EUR 120.00 For Business Accounts Only

MOSL : MAX FINANCIAL SERVICES: Premium growth modest; VNB margin improves to 31.3%

.  MAX Financial Services: Premium growth modest; VNB margin improves to 31.3%

(MAXF IN, Mkt Cap USD3b, CMP INR710, TP INR800, 13% Upside, Downgrade to Neutral)

Product mix shifts in favor of Non-PAR; Banca growth remains under pressure

• MAXLIFE reported a modest growth in total premium with annual premium equivalent (APE) witnessing a decline of 7% YoY. VNB, however, saw flattish trends, driven by ~220bp YoY expansion in margins to 31.3%. Within segments, Non-PAR continues to see healthy momentum, led by the annuity business, while Individual Protection too saw an improvement. Others remained muted under pressure.
• Growth in APE was driven by the proprietary channels, which grew 16% YoY and contributes ~36% (+750 bp YoY) of overall APE. On the other hand, the banca channel APE declined 17% YoY and dragged the overall APE. This is due to the adoption of open architecture at banca partners and a high base. MAXLIFE expects momentum to resume after a couple of quarters.
• We expect VNB margin to sustain at ~29-30% and estimate 13% APE CAGR over FY22-24. This would imply an 18% VNB CAGR over FY22-24E. We remain watchful of further development on the underlying merger and given the modest growth, led by slower traction in the Banca channel, we downgrade our rating to Neutral with a TP of INR800. This is based on 2.2x FY24E EV and a holding company discount of 20%.

Persistency trends stable; APE growth remain under pressure

• Gross written premium grew a modest ~9% YoY (in line) within which single premium grew 21% YoY, while renewal premium grew at 13% YoY. However, first-year premium saw a decline of 9% YoY. Shareholders pre-tax profits declined 25% YoY to INR530m (-42% QoQ).
• In 2QFY23, individual APE declined 7% YoY, similar to the total APE decline of 7% (3% beat). Among the segments, Non-PAR savings grew 5% YoY (+66% QoQ). Retail Protection too saw a pick-up and grew 11% YoY, while Group Protection declined 49% YoY. Thus, total Protection declined 24% YoY, while PAR declined 23% YoY. ULIP, on the other hand, saw flattish trends.
• The business mix thus improved, with Non-PAR increasing to 38% in 2QFY23 vs 34% in 2QFY22, while Protection (12% vs 16% in 2QFY22) and PAR (17% vs 20% in 2QFY22) witnessed a decline. The share of ULIP stood at 32% in2Q23 vs 30% in 2QFY22.
• Absolute VNB stood flat YoY at INR3.7b (19% beat). VNB margins improved 220bp YoY to 31.3% (v/s 21.1% in 1QFY23) on the back of improved product profitability. EV grew at 13% YoY, while Operating RoEV came in at 15.7%. Adversely impacted by the interest rate movement, RoEV (including non-operating variance) stands at 7.6% in 1HFY23.
• On the distribution side, Banca APE declined 17% YoY, while Proprietary Channels witnessed a healthy growth of 16% YoY.
• 13th/61st month persistency was steady YoY at 84%/50%, respectively, while other cohorts too were steady. On the cost front, opex-to-GWP ratio improved 70bp YoY to 21.0% (v/s 22.9% in 1QFY23).

Highlights from the management commentary

• MAXF has enhanced its annuity offering with extended entry ages and flexible payment terms, leading to 86% YoY growth in its annuity business in 1HFY23.
• In Q2FY23, the company has tied up with Tamilnad Mercantile Bank for a period of five years and also signed a partnership with a Small Finance Bank
• With the adoption of a full-blown open architecture model at banca partners and increased focus to raise deposits by the banks, bancassurance has witnessed a decline in APE.