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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 '22 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded.I now hand the conference over to Mr. Jatin Khanna, CFO at Max Financial Services. Thank you, and over to you, sir.
Thank you. Good morning, ladies and gentlemen. Thank you for being part of Max Financial Services earnings call. My name is Jatin Khanna, 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 Mr. Prashant Tripathy, Managing Director and CEO of Max Life; and Mr. Amrit Singh, the CFO and Head of Strategy for Max Life.I'd like to begin with the transaction update first and then get on to the performance. As you know, we concluded the transaction for Axis to become the co-promoter of Max Life with 13% stake this quarter. We have now got on to the third step of the transaction and filed application with IRDAI for acquiring residual stake of 5.17% from MSI in Max Life at INR 85 a share. Significant value creation is expected once this transaction is completed, considering that the price is quite attractive. We are hopeful of concluding this transaction in the current quarter. The next step will be ready to -- for Axis to acquire balance 7%, which we expect them to do sometime next year.I imagine that you'll have some more nuance questions around the transaction, however, since we are still to conclude many other steps of the transaction, my request will be to refrain seeking any further details of the transaction at this stage. We'll be happy to address that at an appropriate time. I will request you to restrict your questions on the call on the business performance.So now quick highlights for our business performance for Q1 FY '22. Our consolidated revenue, excluding investment income, for Q1 FY '22 was INR 3,420 crore, a strong growth of 27% in the most challenging business environment. The consolidated profit after tax declined by 80% to INR 36 crore relative to the same quarter last year, which had one-off tax refund, lower operating expenses and lower debt claims due to COVID-19-induced lockdown.Moving on to the key business highlights for Max Life. Despite COVID wave 2 headwinds, on a 2-year CAGR basis, Max Life registered highest sales and highest VNB growth among the top 4 players, which is an incredible performance in the more challenging times for our country. Max Life individual APE has grown by 32% to INR 875 crore in Q1 FY '22. Market share improved by 63 bps to 11.3%. Our value of new business at INR 172 crore in Q1 FY '22 has grown by about 53% year-on-year, which is, again, a very, very strong growth.Our NBMs have also expanded on a year-on-year basis by about 260 bps to about 19.7%. The MCEV has grown by about 15% to INR 12,290 crore. The first quarter is seasonally a low quarter and this is why the margins and MCEV growth will typically always be the lowest in the first quarter and then it catches up as the year progresses.MCEV on an operating basis has grown at about 13.5% annualized; including nonoperating variances, the RoEV is 16.3%. The operating RoEV for Q1 FY '21 was relatively higher due to positive operating variances in form of tax refunds, which is INR 63 crores, and also due to delayed reporting of claims in the same quarter last year because of the lockdown.Adjusting for same, the operating RoEV for Q1 FY '22 is actually better than last year -- of the same quarter last year given the seasonal prophecy that the first quarter tends to be lower. The gross premium grew by 27% to INR 3,484 crore in Q1 FY '22. And the renewal premium grew by 21% to INR 2,244 crore. 13-month persistency improved by 317 bps (sic) [ 320 bps ] to 85.1% and 61st month by 160 bps to 54%.Claims paid ratio improved by 13 bps to 99.35% in FY '21. Impact of COVID wave 2 for Max Life has been 3 to 4x severe relative to that of the first wave and so has it been for the industry. The claim experience higher than expected across all lines of businesses currently. The higher claims trend consistent across other life insurance and few players created additional reserve with Q1 FY '22 to absorb the higher claims.I'm pleased to report that we were carrying adequate reserves and, therefore, the pandemic reserve of more than INR 500 crores, which we created in Q4 FY '21, maybe helps us to withstand this entire COVID wave 2. The financial strain in the first quarter because of the wave 2 is about INR 234 crores on the shareholder due to the excess claims, which were utilized by the pandemic reserves, as I said, with no impact on the shareholder P&L.Even though our long-term opportunity continues to be attractive on the protection business, however, given the ongoing pandemic, we are taking a bit of a cautious approach on the business. And really, we have put additional underwriting controls in place. As a consequence, our overall protection contribution has reduced from 25% to 18%. The individual sum assured of new business also declined by 13% in Q1 FY '22 due to the degrowth in protection business, while our market share improved to 15.1%. So relative to the other, it still continues to be -- trend better.Our solvency surplus is about INR 1,400 crores with solvency ratio of about 197%. I'm pleased to report that we raised another INR 500 crores this quarter through a nonconvertible debenture issuance and which has strengthened our solvency margin to about 214%. Our AUM as of June stood at INR 94,000 crore, growing at 28% Y-o-Y, led by growth in unit-linked fund and PAR AUM of 35% and 23%, respectively. Max Life is now the fourth largest manager of life insurance AUM. We've also filed an application for pension fund manager license to PFRDA, which is ready to participate in the overall retirement ecosystem driven by our focus on getting it to annuities in a big way. Max Life improved its ranking by 8 places to 18th among The Great Places to Work for 2021 and among top 25 Best Places to Work for second year in a row. For the first time, we've been recognized among the top 100 Great Places to Work in Asia and has been ranked 55. The only life insurance company in India -- insurance company in India actually to really achieve this.So in summary, Max Life will continue its trajectory to deliver strong -- of driving strong shareholder outcome with Axis now on board as a new JV partner. The good progress which has been made on the 5 pillars of Max Life strategy was predictable and sustainable growth, product innovation to drive margins, customer sensitivity across the value chain and digitization and analytics as a foundation to -- and augment your capital. So really, there's good progress to be made on all the 5 pillars of our strategy.Now with Axis partnership, having been strengthened and led by bancassurance arrangement renewed for another 5 years, Max Life is under the process of recrafting its strategic plays and has identified the following key focus areas: leadership in digital distribution across both sort of spectrum in the sense that old assets as well as aggregators and other ecosystems. So we really want to sort of establish a leadership in the digital distribution.We want to be amongst the fastest growing profitable proprietary channels in the country. We would like to consolidate and build our leadership position in protection business as well as strengthen our position in health and retirement schemes by providing holistic offerings to customers.And lastly, actively evaluating organic opportunities to build distribution and ensure the capabilities. So these will really be our focus areas going forward in terms of how we will want to differentiate and position Max Life relative to the other players in the life insurance space.And on that note, I will hand over to moderator to open the floor for Q&A.
[Operator Instructions] First question is from the line of Sanketh Godha from Spark Capital.
Can we get is the EV walk -- sorry, VNB walk from fourth quarter FY '21 to 1 quarter FY '22, so the 25.9% getting declining to 19.7%, though we understand that is seasonal in nature. But just wanted to understand that the negative operating leverage, how much it impacted and then how much it was due to the product mix change? Just from -- the movement from full year to first quarter numbers? So that was my first question. And I have 2 more. If you answer this, then I can ask another 2.
Amrit, will you take this question?
Yes, Sanketh. Sanketh, the exact walk, obviously, I don't have it offhand, but the large reason for it is the product mix which actually is a higher proportion of protection, a higher proportion of non-PAR versus how this quarter has been, which has been a bit more overindexed on ULIPs. And this was also the case last year as well. If you will recall, even last year same time in the first quarter, our ULIP mix was higher. And as the year kind of progressed through, other product categories actually -- the proportion started increasing during the year. And we expect to do something similar even in this year as things kind of move forward.
So let me give you maybe a clearer number. Adjusted for expense, Sanketh -- if we were to make adjustment for expense, which means we keep the expense on a run rate basis for the full year rather than lumping it all in the first quarter because first quarter is generally small. So the seasonality, adjusting for seasonality and expenses, this 19.7% will be somewhere around 23%. So this 25.9% to 23%, which is 2.9% delta is predominantly because of higher ULIP mix.Now this higher ULIP mix, generally, is a phenomena that we see in the first quarter, it has happened last year also. It happened only from our bank channels. As things appear right now, to a great extent, the ULIP bias has been corrected, and we expect that going forward some bit of that product mix related challenges will be corrected.So sitting today, Sanketh, if your question is -- and I'm just guessing your question is, do you have a permanent impact on the margin profile of the organization going forward because of change in product mix, the emphatic answer to that from my perspective is no.
Okay. Perfect. Sir, so you're confident that by end of the year, you will be still in the 25%, 26% range by the end of the year?
Unless there is a wave 3 or wave 4 goes...
Okay. Got it. Got it.
I think as management we are reasonably comfortable that we will be able to come back to the numbers. This first quarter low margin numbers is a phenomena that you will see for Max Life Insurance every year. If you go back last 4 years also, you will see the same phenomenon.As things stand, the month of July, August, the product mix has been -- significant steps have been taken by our bank partners, ourselves to rebalance the product mix in a manner that the margins will get optimized. So on a reasonable level of confidence that we should be able to come back to margin numbers that we delivered last year overall.
Got it. Got it. Perfect. And the second question was basically the interest cost on NCDs for the solvency which we have raised, how much likely impact it will be on the margins or EV? Because that's a permanent cost which we will have in our forecast going ahead. So a likely impact of it on the margins, if you can just tell me, that will be also useful, assuming the product mix remains very similar to what it is at the end of FY '21.
Amrit, do you have any number?
So Sanketh, you know that this is surplus capital only. So obviously, we have a strategy of deploying this capital in similar yield-generating asset. So this cost drag is actually very insignificant because if I raised it at a 7.5% rate, I will, in the range bound itself, be investing it immediately and this being surplus capital. So the drag on the financials is actually very, very insignificant.
Got it. Perfect. Perfect. This explains.
I mean even if you were to push really hard, Sanketh, and talk about say, your own rate or -- whether your own rate will be 7.5% or not, will it be 6.5%, a 1% delta on INR 500 crore number is like INR 5 crore. It's insignificant to any asset.
Got it. Fair point. Yes. And finally, we are saying that we are going to increase the prices from July onwards, so is it driven by more because we had one more round of reinsurance rate hardening? Or is it because of the divergence at the current price with respect to mortality on our own without no defect from the reinsurance, we are increasing the prices? I just wanted to understand the color why we are approaching that by increasing the prices.
It is to factor in some of the price increases around the reinsurance companies, which is what we are now implementing.
Okay. So sir, the last part, whatever you will increase in July month -- from July month onwards is largely because of hardening of reinsurance rates, right?
Predominant. And basically when the reinsurance rates go up to, when we start to reflect in the price, there is generally a lead time. So that lead time, it took us maybe a few weeks to do that. But now it's been implemented.
Fine. Perfect. And finally, out of INR 500 crores, INR 234 crore is utilized. You are still sitting on INR 260-odd crores to take any third, fourth wave kind of impact on COVID claims, right?
No. So let me just clarify. I think this is a very important question that you asked, Sanketh, and I will draw the attention of everybody else. The wave 2 came in the month of April and May and some part of June. That was wave 2. Now when the deaths take place to when the claims are raised, generally there's a lead time, Sanketh. You will appreciate that there will be a lead time. That lead time is 6 to 8 to 10 weeks by when we start to receive the claims, people intimate you, then you inform them that these are the documents which are needed. So that back and forth actually takes 10 weeks' time.So then you would expect the peak to come and then the peak to settle down. So we -- the claims that you see that we have handled until June may not be all the claims of wave 2. We expect that wave 2 claims will come. And you would have seen in our -- some of our peers' disclosures also, they have made provisions, et cetera, to take care of claims of wave 2. So this INR 266 crore is not about wave 3 or wave 4, et cetera. Some part of that will get utilized in wave 2 also because we're expecting that the claims will continue seeking in terms of July, August.Is that a fair explanation, Sanketh?
Fair point. But given you're already in the middle of August -- sir, maybe last point, if I can squeeze, related to this question only. Sir, given you're already 30 days past the second wave of the first quarter, have you seen that INR 266 crore will be fully utilized or you will still carry a buffer by the end of the year? And that's the only question I have.
Very hard to say because we are still seeing wave 2 claims come through. Some of the wave 2 claims are still coming. Until we have some visibility on whether the claims have vanished or have completely gone, et cetera, very hard to comment. Sanketh, I will give ourselves perhaps a few more weeks, like I mentioned to you, it is like a normal distribution curve where the peak comes 6 to 8 weeks after the death has taken place. But the tail of the normal distribution just continues for a little while. We have to wait for maybe 4, 5 weeks to completely ascertain how much of that we can give.
[Operator Instructions] We have the next question from the line of Nitin Aggarwal from Motilal Oswal Securities.
So just continuing on this, like the additional provisions that we have now lifted, do you think that these will be sufficient because as you were indicating like 8 to 10 weeks is what it takes and the wave 2 was there til June. So will this much provisioning be enough? And any color on IBNR claims that you can provide?
Yes. Basically IBNR is on the basis of expectation of the claims which we're expecting, and that's generally a part of the financials. So we just maybe refer it subsequently to Amrit to talk about the IBNR. But this INR 266 crore, unfortunately, very hard for me to say whether this is going to be enough because claims continue to come. But I think I'm reasonably sure that we will be able to keep it P&L neutral with the help of these provisions, if required, some more provisions which are already in the balance sheet to take care and make it P&L neutral as far as wave 2 is concerned.So we think from a profit and loss statement perspective, we feel that we are reasonably confident that we'll be able to manage. Over to you, Amrit.
So on IBNR, firstly, IBNR is actually computed basis how the past trends of delays actually are. And that's the logic that is kind of used. As we sit in the first quarter end, we would have IBNR of around INR 150 crores plus kind of a number.
Okay. Okay, sure. And a question on production business. Like this quarter, like in claims, we have seen typically say almost a 50% higher ticket size in terms of claims that we are seeing on the protection side. Does this not like higher while I know that most other companies also have reported an increase in ticket size in terms of claims that they have received in respect to COVID 2. But because COVID 2 was more rural in terms of its impact, so these ticket sizes ought to be lower versus what the industry is seeing as a whole. So just curious on why this divergence?
Nitin, actually -- so what is your specific question? Are you saying claims on protection have doubled? Or your question is ticket size of protection policies have...
Yes, ticket size. Claims, I understand the impact was much more of COVID 2, casualties were higher. But why the ticket size also are like 50%, 60% higher? Because this time, the impact was more rural.
Yes. So it's not a sum assured play and it's neither is it a market or a customer segment kind of a play. I think that has remained fairly consistent. It is a bit of a mix change, which has happened towards limited pay designs, which would have -- which you can see from a case perspective.
Okay. And lastly on the tariff hike, we have not taken any tariff hike during the first quarter, because if I look at the average ticket size, the protection ticket size is like up by 35% for the quarter. So have we taken any hike during Q1 also?
So we had an introduction of a new product, and Q1 typically is a transitory period also, Nitin. So we had an introduction of a new product, which was at the margin a little higher from a price perspective, not significant, but the significant price hike was taken in the month of July, at the start of July.
[Operator Instructions] The next question is from the line of Madhukar Ladha from Elara Capital.
So first on this COVID claims hit. Can we quantify what is the total net COVID claims for 1Q this year? And what was it net for FY '21? So by net, I mean, net of reinsurance, what was the hit?
So I think Prashant spoke about this, Madhukar. Firstly, as these claims are trickling down and the sharp discernment of the COVID marking and a non-COVID marking is taking a bit longer because we are thoroughly investigating the specific reasons of that as well. But this INR 235 crores, which has been utilized, you can largely attribute towards COVID claims actually.
Understood. And we've not created any additional reserves, right? So is this INR 500 crores? No additional reserves were created in this quarter?
That's correct.
Okay. And 1 question I had on the group credit side. So I think that's still a very small percentage in our APE mix. And I think we're still largely group term insurance, correct me if I'm wrong. But given now -- I mean with this Axis partnership, we know that Axis also uses other partners. Is there any change in thinking towards moving more business and credit protect towards Max Life?
Okay. Because we are all not together in 1 room, there's a little bit of confusion between Amrit and I, but I will take this question. The group term life is a yearly renewable thing, whereas credit life is a single premium paid for many years. So while in crores of rupees, which is premium received, we do significantly high credit life, but when you make the APE adjustment, which means you leave the yearly renewable as it is and you divide the credit life by 10, it starts to appear a bit smaller. So just to clarify, in terms of numbers of crores, we write significantly higher credit life business.Now I think, the relationship with Axis Bank is very promising. And we've been writing with -- the credit life business with Axis Bank for more than a decade. So they are -- they have been always the single biggest contributor to our credit life business. In addition, we have significant relationships with the other bank partners, YES Bank and many other partners that we signed up. Again, like any other organization, we are commercially savvy about this business. We look at profitability and this business has been growing quite significantly.Even in quarter 1, we have seen a big growth come through in the credit life business. So critical speaking, of course, one would expect that with our relationship with Axis Bank strengthening, this part of the business will continue to grow. But at the same time, I have always mentioned in the past that credit life business is a business that we are tactical about. We're not strategic about. We are providers of predominantly individual policies, and that will remain our focus area.So this part will grow. You would expect that with Axis Bank coming on board, we will get the impetus. But a large part of our margin drivers will continue to be individual business.
Sir, can you provide sort of a split, if it's possible, in the credit protect business, what percentage of it is coming from Axis? And just 1 final question.
Close to about 60% -- close to about 60% comes from Axis Bank.
Okay. And I think amongst our peers, I think we are the only insurance company that has seen an increase in the individual protection reinsurance rates. So I just wanted to understand that why is that the case? Is there anything specific in our business as a result of which this has happened? Or it's just a matter of time that even others probably foresee something of the sort?
Amrit, you may take the question.
Yes. So among the peers, and I'm assuming you're comparing the top 4. But on a generic trend for the industry, I would say that, that statement might not be true because this hike has kind of come across other players as well.Now among the top 4, 2 of them, I think, given the lay of land for them where they don't operate in an open architecture environment, the pricing of the protection product is also very different than how it is for us. But whereas for us, who is actually operating in an open architecture environment, we do try to optimize the pricing keeping all things in considerations around brand-related strength, et cetera, to ensure that we optimize for it.Now -- so maybe some of those players that you're hearing from, they are probably indicating some of this. However, in our assessment, it is probably only a timing thing. I think the reinsurers are -- have been assessing the implications of COVID, especially the long-term assessment of that. And some of that, they're actually doing as a play across providers.Now specifically, is our portfolio any different with respect to sourcing quality, stringent quality? We would -- we have been given to understand, especially in this reinsurance conversation itself, that there is no sizing impact. We continue to have a fairly superior overall underwriting quality play in the books and has been the case even in the past.COVID is a recent phenomenon. I think all reinsurers are also grappling with COVID as a recent phenomenon, what long-term implications of COVID will be. And some of that might play out for other players as well.
We'll take the next question from the line of Ajox Frederick from B&K Securities.
Sir, on retail protection, since we are focusing on ROP, why is the growth still lower? Because some of the peers who have been focusing on ROP are doing much better than the others who are focusing on the term. So what are your thoughts there? That's one.Again, an ancillary question to that is, since we are going ahead with the rate hike, that would have factored in the probable mortality risk in future as well. So why are we going cautious again given that the rate hike has happened? So those are the 2 questions on protection.
So Ajox, firstly, I think the ROP proportion for us has remained fairly constant over a period that you're comparing. So that is not as if that we have increased ROP within our mix. It has remained largely constant. So there isn't a play of saying that we have increased the ROP and hence, overall value should have increased.Now coming to your question of why we're going cautious about it. I think wave 2 was fairly grave and fairly unfortunate. And as we have seen so far and more and more data kind of keeps coming through, we have seen the intensity to be almost 3 to 4x of how the wave 1 intensity was. Now during these times, actually, it is imperative that the protection book that we are onboarding, we have just enhanced the diligence of it. We used to practice tele medicals and video medicals where a doctor would speak for the customer. We have modified a little bit of that, and we are ensuring that actually all customers undergo necessary medical test so as to ensure that we are onboarding good quality lives, especially during this uncertain period of the pandemic, which is ongoing.As things will progress in the future, I think the pace at which vaccinations are happening, the efficacy of vaccinations is something that we are watching for. And that's the reason for actually building addition to this. Even globally, you see there is a resurgence of wave 3, which happened. And though from a mortality perspective, the implications are far lesser, the infection rates were higher. I think it is just for us to wait out and pan out because you will recall, all of this quarter was the quarter when actually both in the month of April and May the pandemic was at its highest actually. So we would like to wait out and see out for a couple of more quarters to see how the pandemic actually behaves and the implications of pandemic.
But overall, I must reiterate for the benefit of everyone, and especially answering your question that protection is a very strategic area for Max Life Insurance. We have called that out as a key area where we want to grow. We will continue to drive our way through and increase the share of protection. We will always work towards coming up with competitively priced products, which can help us garner market share and we will work with our reinsurance partners and our underwriting process to make it more frictionless.So that commitment just continues. It's more tactical keeping in mind the way wave 2 came, keeping in mind some of the uncertainties right now. It's not as if we have stopped writing protection business, as you can see, in terms of percentage individual protection business, in terms of percentage of sales. We are still very competitive. Our run rate in quarter 1 is actually more than perhaps quarter 3 and quarter 4.So we are issuing protection with confidence. It's just that why isn't it equal to last year in terms of percentage is predominantly because last year, the demand perhaps was a bit higher than how it is this year and also our underwriting grids, after having seen the experience of first wave and second wave and in consultation with the reinsurance providers, are a bit more stringent, needless to say that's how it should be.
And just to correct, I think the 2-year CAGR, Ajox, if you see is 35% for us on protection business as well. So it was on a high base that there is a decline. But if you see a 2-year CAGR, it's still 35%.
Got it, sir. Sir, going forward, starting August, you will be challenged with high base on Smart Wealth plan, which is the non-PAR piece. So what is our stance there? Because just the outlook on non-PAR because that has been our driving -- growth driver or the engine for growth till now. So what's the view of that?
So there could be quarters or months of up and down -- up or down really. I mean, at my level, at our level, we don't worry too much about it, the business. Last year, we made significant improvement in our margins. We went up from 21%-odd to about 25.2%. The objective this year, like I mentioned in response to the first question, will be to maintain or improve the margin at a total level for the full year.So the other element that we have is try to drive sales growth. And you would have seen that in first quarter. We again gained market share. We are trying to keep the sales propped up so that overall we are able to grow our VNB. So at a very high level, despite a very high base effect, and you may recall that with respect to peers who were more in the range of single-digit growth on VNB, we grew 39%. Despite on that higher VNB growth, the businesses were very confident and we're working towards driving it further with a very long double-digit growth rate, at least aligned to sales growth numbers.So that's really the strategy for this year. And sitting today just over the -- by the horrendous first quarter where all the business struggled, sitting in July, that's the level of confidence that we have that we will be able to churn these numbers, and we will be able to maintain our growth trajectory.
[Operator Instructions] The next question is from the line of Anirudh Shetty from Solidarity Investment Managers.
I have 2 questions. So my first question was more on the group protection business. Obviously, some of your peers are fairly optimistic about it, while some have become more cautious. Wanted to know your stand on this particular product? And how do you see this growing? And what kind of profits can one assume to make in this business?
I can tell you, based on my experience of close to 15 years in the business that, especially if you're looking at group term life, which is the GTL business, which is employer, employee kind of a business, there may be tactical opportunities for any companies to participate and maybe prop up some bit of recovery or say, profit for this year. But I can tell you, that kind of profit may not be sustainable because once the COVID settles, and the employers go out in the market to take quotes, there'll be competitive quotes.So really, some of these margins are not sustainable. Now having said that, is Max Life Insurance quite focused to tactically leverage the opportunity, which -- and through price take more risk? The answer to that is also yes. In fact, in some of our policies, we are trying to do that. But is that a sustainable strategy which will continue to churn huge EV to the companies over a long period of time? I feel that, that may not be possible.On credit protect business, of course, that's a sustainable business. It is similar to individual business, just that it comes in form of group. But it is more individual than group. There, of course, sustainability will be similar to how it is.
Okay. And my second question is, I just wanted to understand going through your sensitivity table, and I thought that your VNB sensitivity to reduction and risk free is negative 7%. So just want to understand what is the reason for that? And I don't know if it correlates with this, but our non-PAR book is about 33%. So I just want to understand what is our hedging strategy over there?
Amrit, you will have to take this.
Yes. So sensitivity -- actually on VNB sensitivity, especially, it's a mix of the product that you're driving PAR, non-PAR, et cetera, but -- and it is a point in time kind of a sensitivity. It does not take into a consequent action that you can take with respect to repricing your products or, let's say, adjusting the bonus rates from a PAR policyholder perspective. So if that interest rate had to move, it does not mean that we will end up actually having a decline of VNB of that number because we will take consequent actions with respect to pricing to ensure that those corrections will happen. So that's the first point.On the second one, on hedging we used -- ever since we have been writing a non-PAR business, we have been hedging this particular business. And at the initial period of time, we used to use tools like interest rate swaps. At this point in time, the dominant strategy for hedging is forward rate agreements. From a capability perspective, as an organization, we have capability to use IRES, IREF, FRAs, even some experiments on partly paid up bond, et cetera. But the dominant strategy in play right now is FRAs, forward rate agreement. And we do hedge our non-PAR business, adjusting for persistency assumption into the [indiscernible] and this hedging happens actually on a monthly basis, all the month that has been [indiscernible]
Anirudh, is the question answered?
Sorry, I lost...
We have lost the line for Anirudh, sir. we'll move to the next question. That is from the line of Hardik Shah from SBI Mutual Fund.
So I have a question on reinsurance. So basically, given the experience of the claims, have you changed your reinsurance package in terms of how much of your term business or life protection business will be reinsuring?
So Hardik, the reinsurance strategy remains same. The -- in case of term business, I see almost 80% of our business to the reinsurer, which has remained similar. Even on the retail side, the reinsurance strategy has remained the same. So no change in the reinsurance strategy.
Okay. And in terms of solvency, now that you raised some debt, it's around 214%. So is there any internal threshold of when you would again require to raise this capital? Or how long would this last?
We generally target for 170% and above. Though the breach as per the regulatory norm is 150%, we generally target 170% and above and that's on the basis of very detailed analysis that our Chief Risk Officer does, and it's a dynamic number. So 170% above. I think with the growth that we're anticipating, we hope that this will be good now for at least next couple of years. But it completely depends.As things stand, with Axis Bank coming on board, we are reviewing our strategy. We are reviewing our growth strategy. We will review our product mix through this year. So depending on the outcome of that strategic exercises that we are undertaking, this may change up or down, but I can confirm to you that if we need capital in the business, that will be available through equity and, b, it will all go towards growth.
The next question is from the line of Adarsh Parasrampuria from CLSA.
A couple of questions. First one is on protection, right? So we've gone through a bit of tightening both in pricing and underwriting, and some of it will get passed on as well. So post the end of this whole period of this tightening, what is the expectation of [Technical Difficulty]
Sorry, Adarsh. Your voice is breaking. Can you please repeat your question?
Your line is a bit disturb -- I can't hear you that well, Adarsh. If you can just come close to phone or something.
Sorry, Prashant, I will try and talk a bit louder. So I was saying is pre and post all these tightening that we feel on protection, right, it's been like 12 to 15 months out of maybe 18 months. Where is protection margins? And what's your outlook, right, let's say, before this tightening? And where do you think we end up on a normalized case basis?
So I mean, generally, we don't disclose margins at a protection level, but they continue to be similar. There is a target that we typically look at. And as and when the margin comes under pressure, we will increase the prices to maintain that level of margin. Needless to say, there is a bit of competitive play also, which could tactically make us operate in a price range despite having a lower margin, et cetera.But one has been reasonably successful with the target approach and we are able to manage that because somehow with all the reinsurers and with experience, it settles at that range. I would like to confirm that on protection. Max Life Insurance will be focused and we'll look for that kind of margin numbers. And we -- experience over the last 4 or 5 years suggest that we will be able to hit that.As far as price increase, et cetera, is concerned, that's unfortunately a very philosophical subject. For example, the big issue is to determine whether the COVID death claims are one-off or there are several of these, because if they are one-off, then we shouldn't ideally go as a [ part ] of pricing because you will be penalizing people over a very long period of time, and you will charge them much more than what they ought to be paying, number one.But if it is permanent, then we ought to be increasing the price. But how do you know whether it is permanent. So only time will tell. Perhaps, we should be able to circumspect, continue to monitor, work with reinsurance companies, look at tactical price revisions. And at this point of time, our belief is that COVID is a one-off and it should get settled. And with all the reserves, et cetera, that we typically carry as a life insurance company, we need to manage that and hopefully build those reserves again for any such future pandemic if it were to come through.But at this point of time, Adarsh, I'm not too sure if COVID has caused a fundamental increase in the mortality profile of Indians because that will evolve over a period. So if that has happened, of course, there's a business case to increase prices permanently.
Got it. And the second question, right, the whole system and even Max has kind of seen margins go up because the non-PAR mix in the last 12, 15 months have kind of gone up and now majority of the players say that there is a point at which you don't want the mix to go up beyond a point, right? Have we come to that point as a business? And then if that lever is exhausted and on the protection side, we are seeing some -- still the industry consolidating a little bit going through this tightening, what's the lever from a product side?
From a non-PAR perspective, Adarsh, on a non-PAR savings perspective, I've always maintained that we typically target a number of 35%. That's our kind of appetite basis of the work that we're taking and we're taking discussions with the Board. So that number is around 35%. In the first quarter, we were lower than that. So there may be an opportunity to shore up a bit on the non-PAR business.On protection, the belief that all of us have collectively as a group is protection is the core part of any life insurance company provider. So there is no point putting any cap on protection. We should write as much protection as possible, provided sufficient risk management practices are involved. We also hedge our protection book. I don't know if we shared that, but we hedge our protection book.So overall, we will try to increase the protection share, protection margin. Now COVID definitely is a one-off event and a pretty severe one. And that's why we are trying to be circumspect about it. But once COVID settles, I think the overall desire and aspiration towards growing the protection business will continue.
The next question is from the line of Abhishek Saraf from Jefferies.
Just -- most of my questions have been answered. Just wanted to understand on this -- the claims that we had, INR 236 crores. So basically, we are saying that those are the net claims, right? And since we are kind of reinsuring around 80% of our book, so gross claims could have been in the handle of around INR 1,300-odd crores. Is my understanding right on that, sir?
INR 1,300 crores -- Abhishek, where did you get the number, INR 1,300 crore?
Yes, the kind of reinsuring 80% of our...
That is only for the protection business, Abhishek. There is other parts of the business also, the savings part of the business.
So overall it's close to 50-50, overall. Overall, 50-50. Okays. So on total basis, -- so this INR 235 crores is net that we have -- that we have retained on our book, and this is like net of what would have been passed on to the reinsurer?
Yes. And...
This INR 260-odd crores is also on a net basis. So that's understood. That's fair. And the second question was on the protection price hike. So probably I might have missed when it was discussed. So what was the quantum of price hike that we took? And did we take it across all of our protection products or a few of them?And in this line, we also have been hearing that on group side, protection price hikes have been coming. So if you can just share that what has been our experience on the group side as well in terms of price hikes with the number that you can share that, will be quite helpful.
So first question on the individual side, Abhishek, we actually deploy -- pricing is a bit of an art and science that has to be kind of played through and it is actually done across sum assured, age groups, the variant of the product, the length of the product, et cetera. So there could be certain places where they might -- there will be a very nominal hike, but it would have ranged anywhere between, let's say, 4% to 8% kind of a number happening across cohorts of our products. But it's -- giving a single number will always be very difficult. It's actually a triangulation of multiple things which happens on the price hike that is typically done.Now your question was on group. On group -- term life business obviously has gone through a significant price hike. Term life business, as you are aware, is a single-year business, and you kind of cover for a single-year risk that is in play. And in single-year business, given the pandemic situation, those price hikes have to be done. And even in as part of our business, all the policy that we are pricing, we are pricing for the eventuality that could be there. And that's how the group term like pricing is happening.Credit protect policies, we are in conversations. Again, this will be dependent upon individual account. There is no single number that I can speak about the group credit policies. It will be dependent upon the kind of book, loan, years of that -- of the underlying asset and also the kind of profile of customers that they deal with. So it's a varied number.Needless to say, as Prashant mentioned, it's a commercial enterprise, which is trying to also ensure the profit profiles are protected. So those decisions are made basis some of those considerations.
Our next question is from the line of Nischint Chawathe from Kotak Securities.
You seem to be alluding to the fact that you might go a little slow on protection business over the next couple of months. And there is some kind of a base effect that is playing out on the non-PAR side as well. So what gives you confidence to maintain sort of a flat or 26% kind of a margin for this year as well?
So because this question is coming again and again, I just gave a clarification saying that if you were to look at our margin last year and because that's being discussed a lot many times, we hit about 25.2% margin. And quarter 2, quarter 3 were really good quarters for us to do significantly higher margin business. We increased the proportion of non-PAR, et cetera.So from that perspective, your observation of -- your observation on overall margin profile appears logical. But understand that this year, we are growing year-on-year on our sales. When we grow on sales, there is the VNB increase that comes if we are able to maintain the margin.Number 2, is the trend that I'm seeing already? I mean we just finished July. July numbers are not audited, et cetera. I can't share that with you. But that number is closer to the number that we [indiscernible] that is an increase already taking place.The third one is, we are not going slow on protection. If you were to see our protection versus some of our competition, I think we are going strong. Maybe it is a bit lower, but other people have gone significantly lower. And with that virtue on our direct channels, on aggregators, et cetera, we continue to maintain the pole position.So it's just that it is taking a bit longer to issue, et cetera, but we're not going slow. And if you were to look at last year, you would have seen that starting from quarter 1, quarter 2, quarter 3, quarter 4, the overall protection as a percentage of our sales was going down. So in a way, how the future will unfold is going to be similar to how it was last year.In view of all the parameters that I mentioned to you, we are confident about maintaining the margin at a full year basis. Again, there will be quarters when it will go up or down depending on how it was last year. But overall, for the full year, we are reasonably confident of being at the same level or better than how we were last year.
Perfect. And what kind of an APE growth would you be kind of expecting for the...
That's a great question. Actually, we grew 19% year-on-year. It was a very difficult year. We significantly captured market share. So we are on a higher base effect. And I'd like to highlight that to everybody. On that, this year, so far, the growth has been robust. And I'm just hoping that we are able to repeat similar or better performance than last year. Very hard for me to comment the exact percentage because we are not sure. But one just looks at the imports, our own channels have started to grow back much stronger just after the wave 2 got finished.Every month, I'm seeing improvement in the growth profile of our own channels. We have our new promoter who has been our distributor for a long time. They are promoters. They are participating in the value, well-being, governance of the organizations [indiscernible] that we will get tailwinds from there. And overall, we have a base effect -- favorable base effect playing out from YES Bank. So I think at an input level, I have been very comfortable of our growth prospects, especially on sales levels.
Next question is from the line of Sriram Rajaram from Ratnatraya Capital.
Sir, what would be your online mix in terms of the overall premium? If you could split that in terms of how much would be the share of aggregators versus the direct online fund?
Will you take that one, Amrit?
Yes. Sorry, Prashant. The line was on mute and I was speaking with myself. The online business for us actually has grown at around 51% over last year and a 2-year CAGR also of around 41%. It would be of our business around -- in the range amount of 2% in this quarter.Also the question on mix, we actually do -- it's more like a 50-50 kind of a sourcing, 50% happens through our own digital assets, which is the consumer landing on to Max Life Insurance page and 50% happens through the aggregator ecosystems and other ecosystem that are in play. We typically have participated only in the protection business in this particular category. That has been our focus area. And that's -- and always have -- we have been assuming leadership position from a market share perspective in the online protection space.
Sir, just to add, would that mix largely remain the same going forward [indiscernible]?
Sorry, say that again? I just lost you.
Would that mix largely remain the same subsequently in terms of online?
I think because the opportunity and the pace at which this channel is growing, that opportunity remains and both of them grow at a very healthy CAGR. So I would say that efforts will remain to ensure that we are well diversified with business on our own websites and our own assets as well and even also keep looking and evaluating opportunities in the aggregator and ecosystems that kind of comes into play.It is difficult for me to answer that question very specifically that the mix will remain same. But our focus will remain similar to ensure that we are tapping into whatever opportunities and pools are becoming available where the customers are coming through the digital doors.
So the aggregator channel would be a focus area for the...
Yes, yes, yes. It is. It continues to be, yes.
Our next question is from the line of Dhaval Acharya from Kotak.
Sir, my question is on the lines of annuity and retirement. How are we focusing on that piece? Because vis-a-vis the top 3 players, we are probably lagging there. What is our strategy? What is the outlook?
Your observation is absolutely right. That is definitely an area of focus. Internally, this year, we are looking at growing both the businesses, annuity/retirement and riders. Those 2 we have identified as area of growth. We are looking at multiple x's of growth, so increase it like 3x versus last year. We have to pick up pace. We just came out of the Board meeting yesterday, and we have discussions around that also.So you're right. If we were to look at ourselves with respect to top 3 on how much annuity they are selling, I think there is a ground to cover and that definitely is a good opportunity for us because as we grow annuities, overall profitability profile, et cetera, gets better. So the answer is yes on both accounts.Do we -- is that a focus area of Max Life Insurance? Yes. I also added the rider element to it because I believe that, that's one more area that we need to focus on. And this year, we are getting a slew of riders approved. There is significant focus. And for the first 3 months, the rider attachment has gone up manyfold already. So I'm very optimistic that on both of these MAX Life has an opportunity for improvement, and we are very focused to grow there.
Also, sir, in the opening remarks, you did mention about applying license for the pension fund manager which makes you overall formidable in the NPS and other varieties also.
That's absolutely the right observation. With that view, we have applied for the pension fund management business. We already have annuity service provider license. So we are going to look at insurance more in the format of ecosystem, not just selling annuity. And very excited discussion has taken place at our Board level around that.
Ladies and gentlemen, that would be our last question for today. I now hand the conference over to the management for their closing comments. Thank you, and over to you.
So thank you. Thank you, ladies and gentlemen, for being on Max Financial earnings call. We look forward to more such interaction in the future. Thank you once again, and goodbye, and have a good day.
Thank you very much. Ladies and gentlemen, on behalf of Max Financial Services Limited, that concludes this conference. Thank you all for joining us, and you may now disconnect your lines.