRA market. Protection is a long term growth opportunity for the entire sector. The management’s focus is on maintaining prudent pricing in this segment. Overall, MAXLIFE believes in maintaining a balanced product mix and expects FY22 NBP (New Business Premium) growth between 15%-20%.
Strong distribution channel: MAXLIFE has one of the most productive agency channels, with an improvement in agent productivity to Rs 250k in FY20 (v/s Rs 150k in FY17). The management remains focused on pushing Non-PAR and ULIP through partner channels, and traditional policy (PAR) and Protection through its own channels. It will continue to invest in growing its proprietary channel, which accounted for 28% of total APE. The management’s focus is also on promoting the Axis Bank brand and is targeting higher cross-sell to AXSB’s customers. It expects Yes Bank’s banca share to increase, in line with the growth of MAXLIFE.
Persistency Improves: Persistency improved with 13th/61st month improving by 100bp/200bp to 84%/54%. In other cohorts, persistency trends remained stable (barring the 49th month). In the medium term, the management expects persistency to reflect an upward trajectory. The 13th month persistency can reach up to 86% (v/s 84% currently). We expect business growth between 15% and 20% over FY22.
VNB growth steady: VNB doubled in the last three years, aided by strong trends in the Non-PAR and Protection segment. Tightening of operating expenses and launch of new Non-PAR product in FY21 helped in VNB margin improvement. It expects a 200-300bp VNB margin improvement over the next 2- 3 years.
Maintains healthy provisioning buffer: MAXLIFE witnessed total net claims of ~Rs 1.2 billion in FY21 on account of COVID-19 deaths. It made total provisions of Rs 3.4 billion due to a likely adverse COVID-19 experience in FY22, and now holds an excess provision buffer of Rs 5 billion on its Balance Sheet - nearly 4x the net claims witnessed in FY21. Operating RoEV stood at 18.5% (v/s 20.3% in FY20), impacted by higher COVID-19 provisions.
Valuation & View: MAXLIFE continues to demonstrate resilient performance amid a challenging macro environment. Healthy product mix towards high margin segments and strong APE growth aided VNB growth. Strong push via the banca channel has aided premium growth, while the proprietary channel is showing healthy traction. We expect 22% CAGR in APE growth over FY21-23E, with VNB margin improving to 26.8% by FY23E. This would enable 26% VNB CAGR over FY21-23E, while operating RoEV sustains ~22%. We maintain our Buy rating with a TP of Rs 1,200/share.
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