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Max Financial Services Ltd
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Ladies and gentlemen, good day, and welcome to Max Financial Services Limited Q1 FY '20 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Jatin Khanna, CFO, from Max Financial Services Limited. Thank you, and over to you, sir.
Thank you. Good evening, ladies and gentlemen. Thank you for being part of Max Financial Services' earnings call. My name is Jatin Khanna. I'm the CFO for Max Financial Services. Before proceeding with the performance highlights, I'd like to introduce my other colleagues who are with me on this call. I have with me Prashant Tripathy, MD and CEO of Max Life; and Analjit Singh, Head of Strategy for Max Life. I will first talk about the key highlights for Q1 FY '20, and then briefly recap the strategic priorities outlined in the last few calls. So pleased to share that MFS Board has approved earlier today a preferential adjustment to MSI, which is our JV partner in our life insurance business, Mitsui Sumitomo, against acquisition of substantial stake headed by MSI and Max Life. MSI will be issued 21.45% stake in MFS at INR 421.67. In exchange, MSI will acquire 19.98% stake in Max Life from MSI at INR 80.89 per share. MFS also has a call option and MSI has the corresponding tools to acquire residual 5.24% stake in Max Life at the same price. The transaction closure is subject to shareholder and regulatory approval. The delayed approval, which are required also from IRDAI, Department of Economic Affairs and CCI, if required. We are still examining it. Now moving on to the quarterly results. Max Financial had a robust growth of about 11% in revenues to about INR 3,949 crores. Their consolidated PAT has grown to 65% to INR 54 crore. Moving on to Max Life, Max Life MCEV full dividend has grown by 22% to INR 9,314 crores. The operating MCEV has grown by about 15%, which is in line with our previous quarter, which is quarter 1 of FY '19. Due to sales seasonality and investments made in propriety channels, the impact of cost overall is higher for Q1. So RoEV tends to be [ more ] relative to full year. Our full year RoEV is expected to be in line with the historical trends. Value of new business post overrun has grown by about 33% to about INR 134 crores and structural NBMs pre cost overruns have expanded by about 150 bps to 25%. And the post cost overrun NBMs have also expanded by 150 bps to 20% relative to last year -- same quarter last year. Max Life individual APE has grown at a strong 23% to INR 685 crores with increased contributions on nonparticipating products. Max Life has performed in line with industry growth of new sales by growing 23%, in line with private insurance growth and maintaining its market share at about 8.5%. Our bancassurance new sales has grown by about 26%, predominantly with Axis Bank delivering 16% growth and YES Bank about 75% growth. We've opened [ 18 ] new offices in quarter 1 FY '20. Total offices has increased to about 345. Our proprietary channels have grown by about 15% Y-o-Y. You will see some slowdown here relative to our overall growth of 23%, but that's due to transient impact caused by transient impact caused by agency restructuring driven by new [ client ] recommendation. So we factor in July performance because the fourth quarter was where we were transitioning and it will be changing, when we factor in our July performance, we are today in July, our proprietary channel has been pretty much growing in line with the overall growth of the company and therefore, they have made up for whatever lost share in the first quarter within the month of July. So there is no lag on our trajectory of Max Life growing, I think, in line or faster than the rest of the business. So we are on course to increase the proprietary channel share to about 35%, which currently stands at about 43%. Max Life APE channel involving few APE channels that delivered positive margins and the probability of -- so -- and the profitability of proprietary channel is now better than nonproprietary channel, which is causing us to grow this channel sharply. Continuing with a strong focus on digital, the e-commerce channel has also grown 49%. The individual protection sales has grown by about 23% year-on-year, in line with the overall growth. However, group protection sales growth has been modest at about 8%, which, as you know, is not a core focus area [ any which way ]. GWP grew a strong 14% to INR 2,361 crores because of 12% growth in renewals to about [ INR 1,740 crore ], which essentially was led by a combination ratio of 89%. Our 13-month persistency has improved by about 231 bps to about 86%. And our claims paid ratio, again, at 96.8% in quarter 1 is pretty much at the market-leading levels. Solvency surplus is at about INR 1,500 crores with a solvency ratio of about 225%. Our AUM [ to an end ] stood at about INR 64,000 crores, growing at 18% year-on-year. Max Life is now the fourth largest asset manager of life insurance AUMs and eighth largest, including mutual fund retail AUMs. We're participating AUM at about INR 34,000 crores. Max Life is the highest-value participating AUM in the private industry. Max Life improved its ranking by 8 places to 35th among great places to work and was among top 20 BSSI places to work. Only life insurance company top 100 as far as great place to work [ institutional ] Economic Times study. So we are very pleased to report that our people focus remains really sharp. So let me sum up on that count. Max Financial Services continues on its trajectory of driving strong shareholder outcome, whilst new strategic plan. With significant investments in proprietary channels, sustained efforts to deepen our bancassurance relationships and a very sharp focus on cost improvement and product mix, we are progressing our exploration of a 25-25-25 target on VNB, NBM and margin over next few years in terms of the growth. On that note, we'll hand over to the moderator to open the floor for Q&A.
[Operator Instructions] The question is from the line of [ Anuj Bhavi ] from [ Karnalin ] Asset Management.
My first question is just wanted to understand the rationale behind this transition because MSI is overall technology distinct and the life insurance remains same. So just wanted to understand whether like we are simplifying the holdco and life insurance, 2 entities into 1 entity because now if I consider this potential 5.24% remaining shareholding with MSI, the other shareholder [ return outstanding will be only excess ]. So if you can explain the rationale for this transaction you do, please.
Sure. So MSI invested in Max India, which is a holding company. Used to be a multibusiness conglomerate. Now today, MSI's only business is Max Life. You rightly said that there is a sort of requirement for simplifying the structure [ into MSI ] but that's still so much later. But for now, MSI share talk is essentially -- I mean predicated on the [ past bid ] because MFS is the sole business. So they have access to a listed company as opposed to being an unlisted company. So that's their sort of critical thing to achieve from this share swap.
Do we need liquidity only if they're planning an exit or are there other reason maybe like -- because earlier, the deal, which was about to happen with ICICI Life, it could not get to because of the complicated structure where a life insurance company cannot be merged with a long life insurance company. So what is -- out of these 2 things, what is the reason for this transaction?
They are fully committed to this business. They are not looking at any [ DRIP ]. What the swap does is that they get swapped into a listed company. There is part of the shareholding, which we will eventually acquire. We have about 12 months or so to make that acquisition. But it essentially -- you are right, they are simplifying the structure because then we can -- we pretty much will buy shareholding with us other than, of course, for Axis brand, which are the 3% ownership, so it does simplify the structure we have this time.
Lastly, in fact better this current structure like if I paid [ a real thing ], which has started our transaction with HDFC Life. Now if we own 100% of the life insurance, does this make things simpler like that kind of transaction, if it has to happen today? With this kind of transaction, with this kind of structure better, it will be more simple.
So I would say yes and no. Yes, because the structure [ gets in with life ]. No, because there is no transaction companies [ with SBI ] or any other life insurance for that matter.
The next question is from the line of [ Prashant Pawar ] from [ Newbury ] Capital.
Just wondering [ the ] arrangement with Axis Bank, just routine update. Anything happening on that front for the bancassurance side or anything?
So our relationship currently secured in September 21. So they'll continue. If and when there is a conversation on extension of the relationship, we would -- something crystalizes on that front, we will be more than happy to come and share. But at this stage, suffice to say that the partnership is still September 21 and has continued strong. And it's firing well as I spoke about in my initial comments.
Okay. Just a follow-up to the previous question. So you were saying that there is no intention of any exit by MSI?
No, no. No intention of an exit.
We'll move on to the next question that is from the line of Dhaval Gada from DSP Mutual Fund.
Just a couple of things. First is on this transaction that we are doing with Mitsui Sumitomo. So just if you could explain the cash flow implications that will happen. And also, how are you going to fund the balance stake of Max Life given that we have an obligation of acquiring Axis Bank stake as well each year? So that is the first question. And second is you mentioned about the call option for MSI. So what is the call and the duration of the call and put? If you could clarify that part.
So let me take the second question first because that sometimes will result into the answer to the first question. So the [ first time call it ] demanded almost a 12-month arrangement wherein we have to acquire this ownership within the next 12 months. And by which time -- now relevant to your second question, by which time we have few options we are working on. We could potentially have liquidity to take care of the sort of acquisition of that stake. At this stage, I can only say [ as much ] and not more because of -- we saw -- none of those options have been crystallized or finalized. As some of those get finalized, we'll be happy to share more details.
Okay. And sort of just one more aspect around this. So what is the reason for doing a 20% stake and not more? I can understand beyond 25%, it could trigger another offer. But what was the reason of doing just 21.45% stake?
So it was also an opportunity for us to, at some point, consolidate our ownership in the business and limit the dilution for our shareholders. And after employees doing a lot of work, we thought it's most optimal that we just swap 20% to 21.5%. And the balance 5% we can acquire, which we can manage through our own resources [ for the next 12 months ].
Okay. Understood. And any thoughts around how we want to sort of remunerate Axis going forward in terms of when the contract comes for renewal in '21? I mean any thoughts around that? Does this, in any way, positively or negatively impact? Or there is no -- basically no sort of implication per se to that? I mean does it any way help or doesn't help in any sense?
It's a little bit of our sort of -- I mean speculative question because the more we do in September '21, so I don't know if I sort of -- I can answer that question for you today about how will this thing impact our Axis arrangements on that. So let something happen there, and then we'll be happy to share more details.
Okay. And just one question on the margins and VNB growth. So the growth has been pretty strong. And -- so just some comments around how -- for the rest of the year, the margin trajectory is likely to sort of move? And some comments around metrics around the agency channel and direct channel in terms of kind of potential that they are sort of building over the next 12 to 24 months, in terms of their share and the overall distribution and how that could help on the margins.
Yes. I'll request Prashant to take that one. Prashant, are you on?
Yes. I am on. I think the overall traction on margin is on the predictable trajectory, the guidance that we had given. And I expect that when we finish the year on a net overall basis, we should come closer to 21%, 22%. That's where we should land up. In terms of overall agency performance, we are very pleased with the progress that we're making. [ You didn't see ] earlier, we've communicated that we were going to work with New York Life 3 of their top [ retire agency ] folks to come and work with us. In the first quarter, we rolled out most of the recommendations, which were given, predominantly around building an agency, which is sustainable, enlarging the pool of high productive or highly productive agents, looking at our entire training and scaling methodology and looking at the overall sales processes. So we have taken those initiatives in quarter 1, and very happy to report that in 4 months, which is including July, agency is growing quite well. It is, of course, about 20% growth that we've seen. As a result, our own channels, which is proprietary channels closer to 30% growth. These numbers are a bit higher than the first 3 months because we have started to see a turnaround in agency or higher growth in agency. And as we finish the first 4 months as a result of that, our growth appears quite robust. We are close to about 30% growth as against 23%, which was for the first 3 months. So the business is doing well. It is on the predictable trajectory that we had described and the margin seems to be holding on. This is the first year of full investment in agency. As you may remember, through last year, we were making investments. We are opening offices starting quarter 2. So in a sense, this is the first year of full investment or near full investment that we had made in agency. And as a result of this, we will start to see the benefit of this going forward as we progress from this year to the next year.
The next question is from the line of Madhukar Ladha from HDFC Securities.
Any update on the promotion of pledges? I don't think there's been any reduction on that. And is this being slimmed down also to kind of provide an exit to the promoters or some partial exit in promoters?
Well, not really because frankly, like one of your other friend asked the question that MSI is at 21.5%. They could have been at 25%, et cetera. So there is hardly any headroom for MSI there frankly to help a promoter at any lower in terms of monetization or not. So they could slowly defer [ in case of the promoters and the sales group ]. Secondly on the question around the pledges, actually, we had spoken about sort of multiple steps through which the pledge will get addressed. The first step of that, which is the transaction around Max Healthcare wherein there was some advance, which was to come, had come, which [ has to be the price ] because it used to be [ in the days when it was around ] 500 bps from the levels it used to be. And there are -- so there's more monetization to banks which are planned over the course of next, I'd say, 9 to 12 months, which will further -- I mean [ that being ] sort of bring down the pledge level. So I mean clearly, we have worked -- I mean not we -- I mean they are working on a plan and their plan is being implemented one after the other. There is something more, which is happening on the monetization front, I think, in the current quarter itself. So one after the other, I think slowly and gradually the plan is to bring down the pledge levels over the next 12 months.
Okay. Any -- can you comment on where the promoters have invested and whether they are being able to service those debts adequately right now? Yes.
So they were broadly, I think, the 2 areas where we've invested. The first investment was around consolidating their shareholding count about 30% to about 40%-plus. So [ virtually Standard ] and MFS has been monetized but the rest of it in Max India and Max Venture contributes. So that was one predominant reason. The second reason was that the return on investment in the hospitality space internationally. So the second reason why we -- so second reason why promoter create it. And what I can confirm to you is that at this stage, there is no default on any of their borrowing. So to that extent, interest servicing or whatever repayments as and when they will become due are all being [ undone ] after the last information that I have. Of course, [ these are non-distinct ] settlements. So we [ I am with them... ]
Got it. And final question, more on the business side. So you're seeing a good increase in nonpar savings products. Can you talk a little bit about which are these products, and are these the deferred annuity and deferred pension products that some of your competitors are selling, one of our competitors mainly selling?
So yes, we have seen increasing proportion of nonpar savings design, and these are not therefore annuity designs. These are short-term interest rate guarantee design, [ life pay ], 10x or 10 years from that period. We actually prefer that because the duration is small. It is a tactical play for us like we have always said that we would like to be in the range of about 15-odd percent, and overall nonpar mix, including protection to go up to 25%. That's the zone that we'll operate in. Overall, it was an attempt to optimize the margin with the growth. But we'd like to clarify 1 or 2 things. A, we prefer nonpar savings only if it is hedged. So we're not taking positions which are unhedged; and b, there is going to be limitation in terms of how much we'd like to sell. Historically, we have always been in and around between 10% to 20%, and we'd like to maintain that share. So your observation is correct. However, I would like to clarify that this is not going to be the major driver of our growth in our 3-year strategy.
Understood. And any change in thought process on group protection? Other companies are growing extremely rapidly on that side. But that doesn't seem to be a case for us.
Yes. Like I always mentioned, we are an individual player. Our credit life portfolio is more tactical. And while we are growing, I must highlight that some of our partners have seen real struggle because NBFC crisis, which is going on. On a more steady-state basis, I'd like to see a growth about 20%, 25%. So that's our status unless things [ were to go down ]. When we talk about 25% growth or 35% margin, et cetera, you should take predominantly individual business being the driver of it.
[Operator Instructions] The next question is from the line of [ A. Jeff Hembree ] from B&K Securities.
Sir, my question is with respect to the protection growth again. On the retail there also, we haven't grown as much as the competition for the quarter. Is there any specific reason towards or you are seeing a structural growth at these levels [ 40-odd percent ] on the individual [ AP ] protection?
Actually, protection we have shared in our disclosure earlier, the large part of protection selling happens through the proprietary channel. Now Prashant had mentioned about the structure weakness that we kind of witnessed there. So there was a bit of a slowdown there. But there is a new product, which has got launched in the month of July. The uptake is positive. We are -- we continue to see significant volumes on NOP, number of policies being sold, but there was a case side stress, which can object to a muted growth this quarter. But as we're going to look forward in the quarter ahead, we do see the trend reversal happening again here. And our July performance has been stronger, the numbers again and prediction are also strong.
So basically, there was a movement from the regular premium to limited pay product design. And unfortunately, for the first 2 months of the quarter, we didn't have a limited pay product, which we've launched somewhere at the end of May. So we just had 1 month of limited pay. As limited pay becomes larger proportion of our [ city ], you will start to see increase. And we are hoping that we will be aligned to market kind of growth rate or even better.
Okay. And sir, my next question is with respect to your changes on CRNHR. So we have always had a higher ratio. So what is the rationale for bringing it down? And even now, we are not at low as the competition so what is the big adjustment happening there?
So basically, it was on the basis of review. We had to align to 2 things. One, on economic capital, what kind of account rate do you apply. And we kind of look at the equity returns over the risk-free rate and to us, that was in the range of 3.5% to 5% is what the range is. So 5 years indeed on the high end. Also, we noticed that most of our competition is in the range about 3% to 4%. So we just thought it would make sense to work to 2 realities. One, the excess over the [ other 3 ] on equity basis, and be more aligned to where the market consistent practices are. And that's why we reduced from 5% to 4%.
Does this [ percent of share ] depend on the mix there anyway? Or is this more like alignment, et cetera?
Yes. Unfortunately, there is no straight signs to it. And there are no guidelines or recommendations around it. One would -- one could debate. However, there's another line where you have to put the cost of guarantees, et cetera. So between the 2, we'd like to cover. This is not like hugely scientific where you could arrive at a number. This is on the basis of the judgment that one applies, and we find that the 4% is reasonably conservative from our perspective.
Okay. Okay. And on the expense ratio, there was a slight uptick to this. And this time, our margins expanded. Is it primarily because of this realignment tool, CRNHR? So what was the impact of margins due to the expense ratio going up?
Yes. So let me clarify that. The expense ratios have gone up and rightfully so as expected. We have opened in last year close to about 135 new offices because we believe that we will like to expand our own channels, and that's been a part of the strategy. Now first quarter last year, we have hardly made any investments. The investment actually happened through second quarter until now. So this indeed is the first quarter where the entire base has been upgraded in terms of total expenses of new channels coming on board. And that is why quarter-on-quarter, you will see an increase, and that is -- as for the budget that we have planned. Now as our own channels start to fire as they are, and they are growing as for the expectation, we will start to see the scale advantage and some of these ratios will get settled. My sense is that somewhere around next year, we will find ratios to be tapering down significantly.
The next question is from the line of Neeraj Toshniwal from Emkay Global.
Just wanted some color on this deal. If you can just explain more on that. I mean I think there's no real money coming in, but there is dilution on the table. So what is it exactly looking at? And how we are structuring it? I mean probably over the next [ quarter ] what is the plan?
It's -- firstly, there's no dilution because as opposed to any -- directly in Max Life. So now at the end of this transaction, the ownership of Max Financial and Max Life [ will go to ] 91.77% once the swap is done. So therefore, to that extent, there is no dilution per se. If we were given an opportunity to over the next 12 months, acquire whatever 5.24% ownership of MSI at the price, which is getting frozen today, at INR 80.89 per share of Max Life, which is essentially a price derived back from the Max Financial initial price, our exit price [ which is not great ]. That price is -- price which is broadly linked to the Max Financial share price.
Sorry to cut you down, but the dilution, I think it's more in March financials and because I think you mentioned from the fresh issue of shares, you'll be doing that.
Our ownership in Max Life will increase from 71.78% to [ 90.0177% ]. So to that extent, we are also -- our ownership of Max Life is going up by 20% also. So our shareholders are not getting diluted at all. It is just a swap.
But on the base of Max Financial, definitely we'll have a dilution, right?.
It doesn't matter because Max Financial and Max Life are not different. The only business Max Life holds -- sorry, Max Financial holds is Max Life.
Are we looking at dissolving the structure any time soon? I mean because you are doing this and probably you will have a larger control in Max Life. So are you looking at dissolving the structure and probably list Max Life individually?
Yes. At some stage we've sort of been on the calls to say, we are going to ultimately sort of simplify the structure. We are not ready at this stage. I cannot comment to any time line also. But what I can tell you at some time, we will simplify the structure.
Okay. Okay. On the business side, the VNB margin, [ broke down can explain ], so you have mentioned that the positive impact coming from the change in the cost of capital in CRNHR and the tax from the effective tax rate. But there is some gap. I think this is due to the [ impact coming ] from the operating expenses. If you can just give me workdown in terms of what does -- supporting and how much is coming from the change in product mix? Movement of margin of 150 basis point.
So [ 19.6% ], if we adjust for the knowledgeable risk part, that will be aligned to what we achieved last year actually. And your division is correct. There's a bit of tax, but that tax is actually real. We got the ruling last year in our favor after which we had done the math. So if you are to really adjust for that, the number will be somewhere between 17% and 18%, a tad lower. But like we had mentioned last year also, our business is quite seasonal. And hence, the first quarter margins are not representative of the full year margin. My anticipation, I have mentioned to you when we finish the full year, we should land up somewhere between 21% and 22%.
So the impact of interest income tends to be in terms of because we are a lot more traditional heavy and [ defaulting ] how we are factoring any change in [ simply that ]? I mean because largely, we are restricted about 40, 45. So any impact coming from that in terms of margins?
So there might be a bit of margin upside, but that margin also as per plan is getting absorbed by the additional expenses that we're incurring by opening so many offices.
Yes. In terms of interest rates I'm asking. I mean...
The interest rate sensitivity is not very high, like I mentioned to you, and the interest rate sensitivity table actually demonstrates the sensitivity of the book. But we have always mentioned that we prefer the nonpar savings book, which is fully hedged. So as we speak, we are perhaps the only players in the industry who have a very active interest rate swaps program and just about everything is hedged. And we have been -- about 90% of what we have written here is short duration, [ 5 pay ] 10-year contract. And with the help of interest rate swaps, we are very effectively able to hedge a book for 10 years. So overall, sensitivity goes down. There's a cost of hedge, which is already baked into the margins that we declared, and it is already priced for.
Okay. And on the last question, I think the surrenders also increased a lot. You've mentioned 6% coming from ULIP discontinuance. What is that? I mean any particular reason or...
There are 2 kinds of surrenders: customer-initiated surrenders and company-initiated surrenders. So customer-initiated surrender in terms of number of policies being surrendered is exactly the same. So let me explain then why this ratio goes up. There is company-initiated surrender as per law, people when they stop making payments in the first 5 years of the ULIP, you are not meant to refund that money. You have to be pocketing the discontinuance fund and you actually return it only after 5 years. So we started writing the new book, which is as for this regulation about 6, 7 years ago. That book has become a bit larger of people who decided not to pay and it goes part in discontinuance one. We return that one. So that is a very significant part. The other trend that we saw, and hopefully, that should subside is people who are surrendering their overall fund size was a bit higher than how it was last year. Because of this, the surrender appears a bit lower. Both of them are not out of expectation. It's a business reality and a part of the commercial progress that the business is meant for.
Okay. So it will probably come down in the future, you're saying from the current level?
It depends on the aging of the book and what is part in the discontinuance fund.
Any guidance? I mean any number you are looking at it?
Similar numbers, perhaps.
Prashant, correct me if I'm wrong, but directionally, because of persistency moving up towards the 51st month, then this -- as a percentage has to come down over a period of time.
Yes. Discontinuance fund is not counted as a part of persistency. So it does -- whatever it has gone, it continues. Fund is already lapsed as per our records. So why don't I come back to you? If you could send me an e-mail, I'll have to -- because -- I'll have to go and kind of read on the book. I can come back with a forecast, but my sense is in the range of [ 15 ].
Okay. And the investment right now on [ CRNHR and bank ] we have done anything in this quarter or anything? Because today, we have cleaned off the book.
I'll come back to this question. Probably, I'll ask you to repeat also. We have also noticed a trend that many of our competition actually do not report company-initiated surrender as a part of their surrender disclosures. So I think our locked-in total disclosure is a bit different. We also report whatever is discontinuance from disclosure as a part of our overall surrenders.
No. No. I'm -- I was asking any impact from the [ BFSL/YES ] Bank investment impairment we have taken the book?
On [ BFSL ], we have taken the impairment of about 25% -- 40% in the bank. By July, we have taken about 40% in the books. That is gone and it was all in ULIP. On the investment that we have on YES Bank, we just continue as it is because I think in the unit book where we have the investment, we have done mark-to-market with the revision in the credit rating. But the other part of the portfolio is full to maturity, and we'll just continue with it.
So [ basically you said ] 40% by July and 25% by 1Q. Is that right? I mean just reconfirming.
Yes. Yes.
Okay. And any impact on changes known to add here? I mean the increase in surrender rate because part of your book. So any impact on margins?
No. No. I mean negligible, really. Actually, we already had a much significant surrender scale compared to all the competition, maybe 20 bps or something like that, which we'll figure out a way of covering. So while there is a lot of administrative work that we're doing, but in terms of the impact to overall financial because the new broad guidelines is negligible.
[Operator Instructions] The next question is from the line of [ Pradeep Hudar ] from Reliance Nippon Asset Management.
Yes. Sir, you talked about in the 12 months even buying out the remaining sales of MSI. That's a correct understanding?
Yes. We have our call option, and we have a put option. Of course, 12 months can be advanced or pushed out on a mutual agreement. But you're right.
And sir, if this has the time, once this happens, it's fair to say that the structure will then be collapsed? Because there's no -- I mean rational right for keeping this -- once Sumitomo is directly in the listed company. That's one question. And second is, so what did the board deliberate on? Why was this right now taken? And what is the rationale for Sumitomo once it has taken the listed company and no longer in the life insurance company? I was not a bit clear on that. So what was deliberated in the board meeting? Could you just talk a bit about that? And why was this [indiscernible]?
Sure. Okay. So let me first answer your first question, which is the eventual collapse of the structure. I think I have addressed that question, saying that, that is eventually the sort of thought process. The time line of that, I cannot comment on at this stage. So therefore, I sort of pass that question [indiscernible] finalize on the time line is again [indiscernible] that. Now on the structure of Mitsui Sumitomo, sort of -- so I think 2 things there: firstly, obviously, from their perspective, they're getting to a listed company. So that was, I believe, motivation from their side. So the motivation from our side is that we have the opportunity to consolidate more ownership in the sense that to acquire the 5% stake over the next 12 months with a price program today. So therefore, any of the opportunity for us is to be able to enhance our overall ownership of Max Life, which -- we will have an option to which we will be able to generate adequate funds. And like I said earlier, leave this with us for a while, we will come back to you what those options are once they are in some share. But clearly, the incentive for us is that it helps us consolidate part of our ownership in Max Life. So it works both ways. And therefore, those are the 2 [ standards ].
And sir, just one operational question. When you talk about the guidance on VNB margins of 21%, 22%, that is assuming assumption changes and effective tax rate, right? Just clarifying.
Yes. That's correct. I mean that's -- I mean sitting today, we are just done with quarter 1 and how things look like. You may notice that our structural margins have been stopped and they are closer to 25%. The objective of the business will be to minimize overall, though not yet possible. So conservatively speaking, we should be in the range of 21%, 22%.
The next question is from the line of Sanketh Godha from Spark Capital.
Just wanted to understand, when we buy back the [ 3 ], 1% stake every year from Axis Bank, I believe Mitsui Sumitomo buying back 0.26% and 0.014% Max Financial Services. So with the current deal, how that structure -- that contract still remaining intact? Or there are changes with respect to the structure also?
Now that Mitsui Sumitomo practically exist, Max Life then becomes a Max Financial shareholder. Therefore, they share in the obligation with Max Financial had to buy back from Axis. And Max Financial, in turn, shares the obligation which MSI has to buy back from Axis. So in some sense, all those obligations then move into Max Financial.
So basically, it's Max Financial ultimately buying an entire 1% stake whenever Axis comes and sells it to you back?
Correct.
Yes. Okay. And just one more thing. Just my understanding, if it's right. I mean if I don't take that assumption changes of 250 basis points, then the margins for the current quarter would have been lower than what we have reported in the last quarter, right?
Yes.
Yes. Adjusted for those 2 changes. However, I'm not saying the highlight that it is only internal comparison. When you make the comparison with respect to other players, it is apple to apple. So I think there is a bit of assumption in the market where people take a view of cost on a full year basis, whereas we actually report the actual cost of quarter 1 and the costs are typically -- the ratio going to start improving at the EBITDA because the sales in this quarter is less than 20%. And as the year progresses, that kind of changes.
When historically, for last many years, in case on a full year basis, the delta between our structural margins and our net overall margin ranges less than 100 basis points or around 100 basis points. However, in quarter 1, you would find that the structural margin concluded at 25%, and we are reporting a 19.6%, which only states that we don't do any smoothening in terms of giving a forecast on margins. However, as we are progressive, quarter 1 being the smallest quarter, where total sales actually is less than 20% of the full year sales. As the business starts to see the seasonality and grows the overall overrun, as a percentage of total actually falls drastically. And hence, on a conservative base, something which should line up between 21% and 22%.
Yes. The reason why I'm asking this question is because the contribution of non-par savings, which is possibly having margins better than overall margins has increased and even protection has remained the way it was in the Q1 of last year. So mid-term, despite assumption changes, [ Mitsui ] have not incorporated assumption changes, the margin should ideally would have expanded. So basically, the prop channel has not grown to the extent yet because of the trends in nature? Is it the major reason why the margins have not expanded? Because of this product...
Yes. Yes. Your observation is absolutely correct. For example, end of July, and like I mentioned to you for the month of July, the prop channels are growing [ versus ] around 59%. If I were to add that, all the numbers will start to look good, but your observation is correct in quarter 1, the prop channels were undergoing the changes because of which there were bigger drag on overall. So that will settle down as we go along. So on a completely apple-to-apple internal comparison basis, our margins are a tad lower than how they were last year. It is aligned to the budgeting exercise that we do internally because that has an implication of all the investment that the business has done. And hence, the long-term forecast as well as the forecast for the year remains intact.
Okay. And the one, just on EV. The EV growth is around 22%, but ROE is around 15%. So when ROE -- the operating ROE, which we report 15%, does it include the assumption changes, what we have made with respect to tax and also the capital charge on CRNHR, right?
Absolutely correct.
Okay. Perfect. And just one small question to Jatin. I mean when we started the year, you said that the holding company expenses probably will fall to INR crores 50 to INR 60 crores for the full year. But if I look at the quarter, the net holding company cost is still around INR 20-odd crores. So sir, if I annualize it, it is closer to INR 80-odd crores. So do we see a trajectory moving to around INR 60-odd crores for the full year? Or we would be running with INR 80 crores to INR 100 crores kind of it was for the full year of FY '20?
So your question is right. I think there is also a severance payout in this quarter because of the cost rationalization initiative, which has pretty much resulted in this quarter's expense being a little higher. And so on a normalized basis, you will find it around INR 55 crores. [ We discussed ] INR 55 crores. That INR 55 crores plus/minus INR 5 crores [ hinge ] on an annualized basis.
Okay. So basically, we would end up at around INR 60-odd crores for the full year, right?
Well, INR 55 crores is where my sense is, but it could be plus/minus INR 5 crores. So it could be a bit lower or higher.
Okay. And just last one, on the hedging strategy, whether -- we are basically hedging it with -- to partially pay debentures? Or it's more through swaps? And if I include the cost -- if it's swaps, then after hedging cost, whether the VNB margin, structural VNB margins on non-par savings products would be closer to our structural VNB margins? Or lower than our structural VNB margins? Just an indication.
So the interest rate swap is what we use. We don't use partial pay debentures because what comes along with that is also come to the credit risk. Considering the current circumstance, we want to use such mechanisms only as ancillary or peripheral mechanisms to hit. Our core strategy so far has been interest rate swaps. We were also quite keen to do [ SRE ], but RBI has not allowed it. So in the industry, I think we'll be the only players that has very few -- one of the very few players who are using interest rate swaps quite successfully. Ever since we started to sell non-par savings designs. The cost of doing hedging is already built in the structural margin as well as net margin. So we look at margin only, net of expenses on swaps.
Yes. I understand that point, but just wanted to understand whether after the cost of hedging, the margins of non-par savings is overall margin accretive for the company? Or it remains flat?
Absolutely margin accretive. Otherwise, I will be writing -- why else we'd be writing [ this one ]?The other thing that I'd like to highlight is -- and considering that there's a lot being discussed now in market regarding the non-par design, our stance is very conservative with respect to the guarantees that we offer. We always validate the returns margins from MCEV perspective, but also with respect to the traditional margin computation perspective as well as IRR. And these numbers are quite sensitive with respect to where the -- whether on the interest rate is, and what is the level of guarantee. We are generally quite conservative about it so that it is accretive, not just on an MTE basis, but also on top-down embedded value methodology as well as IRR perspective.
Can you just tell us what are the typical IRR offered on [ 5 pay ] 10-year payout?
To the customers?
Yes. To the customer, I mean to say.
Anywhere between [ 5% to 5.5% ].
That's -- it's just a [ mandatory idea ]. The revenues have been coming down, these numbers are falling down.
Yes. Yes. They are always revised upwards or downwards depending on what is interest rate.
So have you revised it after we have introduced it any time in near future -- near [ H2 ] I mean to say?
[ Near top ]? Ever since the interest rates have fallen drastically, we are just looking at making the changes because that's not -- that's about a month-old phenomenon.
The next question is from the line of Nidhesh Jain from Investec.
So firstly on the change in shareholding. Will there be a change in Board composition at Max Life and Max Financial Services level also? And just wanted to [ understand ], who initiated this initiative of changing shareholding? Was it then from a Max Financial Service perspective? Or Mitsui Sumitomo was more into [ the entire stake ] entity?
Okay. So first question -- sorry, one second. So first, on the board side, as Mitsui Sumitomo comes on the Max Financial board, therefore, they will have a Board seat at a Max Financial level. As always, the first time you have ownership at Max Life level, they will have a Board seat at Max Life level also. So therefore, to that extent -- but obviously, from a governance standpoint, governance will mostly largely move to a Max Financial level, and will become lighter at the Max Life level. So that is, I think, sort of one thing. The second is that I think just to know who initiated this conversation is less important. But I think what's more important is to say that we had a mutual win-win in this because it allows us to, like I said, consolidate our shareholding. And it also helps them to be as a listed company. So it was well support. And then one question around eventually simplifying the structure, things like that, so that also.
Yes. Because as outsiders, we can just speculate, and there could be 2, 3 reasons for doing this. One is either Mitsui Sumitomo is looking for an exit or we are trying to simplify the structure, or third is that since we are trying for a long-term partnership with Axis Bank, whether Axis Bank stands like a holding company level instead of a Max Life level. But this is just one step. So we will be speculating. If you can give some clarity around that, that would be quite useful, I think.
I don't think as a company it's appropriate for us to sort of comment on the speculation. I have already sort of given you the rationale on the transaction. So for now I just say that we should leave it at that. And as the time comes for future development, we will be sharing as accustomed.
Yes. But how about this, you are saying that, definitely, Mitsui Sumitomo is not exiting their investment at Max Financial Services...
No. No. Hosting the company continues. Absolutely.
Perfect. And secondly, on the Max Life performance, did you mention [ the sector ] profitability of proprietary channel has become -- it has become more profitable than bancassurance channel on margin basis? Or was there a comment on that?
Yes. I mean if we were -- I were to look at the overall margin for last years, the proprietary channel consolidated margin net overall is comparable or slightly better than banca channels. And as we move along, one of the best that we have is, we start to grow our own channels a bit faster than how third-party channels are growing. And all the scale advantage or economy advantage will accrue to our proprietary channels because [ at this time ] hoping that in 3 years' time, the margins of proprietary channels will be significantly better than third-party channels. And that is one of the key drivers of our 25-25-25 strategy.
Sure, sir. And then just one clarification, when we are saying margins, we are saying net of cost overrun? Or...
In all cases. In all cases, net overrun.
The next question is from the line of Harshit Toshniwal from Jefferies Group.
A couple of questions. First, on the CRNHR assumption change. So largely I want to understand that. Is there any way of ensuring consistency in standards for these kind of rates within pledge? Or do we need to get this vouched or audited at intervals? Because as you rightly said that you maintain a buffer of 4% versus 5% earlier, and even currently, industry maintains the buffer of 2.5%, 3%. So what is the rationale for changes in CRNHR at this offering?
The rationale -- like I mentioned to you, we -- there are 2 data points that we continue to rebuild, which is the equity delta that you will expect. I mentioned to you [ the reason of 3.5% to 5% ]. Now these are -- these are risk that you take with respect to business, and we are sure of our assumptions. So I won't go to the higher end of 5%. It has to be perhaps close to lower end, and we have chosen a number of percent. And we -- I think because these are implications, analysts like you compare our numbers, and we believe that the 4% is as dependable as 5% was. It's chosen to be at 4%. I think there's no guidance around it. These are calls that [ rural ] folks make, looking at the business and the dynamics, and the kind of sensitivities do exist with respect to different assumptions. And with a robust assumption methodology and positive variances that we see with respect to our operating assumptions, the point actually was quite comfortable to go with 4%. That's really the rationale. I mean broadly speaking, these are 2 reasons. One, to align it with broader set, come closer; and b, looking at the risk profile existing equity cleared up.
Okay. Okay. And one more thing. So it's more about curiosity on this transaction, which we have done. So we have done 20%. I understand this is a transaction beneficial to both you and MSI. What was the reason to hold back on the 5% shareholding?
I guess from our perspective, we had an opportunity to consolidate. We did not want a situation wherein we don't make most of the opportunity -- sort of the opportunity here and there sorting for part of the shareholding at the Max Financial level. So we have not been at this 5% at our current share price to be acquired over a 12-month period. We have options to sort of to fund that acquisition, which are currently being worked upon. As some of those get finalized, we will share those options with you. So that's the summary of what I said [ and logged ].
The next question is from the line of Amit Saxena from Credit Suisse. As there's no response from the current participant, we will move on to the next. That is from the line of Adarsh P. from Nomura.
Jatin, I guess the question is on -- again on the structure. Just wanted to understand once you've done this, once you're doing any deal, for example later, the merger or selling or getting in a partner at whatever level life company or holding company. What are the pro and cons of what you have done in terms of the structure, right? Earlier, what was not possible, is it possible now? Anything that -- we did step 1 and there could be step 2, 3. So I just wanted to understand with the changes done, does that -- any consequences materially change on either a merger possibility or a partner coming in? Does that materially change how -- what you can structure now?
So I think I sort of addressed this question previously. When I said that the simplification and structure will open up more options than -- relative to the current structure. So therefore, really the attempt is to see if we can obviously simplify in this whole process of simplification, consolidate part of our shareholding so that we get benefited eventually. So that -- we will [ team off ] the strong action.
And any time line of like collapsing the structure? Like I know 12 months is the period you have to buy out. But any time period that you would collapse the holding company and the life company?
Adarsh, apologies that I can't answer that question at this stage because we don't have a time line at this stage and -- to be very honest. But the eventual game plan as we sort of discussed previously also and other -- on this call and previous occasions, we eventually sort of -- idea is to really simplify the structure and not have a holding company maybe at some stage, et cetera, et cetera. But putting a time line on something like that business plan, we have sort of for me a worked out plan, will be I think a little premature.
The next question is from the line of Amit Jain from Samsung Asset Management.
Just wanted to understand the sort of structure again. The sort of -- the way I understand this is 75% of mature stakes sort of -- you sort of get to keep and 25% is effectively being acquired by Max Financial Services. Any reason why the sort of ratio was worked out? Was this part of an earlier transaction sort of when they came in? Or was this negotiated sort of this time and they sort of got a chance to flip up? I mean sort of, can you sort of talk to that?
So it's actually 80%, 20% and not a 75%, 25% because of the 25%, 20% is being acquired and 5% has been left behind, acquired through the swap and -- essentially. Point number 1. Point number 2, this is not a part of the -- any preconceived arrangement because at that stage actually, we have the consolidated entity. So there was no way that we could have flipped the life insurers' ownership into a conglomerate. So therefore, all of what we have done has been done here and now. Actually, I mean we work shopped over the last few weeks but it's not a here-and-now story.
Sure. Understand. And second, just sort of -- and maybe I missed this, clearly. But in terms of when you sort of talk to the margins and sort of if you look at sort of the changes that were made in this particular quarter, [ ex tax ] why would the margins be still down Q2 despite having a better mix? Is that pure protection being lower? Or there's something more to it?
So Amit, I think Prashant alluded to this. You're right that the margins actually adjusting for the [ C&I ] change and the effective tax rate change is lower than what it was last quarter. It's primarily because of the first quarter slowdown of proprietary weakness, which I think July strength stands now corrected. So that, along with the fact that this was a quarter of the full cost kind of coming into -- with respect to run rate of the investment of last year has impacted the margins. But as we mentioned, the [ high ] numbers back on track. Proprietary channel's up now, actually July bringing the range of around 30-odd percent.
Amit, I think it is important here to understand that there was a little bit of a sort of transition we have done from our [ agency ], from how it used to be done versus some of the recommendations, which came out of the New York Life study. So which is only a temporary effect. And therefore, like understood that by -- if you look at our performance, not on a YTD June basis, but on a YTD July basis, we are pretty much doing as we have been doing over the last full year wherein proprietary channels are growing very sharply and the contribution on a YTD utilization is pretty much evened out. But if this pace of growth continues in August, September, et cetera, then therefore the equation of proprietary channels outperforming the non-proprietary channels and their contribution going up in line with our articulated strategy of saying that we want to take that share above 25% will then play out.
The next question is from the line of Sanketh Godha from Spark Capital.
Yes. Just one clarification with the transaction. So that 5.24% stake, which would be bought back, it will happen at a -- again at a swap deal? Or it could be a cash consideration at that point of time because the value comes to around INR [ 815 ] crores? So that INR [ 815 ] crores will be funded through swap itself? Or there would be some other way of doing it?
Well, so if you look at the announcement carefully, the balance 5.24% is meant to be a cash transaction, wherein we will acquire that 5.24% of cash.
But at the holding company level means the source of income is just the dividend income from Max Life. So how will you fund this INR [ 815 ] crores, sir?
Like I said, there are certain plans being sort of work shopped currently in terms of what's the use of finance for the INR [ 815 ] crores. So therefore, once we have something crystallized, we will be happy to share more details. But at this stage, all I can say is that there are certain things, which are work under process. And we'll finalize some of those things. We will be happy to share how we will fund this.
The next question is from the line of Amit Saxena from Credit Suisse.
I think you've us a fair bit of background on the transaction. Just one question on the transaction. You mentioned there are certain call and put arrangements and these put arrangements specifically, this is a cash transaction. Just wanted to get your view as to what are the key aspects of this put when you gave -- to understand the obligations on the company for, say, from a time line perspective and other side of things?
So it's broadly a 12-month time line, firstly. Secondly, the price is now as it is today, so it's a customized price. In some sense, there's an advantage of having the price frozen over the next 12 months to do this put-call arrangement. So I think those are the 2 details. Other than that, I think pretty much...
You mentioned 12 months. Is it any time between 12 months or post 12 months?
It's currently 12 months, which can be advanced or extended mutually.
Got it. So it's a specific kind of close to 12-month kind of a period. Are there any -- they might [ consider ] more in terms of the obligations of a cash layout. So that makes sense. And then last bit was on -- I think we've been in discussion on the distribution side of the individual partners. Has there been any certain updates on any bank or long-term distribution partner coming on a more holistic basis? Or is there any thoughts around that? Any updates?
Well, I mean our existing partnerships with our partners are actually going very strong, and performance is for all of you to see. In terms of the new targets, we are always on the lookout, and we are aggressively seeking organic opportunities on that front as well as remain always open and keen to do organic opportunities to expand our distribution. So that's our strategy, and we are pretty much on core from that strategy.
Yes. And this with Jatin, from a perspective of this shareholding swap, is this a precursor to any potential transaction at the Max Life level, because again, you value -- I think there's been a couple of questions around rationale for the share swap? It is difficult to understand as to -- from a Mitsui Sumitomo perspective, us hopping into a holding company, and you consolidating to life company. Is it a precursor to any potential long-term distribution partner coming at the life level? Or any thoughts you can give for further clarity on that aspect of the business?
Amit, unfortunately, it's not appropriate for us to comment on speculations. And like I said that anything and everything, which we do has some of those things, which slowly we'll come back and share with you at an appropriate time. Unfortunately, I have nothing, which is [ displayed in the hand obviously ] whether our distribution arrangement or a different way of funding this transaction, et cetera. So you'll have to bear with us till such time we can finalize something and come back and share the details.
The next question is from the line of [ Sushmine Padoria ] from Motilal Oswal Securities.
I'm from the [ A&C ] team. I just had a couple of questions with -- will Sumitomo be a private promoter as the [ serenity ]?
No.
No. And would you need a special resolution, 75% of minority? Or these promoters can vote as well?
Promoters can vote. It's not a majority or minority resolution for sure. I think there's a special resolution there. I will have to check and reconfirm this to you. [ We can do a majority also ]. Let me check and come back to you. Please know, just drop me a line and I'll check this and confirm it to you.
And Sumitomo not classified as promoter [ as concerned ]?
Sumitomo not classified as promoter [ as concerned ]. Absolutely.
The next question is from the line of Harshit Toshniwal from Jefferies Group.
Two questions. One, when I look at dissolving the [ too tight ] structure. So at the time of [ SBC Life ] Max merger, there was a problem because we had some liability sitting at the NBFC level, which did not allow. So at this point of time, are we mostly clear from the regulatory angle of merging Max Life at Max Financials at whatever point of time?
So Harshit, we've discussed this topic. I think we have options at that stage also to sort of make that work. And the next steps could have been taken if both parties were aligned, but at that stage the priority for [ SBC Life ] was really to sort of do an IPO because the other insurers had done an IPO. Therefore, we had to sort of part ways. So clearly, from a structure standpoint, I think we know how it can be done, what can be done, even more than we know today. I really want to test it with the regulator at the right time, make it work and do whatever is required to make it work. I mean frankly, again, one of the speculative questions, which is difficult to answer at this point in time. I don't know if I can really answer it clearly.
The next question is from the line of Dhaval Gada from DSP Mutual Fund.
Sorry, Jatin, just to -- just had one more thought on this. So in the past, one of the sort of thoughts that we had was if and when we need to give equity to our banca partner, both departments will chip in, in their respective shareholding structure. How does this sort of play out if we were to give an equity even in the future given now they are at the holding company level? So the entire 90% or 95% -- 100% basically is now -- so the cost of debt is with the holding company. So just if you could explain that.
Yes. I think you're right. The cost of value at the holding company, while at the same time, I think Mitsui Sumitomo will share -- will come in with their share because they are shareholders of MFS now. So they will participate in what MFS would have given. And MFS shareholders will participate in what Mitsui could have given. So in some sense, now that the [ guiding ], like you said, we are 100% owner of Max Life practically. So therefore, whatever has to then happen, if at all it happens, has to happen now there for Max Financial.
But with a 20% share, instead of 25% earlier?
What's the 20% and 25%?
No, no. Now they hold -- so I was just saying that they hold 21% -- 22%, sorry, 22%, so that is their share versus earlier 26% sort of...
I mean frankly, given the cost of pension dilution in the future, if at all, for any bancassurance that is member or partner or otherwise, they could do a strategic sort of partnership with anyone. Frankly, I mean in this sense, is I'm sure we're well understood by the markets, and therefore, it's factored in our share price today. So to that extent, we are sort of buying part of their ownership at the current share price. So I assume that ownership already factors in such costs. And therefore, the cost of any potential dilution to any investor is reflected appropriately through the ownership.
Understood. And just sorry, one more. Just a follow-up on what I asked earlier. I mean broad calculation is that we will need about INR 1,000 crore of money to sort of buy the Axis stake and also the MSI stake. And I will expect about INR 600 crore to INR 700 crore dividend to come from Max Life. So the balance bridge. We have, how -- I mean so would you take debt or something? I mean just some color around that. Is that -- firstly, is the math correct or...
[ We do ] option for a while. Once we have something [ to slide ] in hand, we will be happy to share -- give you more detail.
Ladies and gentlemen, that was the last question. I now hand the conference over to the management for the closing comments.
Thank you so much for being part of the earnings call. We hope we have clarified all your questions to best availability. Should you have any further questions, please feel free to reach out to us. We look forward to more interaction. Thank you, once again, and goodbye and have a good day.
Thank you. Ladies and gentlemen, on behalf of Max Financial Services Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines. Thank you.