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Max Financial Services Ltd
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Ladies and gentlemen, good day, and welcome to the Max Financial Services Limited Q4 and FY '18 Earning Conference Call.[Operator Instructions] Please note that this conference is being recorded.I would now like to hand the conference over to Mr. Mohit Talwar, Managing Director, Max Financial Services. Thank you. And over to you, Mr. Talwar.
Yes, thank you. Welcome, everybody, on the earnings call.I'd like to introduce you to Prashant Tripathy, who is the CFO for Max Life. He's joined me as well. And Mr. Jatin Khanna, who handles the investor relations for Max Financial Services.So let me start with the key highlights, and then we can move on to some of the strategic priorities for the group. And then thereafter, we would welcome questions from you all.So we had a pretty solid year, I must say. The revenue growth has been 15%, achieving INR 14,967 crores. Our consolidated PBT, however, was lower than last year at INR 538 crores, but then last year was an unusual year for us, when we were in the midst of a merger with HDFC which you are all familiar.Moving on to some highlights of Max Life specifically. You will recollect that, a few quarters back, we had shared an aspiration to get to a 20-20-20 performance on embedded value, sales and margins. And this was to be achieved by 2020. I'm delighted to share that we have achieved this during the year itself. The MCEV has grown by 21% on an operating basis, and so the EV is at INR 7,509 crores. This is after dividends, right?
Yes.
Yes, yes.
This is after dividends. Value of new business has grown by 31% to INR 656 crores, with our margins at 20%, and that's an improvement of about 140 basis points over last year.Our individual adjusted sales, that has grown 22% to INR 3,215 crores, with an undiluted focus on traditional and protection products. We have experienced a strong growth across all our channels, and we are very encouraged by our -- by this performance. We continue to focus strongly on digital, and the e-commerce channel has grown 112%. Online ULIP has been launched to gain further market share in the online market. Protection sales, including individual and group, that's grown 35% year-on-year, resulting in improvement in protection mix from 7% in financial year '17 to 8% in financial year '18. We want to take this to about 11% or so by financial year '21. Gross written premium has grown 16% to INR 12,501 crores. There's a 15% growth in renewal premiums at INR 8,152 crores. And this has been led by record improvement in the conservation ratio to 90%, which is one of the highest in the industry.The trend lines in the expense ratios, conservation, persistency all continued to show a healthy year-on-year improvement. Claim settlement ratio at 98.3% is probably best in class. Our solvency surplus is at INR 2,028 crores, with the solvency ratio registering 275%. Assets under management has for the first time crossed the INR 50,000 crore milestone; and now it's at INR 52,237 crores, growing 18% year-on-year.Some softer aspects of the business, and these are awards and accolades. Max Life has won the life insurer of the year at the Outlook Money Awards for 2018. And they also won a gold at the ASQ world conference for quality and improvement for the year 2018.Now briefly about the performance highlights for Q4 of 2018.Again, strong performance with a 23% growth in GWP, which is at INR 4,648 crores; 28% individual adjusted FYP growth to INR 1,339 crores. And the shareholder profit pretax has increased 3% to INR 225 crores.I'd like now talk about some of these strategic priorities for Max Life for during the period, what we are envisaging from financial year '19 all the way to '21. And we've just concluded our business and strategic review.So some highlights on that. We will continue our efforts to deeply integrate with our partners; and build capabilities across products, marketing and technology. We will accelerate investment in proprietary channels to build a robust multi-distribution architecture. We will aspire to grow these channels by around 35% CAGR over the next 3 years to get to a more balanced channel mix; and get as close to about 35% to 40% contribution from these channels; bring down the Axis to about 40% to 45%, and the others 15% to 20%. Max Life agency channel is one of the few channels in the country that is delivering positive margins. We will continue to build on our market leadership in online sales because of consistent pricing advantage powered by strong underwriting capabilities.I'd like to now just touch upon the bancassurance strategy. There's a sharp focus to retain and grow our existing partners. There's also a lot of curiosity in terms of the Axis Bank partnership, so here I'd just like to say 3 things. And we have a kind of a socialized script between Axis and ourselves, and I've said this on some of my investor meetings as well. Number one, our arrangement, which is still 2021, that is strong, solid and sacrosanct, so that's not changing. Number two, any of these long-term strategic initiatives like greenfield, brownfield, we told, is not a priority for the bank at this point in time. And the third thing is that, if and when they decide to do something which is strategic in nature, we would be frontrunners. And this is because of the fact that we have a long-standing, mutually rewarding relationship. So on our side, we are very optimistic that we are a preferred partner. And I'd like to believe that the arrangement which they have with us is far superior to any other option that they may want to explore in the future. In our assessment, the value creation from us is in multiples of any other option, so we will continue to maintain an aggressive posture towards inorganic growth for acquiring bank-based life insurers and acquiring new banca relationships. And to this effect, the Max Financial board has approved a significant capital raise too. There will be a focus to pursue a more balanced product portfolio with a bias towards preferred segments in which we want to [ progress ].Given our increased focus on the affluent customer segment, you will see proportion of par will reduce to around 40%, contribution from ULIP increasing to about 40% and protection focus contribution increasing to about 11% from the current 8%. Having achieved the 20-20-20 target over 3 years within 1 year, we have now set our aspirations to a 25-25-25 target over the next 3 years. The key drivers will be growth acceleration, increased protection focus and sustained improvement in cost ratios.So to sum up. Max Financial Services is delivering strong performance for shareholders via Max Life, which is further improved as Max Life delivers on its new strategic plan. There's a 3-pronged strategy in play for addressing the channel concentration risks that have been playing in the mind of investors: aggressively grow our proprietary channels, retain and grow existing partners and pursue inorganic opportunities to balance out the channel mix in a shorter time.On that note, I'd like to hand you back to the moderator and open it up for questions and answers. Thank you.
[Operator Instructions] We take the first question from the line of Kunal Shah from Edelweiss.
Sir, this is Prakhar. A couple of questions. First, when I look at your unwind rate, which has come up by -- to 9.73% vis-à-vis 9.5%, whereas when we look for other players there has been decline. Anything to read into it or why we have seen a rise in this unwind in discount rate?
No specific reasons. These are minor movements. You may also like to see that the -- our non-hedgeable risk, which typically is higher the -- than the market, we do it at 5%, whereas I've seen that the market players are at 3.5% to 4%. So when it unwinds, it unwinds at a higher rate, so you should expect us to have our unwind rate higher than the market players because of that reason.
So that probably will continue in future [indiscernible].
Yes, that's correct.
And second is more from an overall perspective. What do you see -- how do you see the overall size of protection market in India, if there are any ballpark number? Or how do you see it in the Indian context?
Yes, basically I will give the answer broken into 2 parts. One is the group market which to a great extent is protection only if you exclude the funds business, which really is not life insurance but is fund management business. So if you were to look at the group business, almost all of it is protection. And it has been growing close to about 15-odd percent year-on-year. So that should continue to build. On individual side, I think the current mix will be in the range of 2% to 3%, if you include the entire market including LIC. And I'm reasonably sure that, in a few years from now, that should go closer to 10%. And that by far will be one of the highest margin drivers. If a company demonstrates very strong underwriting capabilities, then it will be a strong margin driver. So we are definitely quite bullish on the protection market. And that's reflected in the strategy that Mohit just outlined.
And last question. How many banks have we tie-up therefore in terms of credit protect plans? And related question related to it: There's so much -- so there has been commentary from various other players that credit product business is possibly seeing higher level of competition and thus placing there some pricing pressure. Do you also see the same? Or probably it's too early to comment.
So we have a credit protect business with people who we work closely, but as you can -- as you may know, credit protect business not only comes from banks but also comes from NBFCs, other financial service providers and loan providers. We currently have -- the largest relationship is with Axis Bank, but other than that, we have a relationship with 3, 4 other NBFCs. And we are in the process of building it. However, a large part of this growth from our current 8% to 11%, 12% is predicated on individual, so we will be quite aggressive in the individual businesses, which is more sustainable. And we believe that it will continue to provide good source of margin as we continue to work through.
Okay. And the second part is a pricing thing. Do you see any pressure on pricing flowing through in credit protect businesses?
Good flow-through. I mean that's really a B2B business, and in B2B business it is logical that the margin generally gets [ some doubt ] as more people jump in the fray. And exactly for the same reason as I described to you, we are going to be more aggressive in the individual business rather than in the credit protect business.
[Operator Instructions] We take the next question from the line of Madhukar Ladha from HDFC Securities.
Can you name the sources and quantify the amounts of -- that have caused this improvement...
We are not able to hear you, Madhukar, that well. If you could please come close to the phone.
[Operator Instructions]
[ I think be broke off ].
Well, as there seems no response from the current participant, me -- we move on to the next question. It is from the line of Utsav Gogirwar from Investec Capital.
Sir, it's just a couple of questions from my side. If I look at the AUM growth for this year, it has declined compared to historical run rate. It is now around 18%. Is it because of the decline in markets or higher [ surrenders ], any specific reasons?
None of that actually, some bit because of market being more stable but none of that. Typically our growth rate will range between 18% to 20%, 22%. And it completely depends on how you have written the business, some bit. So no specific reason. We expect it to be in the range of about 18% to 20% going forward.
Okay. And sir, second question is I just want to understand the distribution from an Axis Bank perspective. Like LIC is doing good business with them, so I just wanted to understand how the things will span out over the next couple of years from Axis Bank distribution channel. How are we looking at that, please?
So your observation is correct that [ Axis Bank ] is another distribution partner that [ Axis Bank ] has. What I'd like to inform you is the -- perhaps the segments where we operate, the two of us, is quite different. So while Axis Bank -- LIC operates more in the segment of low ticket size or single premium, as you know, we don't operate in those 2 segments. So we have mutually an exclusive market that we're targeting. If you were to look at a percentage of total sales that is going to LIC at this point of time, it is less than 5%. And we hope that it continues to remain or will continue to remain sub 10%. So really from our perspective we are quite comfortable with how things are, and it is not different from how we had anticipated it to be.
[Operator Instructions] We take the next question from the line of Madhukar Ladha from HDFC Securities.
Sorry about last time. Something went wrong with my line. My question is on the margin improvement. Can you name the sources and quantify the different sources of margin improvement?
So basically 2 big sources. One source is higher protection. That should be close to about 1/3 of margin enhancement. And the balance 2/3 is on account of a couple of things: a, a hardening of interest rate, which generally gives a better profile on margins of non-par; and also a new design -- or improved design that we came up with within non-par itself. So those are a couple of reasons that should contribute 2/3. So that's really the full margin enhancement.
[Operator Instructions] Next question is from the line of [ Shelindro Mundhra ] from [indiscernible] financial.
I want to understand a little bit. There have been some press reports that you have been bidding for the IDBI Federal Life Insurance company et cetera, so could you please throw some light on what kind of financial arrangements you have made in order to acquire any company if it is -- it comes your way? Because it's weighing heavily on the share prices and investor sentiment. So like to have some clarification, please.
Okay, so I can only comment on the fact that we are one of the bidders who have reached the final round for this particular transaction. You will appreciate that, since it is a bid process, there's no way that I can talk numbers here. At this point in time, we are to meet with IDBI Federal shareholders for what is going to be a final, final round. We are in the process of working through documentation. And as far as the funding arrangements are concerned, we have tied up the funding. We have managed to get underwritten offers from several banks, but I'm afraid I won't be able to add more color in terms of quantums or what those arrangements are because of the fact that we are in a very, very sensitive stage, as far as the bidding is concerned. You'll appreciate that.
Yes. So at least, will it be a mix of debt and equity, only debt or only equity? Any light on that?
So all of the above, including Max Life, including Japanese. So it's all these options are going to be evaluated at the appropriate time.
Okay. And one last question on the same thing. Does it -- if you manage to acquire the company, IDBI, Federal Bank, does it give you any advantage in terms of bancassurance channel with those 2 partners, IDBI and Federal? Or is it part of the deal, or what?
Yes, of course. I mean that's the only reason we bid. It's for the distribution. Although, they have a very clean book, a good book. And it's about maybe 1/3 our size, but it's a good book. Nothing major came out in diligence, but yes, the whole idea is to enhance the distribution. And it comes with 2 big banks. And that's why I think most insurance companies bid for it. To start with, there were 16, down to 8; down to 5; and now down to, I don't know, a couple maybe.
And when is the entire process going to be completed? So when would you -- would we know that the -- it's closed?
Closed, it will be -- is only after statutory approval, but if you are asking when is a decision going to be made, we are hoping that will happen sometime in June. [ We're hoping ] like that.
We take the next question from the line of Bhavesh Jain in -- from Envision Capital.
Sir, for this year, our claims and other benefit payout growth rate seems to be high versus the turnover, overall revenue, so how do we -- we should see this line item going forward?
Yes, it's because the majority of ULIP and par book [ have been ] maturing. So that is the reason.
Okay. And sir, you said in FY '17 there was some one-off in PBT line item. Is it possible to quantify that?
Yes. Basically the largest item was an item which happened because of falling interest rates. So we realized all the gains on the shareholder account, and that was close to about [ 150-odd crores ].
Okay. And sir, how do we see this other banks channel going forward in terms of the growth rate in that particular channel?
We will expect it to be higher than the company growth rate because some of these channels are growing quite rapidly. So if you look at, for example, this year, the other category, you will have noticed, has grown faster than the average company growth rate.
We take the next question from the line of Neeraj Toshniwal from Emkay Global.
So I just wanted to understand on the margin improvement, which [ you really ] talked about some time back. How much of it is sustainable in terms of the 2/3 portion? Because the protection [ mix, okay ], are improving. And you will be improving more, but [ out of this ] 2/3, I wanted to understand how much it will be repeat business. And how do you see that?
We see that as quite sustainable. You heard Mohit just talk about our strategy on going to 25-25-25, which means our outlook is that, in next 3 to 4 years, our margin should reach close to 25% from the current level of 20%. And that will happen on the back of increased penetration of protection as well as growth, which will start to [ churn ] economies of scale and better leverage. So those 2 factors put together should take our margin up from current level of 20% to around 25%.
Okay, but my question is actually this 2/3, if you can talk about more on that and how much will that repeat. I mean a hardening of interest rate is -- again, it can change. And where do you see that? I mean...
Well, just to be honest, we will able to protect that margin because what happens on a non-par interest rate guaranteed design is that, if the interest rates fall, then there is an impact on the margins, but then now there's a flexibility to go ahead and refile the products. So in a way, it will be easy for us to protect the margin irrespective of how the interest rates are moving. And hence, I'm quite comfortable that the margins on non-par will be where they are.
Okay, and possibly no impact from change of interest rate. What assumptions are taking in that? I mean for the interest rate [indiscernible] margin.
We used [indiscernible] of like I have shared in the deck.
Okay, okay. And on IDBI, Federal, what was the EV book they had in FY '18?
So those are really confidential pieces of information that we'll be quite reluctant to share.
We are bound by a confidentiality agreement. So we can't be sharing too much information on that at this stage.
Okay. And one more thing was like there was a change in your presentation of -- for the group and individual for the protection biz. So last year was something like 5%, which is now the consensus [ seem does ]. So...
Basically this is just to bring it in consistent with how other people a reporting. We were earlier reporting only on individual basis, but what I found was most of the people are reporting total protection. So we just made sure that we reported a total level. However, we have also given visibility to individual and group separately. So you will notice that it gives you a more comprehensive picture of our current protection mix.
Okay. And in terms of your ticket size in protection, are we seeing ticket size improving after, I mean, of -- especially in the individual segment, after [indiscernible] and a lot of things that are happening and people are bringing in different kind of products as well?
That's generally an attempt that we work towards. However, it is not the biggest driver of margin. And it is quite range bound typically on average. On average, our numbers will vary between INR 13,000 to INR 15,000 per ticket size.
And last question would be on your cost ratios, I mean, which has improved actually a lot in terms of policyholder 20% of GWP, as you mentioned. Where do we see after investments to be made in the agency channel? So where do we see in over the next few years, to be consistent or higher...
Yes, absolutely expect it to get better. And just to give you some sense of the agency investment: We are making investments to ensure that our current channels start to get [ filled up ], but equally the decisions that we are making around expansion are not hugely fixed costs oriented, so there'll be better control on costs. We are also attempting to leverage the current infrastructure as much as possible so that we could [ stretch ] our assets better. And hence, in about 3 years' time, we will definitely expect it to be more closer to 10% from the current level of 13%.
And 10% basically reducing the costs of -- basically we are seeing reducing the cost structure by...
No. I mean really you hold the costs at lower level, and you expand. So it happens more out of expansion overtaking the increase in costs. And my sense is that the numbers will be between 11% and 12% from the current-level 13%, if you outlook 2 more years, 3 more years from here on.
We take the next question from the line of Sumeet Kariwala from Morgan Stanley.
Prashant, just 2 questions from my side. One is on the group protection business. Have you shared any breakup between credit life and term?
It's -- Sumeet, it's in the presentation.
It's there in the presentation, is it?
Yes...
Okay, so I'll take it from there. And the other one is if you can share the distribution mix for individual protection as well. I'm not sure if it's there in the presentation or not.
So basically, if you look at the credit protect, it is close to about 1%. The individual is close to about 4.2%. So between the two, credit protect and individual will come close to between 5.1% to 5.2%. That's where we'll end up. The balance is [ GTL ] business.
Yes, okay. Okay, balance is [ GTL ], yes. And the other question was with respect to distribution mix of the individual protection business. So how much is...
So a large part actually of the 5.2% that you see, needless to say the share from our own channels is reasonably high, will be in the range of about 5% to 6% of their sales being protection. For the bank channels, it ranges between 2% to 3%. So the weighted average comes to about 5.1%, 5.2% at a total level. Group credit life, a large part actually comes from Axis Bank.
Okay. And how much of initial protection will be third-party web aggregators, something like that, online web aggregators?
Yes, it will be close to about 1%, around 1%.
So 1% of overall APE.
So you see we are -- I mentioned to you on individual basis we are close to about 4.1%, 4.2%. Of that, I think Internet total channel is about anywhere between 1.5% to 2%. And of that, about 50% to 60% comes out of aggregators.
We take the next question from the line of Aditya Jain from CLSA.
This is Prakhar. I just wanted to just get a sense on the product strategy between ULIPs and par. This year, ULIPs have seen a very strong growth, whereas par is flattish. Margin profiles of these products generally are not very different. So one, can you discuss it in the context of is there a thought process around changing the mix towards ULIPs? And what will be the difference in terms of margins on these products?
Well, basically we don't declare margins at product levels, but margin profiles on par are slightly better than margin profiles on unit linked. When I say slightly, which means about 200 to 300 basis points more. We did maintain and we have been telling that we want to reach higher level of balance in our product mix. And from that objective, even in the last call, we described that, when we look at long-term product mix, we would like to be between 35% to 40% par; a little over 40% on ULIP; and the balance, on non-par, with a higher orientation towards protection business. And what we did last year was an attempt to align it to our long-term strategy. So we are happy with the current level of product mix. Suffice it to say at this point in time that we don't intend to become a player where ULIP will be 60% or 70% of our product mix, but we want to remain that -- in the range of where we are between 40% to 45% [ of unit ].
We take the next question from the line of Avinash Singh from SBICAP Securities.
One question on persistency. I mean we have seen towards a longer [ period ] persistency continues to improve. What I mean on 13 months is we are sort of stable at 80%. Now I mean, realistically where do you see this persistency evolving? And how much this persistency improvement you expect to contribute towards your ambition 25%, that 25% [indiscernible] margin; what sort of improvement that realistically this persistency improvement can bring into your margins.
The 80% number that you see for 13th month, 80%, 81% number, should go past 85%. So I'm quite hopeful that, when we finish this year, we will be in the range of about 80% to 83%. And we'll continue to make progress. So suffice it to say that, in 3 years' time, we should attempt to be north of 85%.
Okay, okay, and a similar sort of an improvement, of course not that same level, but the improvement directionally should be similar over the [ other tenders ], like or 25s or 37 or so on.
[indiscernible].
It just flows -- with every passing year, it just flows and transfer to the next tranche.
Yes.
[Operator Instructions] Next question is from the line of [ Nihal Shalma ] from [ Edelweiss ].
So I wanted to ask that -- since you maintained that you will keep your ULIP targets at 40% distribution mix, so what products do you see as contributing to your growth in future other than the protection business?
Well, a, 40% to 45%, so not just quite 40%, between 40% and 45% is the target. Again, tactically it may go up or go down, depending on how the markets are moving. And we will be opportunistic about driving growth. B, while products do play a role in terms of driving the growth, we are anticipating that the growth will be driven also because the investments that we are going to make in our own channels, as well as productivity improvement that we see year-on-year through the bank channel. So a large part of that is -- on growth is also about expansion of distribution channel.
So in terms of breakup of distribution through banks, so what -- as of now, what is the distribution mix for different products that you are selling to your banking arms? As you previously mentioned, 6% to 7% -- sorry, 2% to 3% are protection sales. So what is the breakup for your bank...
So basically, depending on the bank, it ranges, again not very different from how you see it to a top level, between 45% to 50% of ULIP; about 10%, closer to 10% on non-par; and then the balance of participating. So they also sell quite a balanced product mix like the entire company sells.
[Operator Instructions] Next question is from the line of [ Sorub Duli ] from [indiscernible] capital.
I just have 2 things to talk to you about. One is on the protection side. Now we have -- for the last couple of years, you have seen a consistent improvement in the protection business, in the proportion of the protection business, so I just wanted to know. What kind of initiatives have you taken which have led to this consistent improvement? So that is one. And the second would be related to this acquisition that you're looking at. I understand that you are obviously not in a position to give out the financial details, but were you to, say, acquire this particular entity and, say for instance, if there was any other entity, would you have plans to sell your own policies, that is Max policies, to the channel of this particular acquisition that you would have? And how would you look at cannibalization in that case? Yes, those are my 2 questions.
So let's take the first question, first, on your question on protection. It is correct, that we have been focused on protection business. And if you look at our individual protection, for example, we have grown it quite consistently over last few years. And the objective is to continue to grow. I have given a slide also on looking at the protection in terms of number of policies, how we have grown over last 3 years. And all of them are witnessing strong growth. The reason for that growth is two- or threefold. A, our focus on e-commerce as a channel; and our progress on working with the digital companies, aggregators et cetera have been one of the core reasons. The second one is having or created competitive product offers which have been accepted by the market, and we continue to do very well there. And number three is the aligning the protection penetration as a part of key measurement criteria for evaluation of performance. So starting from the top management, to the last person or who does the sale, everybody is aligned in terms of goals and objectives to drive the protection up. So those are 2 or 3 reasons why you see enhancement in our protection mix. And we continue to do so, as Mohit explained. On your question on whether or not we will be selling Max policies through the distribution partners of the acquired entity, the answer to that is yes. That's the design. However, we will try to ensure that there is good phasing and there is good staging which is provided before we start to do that. If we were to acquire this and we succeed in our bidding process and we happen to acquire, then there'll be a very detailed plan that we will lay out to start to put distribution. And you see distribution as a part of this acquisition strategy. I didn't quite get your question on [ being rep sales ], replacements et cetera. It's just that currently there's -- the banking partners are selling the products of that particular life insurance company. When that life insurance company merges with our company, then the distribution partners will continue to sell the products, just being replaced by maybe a brand et cetera. But we anticipate that there will be -- it will be quite seamless, and we don't anticipate any replacement.
Okay, okay. And just one last question, on persistency. Now -- and this is something that is common to almost all life insurance companies. So on the 13-month persistency, if you look at, so the best [ is, I mean, maybe at around ] 85%. You are at 80%, and you obviously plan to move to 85%. I just want to understand what industry characteristics drive a 15 percentage point or, say, 20 percentage point drop in the first bucket, while the successive buckets have around 7 to 8 percentage point kind of a drop.
So basically it will be quite unique about India. I mean, if you were to look at more evolved geographies, generally the persistency will be upwards of 90%. Even now at Internet channels we are witnessing a persistency level of closer to 95%. There are a couple of reasons that drives persistency or lapsation. One of them is the quality of sales; and b, the ticket size. So the lower the ticket size, the lower generally is the persistency. And the better quality of representation, the better is the persistency. Also, we have noticed that, because of the lock-in which is there in -- for 5 years in ULIP designs and by virtue of ULIP being higher-ticket-size products -- generally the average ticket size on ULIP will be higher than average ticket size on any other product design. ULIP is witnessing higher persistency for first 4 or 5 years.
[Operator Instructions] Well, that seemed to be the last question. I would now like to hand the floor over to Mr. Mohit Talwar for his closing comments.
Thank you. I'd like to thank all the participants for sparing time off to be on this call. And we'll have more such calls in the future as well. Thank you very much for taking the time off. Goodbye.
Thank you. Ladies and gentlemen, on behalf of Max Financial Services, we conclude today's conference. Thank you for joining us. You may disconnect your lines now. Thank you.