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Max Financial Services Ltd
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Good morning, ladies and gentlemen, welcome to the Max Financial Services Limited Q4 FY '19 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Jatin Khanna, Max Financial Services Limited. 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, and I'm representing Max Financial on the earnings call.Before I proceed with the performance highlight, I'd like to introduce some of my other colleagues who are with me on this call. I have with me Mr. Prashant Tripathy, who is the Managing Director and CEO of Max Life. I have with me Analjit Singh, who heads the strategy for Max Life.Now I'll talk about the key highlights for FY '19 first and then update on the strategic priorities outlined in the last couple of calls as well. I'm very happy to share that Max Financial had a robust financial performance with a revenue growth of 17% to INR 17,538 crore. The consolidated profit of PBT at INR 391 crore, but was down about 28% year-on-year, but that was for some reasons which we had outlined in the investor release as well as in the previous call, so we had a one-off expense relating to the acquisition, which we were pursuing earlier in the year. Then there's fair valuation of Axis Bank put option obligation and then expenses for distribution expansion. I will talk to reasons why our earnings are down.But moving on to specifically to Max Life performance, I'll first want to start with yearly aspiration, and as you would recall from our last few calls, we have a little bit aspiration clearly to get to 25-25-25 target by 2022. Now I'm pleased to share that we have achieved a 22-22-22 target this year on the sales growth around new business margins as well as R&D, and we're progressing smartly towards the aspiration. And this is on back of, just to remind you, a 20-20-20 performing last year, so we have a considerable improvement on the performance.Now Max Life MCEV on an operating basis has grown about 22% to INR 8,938 crore. The value of new business post cost overrun has grown by 30% to INR 856 crore.Here, I'd like sort of lay emphasis on the fact that our VNB has grown by more than 30% consecutively over the last 3 years. The structural NBMs or the margin has expanded by about 230 bps to 22.5%, and the actual NBM post cost overrun have expanded by about 150 bps to 21.7%, which is driven by increased focus on protection products.Our RoEV for FY '19 has been about 21%. And again, they were like on the VNB growth, on RoEV as well, we have been consistently clocking about 20% mark over the last few years. This is best in class among the financial services industry and has been delivered without the requirement of continuously raising capital.Max Life APE has grown at a strong 22% to INR 3,917 crores with increased contribution from protection products. Max Life has outperformed the industry growth on new sales by growing 22% against diverse insurance growth of 12% and a gain about 65 bps market share -- on the market share. Again, this outperformance has been continuously over the last 3 years, and our market share now stands at close to 10%. Again, our enhanced productivity and investment in proprietary channels are predominantly the reason which has led to a 30% growth in those channels relative to a bancassurance growth of about 18%. The proprietary channel contribution has increased to 30% in FY '19 from 27% in FY '18. This is in line with our aspiration to increase proprietary channel share to about 35%.Max Life [ agency ] channel is one of the few [ agency ] channels that delivers positive margins. So that's really important because -- and actually the margin for our proprietary channels are now similar to our nonproprietary channels.Max Life has now entered into a strategic knowledge partnership with New York Life to further enhance its productivity on the proprietary channel. So already, in addition to protection product, the second big focus for Max Life is on the proprietary channels. Now continuing with a strong focus also on digital, the e-commerce segment has grown by about 57% and our protection mix, like I said, the focus area has improved by 150 bps to about 6% on the individual side and the group protection mix has also improved by 60 bps to about 4%. So the overall protection is about 10%.The GWP growth has been strong at 17% to INR 14,575 crore. And renewal premiums have grown 15% to INR 9,415 crore, and this was led by a notable improvement in our combination ratio to about 89% and 300 bps improvement in a 13-month persistency to about 83%. Our claims paid ratio at 98.7% makes us the only private insurer [ that offers ] market leader LIC and on the face of that [indiscernible] improving month after month.The AUM as at March 19 stood at about INR 63,000 crore, growing at about 21%. Max Life now is the fourth largest manager of life insurance. In AUM the fifth largest manager of -- overall AUM and including mutual funds -- other retail portfolio mutual fund. Max Life is recognized amongst top 50 companies and top 20 BFSI companies by Great Place to Work institute 2019 survey, something which we feel very proudly about. So to sum up, Max Financial is on course to drive strong shareholder outcome via a new strategic plan with significant investments in proprietary channels, sustained efforts to deepen our bancassurance relationship, laser sharp focus on cost and improvement in our protection mix. We are progressing towards our aspiration of 25-25-25 target on EV, VNB and VNB margins over the next 3 years.On that note, I'll hand over to the moderator to open the floor for Q&A.
[Operator Instructions] The first question is from the line of Abhishek Saraf from Deutsche Bank.
So just a few things. On the proprietary channel, now you say that your profitability is similar to the nonproprietary part, so -- but the -- generally, the receivable in proprietary tends to be higher expenses, more fixed cost than the banca channel, so what had led to this equalization in margin of the 2 channels? And going forward, do you think that proprietary could actually be a higher margin driver? Because right now, we are just thinking in terms of products being the margin driver. So is this the right assessment going forward? And because you're also focusing more on proprietary, taking it to 25%, so that is one on the channel part.Secondly, on the product part, sir, what are your thoughts on the non-PAR savings? So few of the peer sectors also started to now incrementally focus more on non-PAR savings bid and those who were not doing it earlier now seeing reasonable opportunity there as well, so what is the thinking of Max Life on the non-PAR saving part?
Right. I will take that [indiscernible]. We did -- it is right that the margin outcome for our [ own ] channel now are significantly [indiscernible] in the channel, and this is how it is expected also. You may recall that in the previous call [indiscernible] that the margin enhancements happened more out of our own channels because the driver of the margin are a little [indiscernible], higher protection risk, and b, as we will scale the leverage -- operating leverage [indiscernible] to our own channels. As we can see on Slide 16, you will notice that the protection mix through our own channel, proprietary channels, is significantly higher than the protection mix in the bancassurance segment [indiscernible] protection mix is about 48%, whereas the distribution in the bancassurance [indiscernible] one of the biggest drivers. Also, [indiscernible] and we believe [indiscernible] the ability to absorb the [indiscernible]. So those are 2 reasons why we need to change that our own channels and the margins enhancement [indiscernible]. And it [indiscernible] pay back by [indiscernible] the margins from our own channels are expected to be higher than the margins from the bancassurance channels. So that's the answer to your first question.On the question on non-PAR, this [indiscernible] been detailed a bit late in non-PAR, so maybe not now. It is going to be an anchor design, but because non-PAR designs are directly in terms of we [indiscernible] we always hid the [indiscernible] and our portfolio [indiscernible] in how we manage it. It is also our endeavor to be around 15% of our total product mix through non-PAR, so you will see enhancements through non-PAR that will come through in the areas of [indiscernible]. As we move forward, it is expected that the share of PAR will move towards the non-PAR broken into production, higher production and higher non-PAR guaranteed sales.
So the share of non-PAR will keep increasing obviously driven by production and even the savings bid. Okay. The last one on consistency, just wanted to understand, like, when do you true-up your persistency? So like, generally, over the past few years, we've seen it across players persistency have been improving. But in the EV calculation, so, like, do you want that persistency improvement to season for a certain period and then you account persistency improvement in your EV calculations or you do it -- or your truing up is much faster for persistency.
No. Actually, it is on the basis of experience management track [indiscernible] assessment. And the EV reports are tied to the latest experience number. So if the persistency improves, we will try to create operating variance, and some part of operating variance this year is coming from the advancement in persistency.
Sorry, I just want to add here that in terms of our aspirations, which we've forecasted for the 25-25-25 target, we are looking at persistency improving beyond the 83% insignificantly.
The next question from the line of Rahul Marathe from Akash Ganga Investments.
Congratulations on the good set of numbers. So when we see your EV walk-through, we see that Max Life has doubled final dividend INR 319 crores over and above what we have already paid, 282 crores, so what will be the dividend policy for Max Financial Services, the dividend that we receive from Max Life?
So the dividend we receive from Max Life is actually preserved for the put option liability obligation, which we have towards Axis Bank. As you know, they send -- they have about 3% ownership, which they sell back to us at a staggered fashion. So the dividend got preserved in Max Financial is utilized for meeting that put option obligation.
[Operator Instructions] The next question is from the line of Neeraj Toshniwal from Emkay Global.
So congratulations on a good set of numbers. And just wanted to ask some color on the -- how much we are [indiscernible] for the proprietary channel this year and what is the plan going ahead?Hello?
So the proprietary channel -- yes, can you hear us?
Yes, yes, yes.
For the proprietary channel, think about proprietary channel in 3 parts. One is [indiscernible]. The other one is our direct channel [indiscernible] growth. And the third one is Internet channel growth.
Sorry to interrupt, Mr. Toshniwal. Sir, there's a lot of echo from your line.
Is it better now?
Slight better. Sir, the echo is still there.
Okay, just hold on.
Hello Mr. Toshniwal?
Yes, I'm going to respond to his question. Maybe he's put himself on mute. So the focus is on [indiscernible]
Sir, the current participant has placed us on hold. [Operator Instructions]
Yes, I will respond to the question because it may be relevant to everybody else. We had taken on both [indiscernible] 145 obviously last year [indiscernible] by 1.2 and the balance [indiscernible] within this year in the first in the third quarter. The total expenses that we incurred on a CapEx basis instead of [indiscernible] was less than 30 crores. And total [indiscernible] related OpEx, including people that we've hired on new channels, agencies, everything, every setup was close to about INR 58 crores. So just to give you a high level sense of number, we spent about INR 58 crores in CapEx in new channels and about INR 20 crores in digital and about INR 28 crores in certain of the offices as CapEx. The total cost was about [ 100 crores ] and it has been focused around setting up new offices, hiring more people, enhancing capacity, making investment in growing dividend channel in just about everywhere.
[Operator Instructions] The next question is from the line of Neeraj Toshniwal from Emkay Global.
So my line dropped. So just wanted to ask on the investment side on the proprietary channel and the plan going ahead.
Neeraj I just responded, and I'll say again to you that we made a CapEx investment of about INR 28 crores in [indiscernible] close to about 120 offices. And we also had OpEx of about INR 58 crores in setting up all the [indiscernible] offices, new channels, everything that we've decided we will do that because [indiscernible] some sections are [indiscernible] digital [indiscernible] and [indiscernible] close to about INR 90 crores of OpEx and about 30 crores of CapEx. As we look ahead, the plan is to continue to grow, but not at this speed, so we have planning to open about 60, 65 offices [indiscernible] .
Okay. And on the subject of strategic partnership with New York Life, how is that progressing? Any color on that? I mean, what different they're doing [indiscernible]?
[indiscernible] Thank you for asking that question. If you look, it's a very strategic partnership. And actually, the entire [ team of ] New York Life has had very significant solutions that New York Life are working with us to, a, look at [indiscernible], it will see recruitment and the development and development of leadership [indiscernible] those are core projects that we're working on. There's a big plan we're tracking to it. And as a result of that, we're hoping that [indiscernible] retail growth will continue.
Okay. And on the last call, we -- so that we're looking at selling some part of Max Financial as well, so any [ progress] [on that or any color on that?
No. What we had said was that at some stage we would look at it. But maybe this is not the right time from our perspective. We don't think it's the right time, so therefore -- what I think Mr. Talwar had said in the last call was that at some stage we would look at it.
Okay. And on the development with Axis Bank, where are we? If we can have some color on that as well?
Yes, at this stage all I can say is that it's progressing. But at the same time, there is no tangible development, which I can report. So [indiscernible] this at this stage.
Okay. And if you can give me the ticket size of product-wise? I mean, segment by [indiscernible]. If that's handy with you.
Yes. If you could send that email, we'll be able to contact you on the [indiscernible].
Sure. And the last question, what are the severance fee of INR 25 crore that was there in the standalone entity for a particular employer or group of employer. I mean, that's kind of one-off.
So there has been sort of, I'd say, several conversations with investors, analysts effectively to say, the Max Financial cost and all of that, what's the long-term plan around those costs. So this is a journey, which we have now started to [indiscernible] sort of prune down the cost. So I think if you look at the P&L for Max Financial and I'm taking the one-offs away, which is like the acquisition cost or Axis put option liability, et cetera. If you really look at it from an operating P&L standpoint, Max Financial had about INR 85 crore of cost. So the whole idea, through settling some of the employees, et cetera, and some of the other associated cost also which come down is to bring that to about -- more or less like a INR 55-odd crores number this year. And in the future, this will -- is likely to further go down in the next few years. So the whole idea is to bring down the holdco cost to sub INR 50 crore over the next few years. And then by this time, this thing becomes irrelevant and sort of meaningless from an overall [ fiscal ] standpoint because both the EVM and VNB would have become so sizable that it would sort of be like some decimal points or EVM with a low single digit number of VNB. So really, the idea is to sort of address that expense because of which some people sort of talk about some sort of holdco discount [indiscernible] so the whole idea is to sort of take that concern away from the investor.
Got the point. And there's one mention of buying off [indiscernible] Axis, so this 0.74% from Axis at a cost of INR 165 crore or including the cost of some [indiscernible] 0.3% buyback?
[ Give us ] total.
The next question from the line of [indiscernible]
Sir, just wanted to check, what does the banca channels retail APE? And I was comparing the numbers, which are given in the presentation from the presentation, which was given last year, quarter 4 FY '18, the number doesn't seem to match. So just wanted to crosscheck on the change in the banca APE?
Is there minor variance or a big variance?
There is a minor variance, I wanted to understand on what -- why that number -- the variance has come in from INR 2,335 crores in -- it was at INR 2,299 crore in FY '18 and this year we've reported that to be INR 2,335 crore. In fact, all the number still FY '16 have gotten restated for banca channel APE?
Yes. We have taken out the group business, so credit protect business for the banca, and we have shown only the individual. Just to give you a sense of individual as it's also aligned to -- okay, so there may be a delta between individual and group, that could be the variance. The higher number, including this, the lower number will be individual.
The next question is from the line of Ashish Kacholia from Lucky Investment Managers.
Congratulations to the team on a good set of numbers. My question regarding the industry growth, the share of industry has grown to 9%, which is pretty low for an under penetrated market like India. So do you have any thoughts on this? Why is the industry so slow?
Yes. We believe -- I mean, there's a [indiscernible] on why it was 9%. It was 9% this year because the last year we were at 20% [indiscernible] or 20% plus. So because the high base is at lower [ help, so you'll have a number ] which is lower. The private industry has grown at around 12%, our growth is 22%. My view is that what makes India's industry growth rate will be in the 13% to 15% zone as the base settles. [indiscernible] 6%, 7%, out of inflation, so 11%. So I mean it's -- [indiscernible] So there's no potential for the industry to grow from high double digits or something. So you will see private companies, you will see some of them [indiscernible] that. It's a very foundational industry and will lead strong limitations on how it is growing. So my math will be 11% of nominal GDP, plus 2%, 3% plus of limitation everywhere, it will be in the range of 14%, 15%.
I think then the -- also, part of the sort of the demand impact because Q2 FY '18 as well, which could have created a little bit higher base for growth to look a little tepid.
Okay. And how is it trending in the first -- in April, May of this year? I mean, are you getting a sense that there is a good demand in the market or is it going to be, like, slow?
Looks pretty good. We are hoping that the first few months for us will be upward of 25%, so overall industry outlook is okay.
25% for us, okay, that's nice. And any thoughts on the -- from what I understood, when we had discussions with HDFC Life, the merger deal, the deal couldn't happen because there was issue of the Max Financial Services company, which couldn't get more written insurance company. Can you just throw a little bit of light on this regulatory angle of M&A process regarding Max Life?
Sure. So let me take this one. So what happened in the HDFC Life transaction was that there was a section called Section 35. Under that section, IRDA can approve an insurance within insurance company merger within insurance company merger. Now here the thing was that for a nanosecond, the insurance company was merging into a CIC and then simultaneously demerging into an insurance company. So that was sort of wanting to -- because it was a very technical sort of merger and not a merger-merger with an [indiscernible] so that is my point number one. Point number two was that Section 35 talks about insurance, insurance that IDA approved but does not prohibit a noninsurance and insurance merger. So that is the second sort of very important point.Third very important point was there was no assets of noninsurance business moving into insurance business. That was sort of the third critical point. And the fourth thing was there was a [indiscernible] of judgment, which supported the thing that these teams have to be looked at holistically and therefore the sort of the company just doing their [indiscernible] not really staying into an NBFC, so it's not an insurance-driven NBFC merger. So those are the 4 arguments. But what happened was that those arguments were submitted after [indiscernible] had already given its opinion. So when we represented to [indiscernible] all these arguments, then we got, your opinion does not stand good because you've sort of not understood the case properly.And as you said, I can't change my opinion, so you have to either now go to [ AG] or you go to [ SAT ] When we went to [ AG ], then we went to law ministry, finance ministry because there was [ lots ] of time that got lost in all of that. So this time the IPOs of both ICICI and HDFC Life has been done, so HDFC life sort of decision was to say that whether they pursue this [indiscernible] and go [indiscernible] or they go in do their IPO. They chose latter. And therefore, the transaction was called off. So that's the -- so that's what happened.
Okay. So now if you were to hypothetically assume that Max Life is to be consolidated with another entity at some point of time, when -- the way to do this would be that this company would have to merge into another finance -- into another insurance company. That would be a clean way of doing it?
See, I don't want to sort of get into the...
No, I'm just checking the feasibility. I'm just saying that if it is to be merged with another insurance company, there is no hurdle, right? That's all.
There are several structures possible if you have to do something like that. For example, we bought one, IDBI Federal, and as one of our acquisition, IDBI Federal would have been merged with Max Life. So I guess it depends on the situation and circumstances, but clearly, there is true consideration for any merger or...
Sure. I appreciate that, I appreciate that.
The next question is from the line of Hitesh Gulati from Haitong Securities.
Congratulations on a very good set of numbers. Sir, just 2 questions. One is on this operating variance of INR 126 crores, so does this include operating assumptions in here also?
Yes.
And sir, so what would that quantum be in this INR 126 crores?
We think the large part is coming from the different [ assumptions ] being given and [ demographic ] assumptions being given.
Okay. Sir, so my question actually, sir, this INR 126 crores, do we break up between operating variance and operating assumption changes?
Well, I'll tell you, operating assumption changes off the INR 126 crore will be close to about INR 60 crores will be still variance and about net INR 20 crores on assumption changes and assumption changes with respect to demographic variances. And then there are some assumption changes with respect to lapse revival also, which is the balance.
Okay. And sir, just one last thing. What is the tax reduced -- increased effective tax rate? And also, what is that number that you are building in right now?
We don't really reveal that number. I think it is closer to 11.5.
Okay. So it's not marginally -- it's only slightly different from what is the rate of -- a marginal tax rate for us?
Yes. I mean we had -- we went through -- it is not simply just copying the practice of who will do what. We had a claim to IDAC, which IDAC agreed and approved. So we've gone through the [indiscernible] [ part of this and that business has continued to ] [indiscernible] and went down from 13.56 to 11.25.
The next question is from the line of Sanketh Godha from Spark Capital.
Just wanted to understand why we bought the stake of 0.3% from Mitsui Sumitomo in the current fiscal year. And the second thing is that we had paid around INR 165 crores in the current year, for 1.05% payback -- buyback. So can you just break it down into Axis Bank -- what we paid to Axis Bank and Mitsui Sumitomo?
So before I answer your second question, I will -- let me first answer the first question, which is -- has to do with the 0.34%. If the 0.4% of Mitsui Sumitomo was acquired, then we'd be [ whole owners of ] 5%. Mitsui Sumitomo has the preference to maintain their shareholding above 25%, because of which we had to actually -- we sold 4%, and they sold 1%. So it's not the 74-26 ratio. So when to readjust back to the 74-26 ratio, they had to sell some stake back to us once they have repurchased at least the 0.34% from Axis Bank. So as they -- [ we control the book, ] so the 2 buybacks over the last few years, the 0.34% was acquired. Then Mitsui Sumitomo sold it back to us to readjust this to 74-26. So that was sort of one -- answer to your question number one. Now to question number two, that -- Mitsui Sumitomo stake was to be bought at par value. So it's -- I believe there's anything [indiscernible]. The balance has been paid for acquisition of Axis Bank's stake.
Okay. Perfect. And just one more thing. Since we are -- at Max Life, we are paying almost 100% kind of a dividend payout, this, over a period of time, will have a bearing on solvency. So how long we can continue with the kind of growth we are doing with 100% payout -- kind of a dividend payout at Max Life level?
About 18 months to 2 years north.
Okay. So basically, it will probably coincide with the period when our renewal of higher deductions bank will come?
Yes. But that's not how we see it. But it has to be seen more in light of our net of dividend solvency ratio of 227%. We would like to not go below 170%, so that's a buildout of about [ 30% and 23%, 53%.]I think it will be consumed over a period of next 18 months.
Okay. And then if it does -- at 170%, do we -- will we change our product strategy by focusing on more -- less capital consuming products? Like maybe protection would go behind this [indiscernible] type of a thing?
Well, yes, let me [indiscernible]. We want to maintain this product portfolio actively, Sanketh.
Okay. Perfect. Yes, hello?
Yes.
And...
I do want to spend a minute talking about this capital, Sanketh. We don't want to change the product portfolio quite considerably because this yields an outcome, it balances out because you reap the overall profitability, the capital consumption as well as the ending outcome. So we will eventually have a bit lower par and a bit higher nonpar, but we are not drastically planning to change. From this perspective, [ legacy ] continue to declare dividend and everything, add capital sources. Of course, there are 2 things [ we have to keep in our mind ]. We are keeping more capital in the business, we declare less dividend. But with that, there's also the possibility of raising debt with a higher amount, we will consider both of them and choose the one that makes sense to us.
And also, I just wanted to add that once we have had a long-term arrangement with Axis Bank that is cemented, then our -- we need to do -- sort of pay -- this kind of dividend also comes down a bit.
Yes. Yes, I completely agree.
Yes, [indiscernible].
Yes, yes, yes. And just 2 data housekeeping points. One is, can you give the group protection breakup into the credit life and the GTL? And secondly is that when you said that in FY '20, we want to keep holding company OpEx at INR 55 crores, can you just break it down into employee cost and non-employee cost? I think the legal expense is the largest, second line, so just if you can give a broader breakup of the INR 55 crores into these 2 numbers.
Sure. So [indiscernible] -- I think before I give you the breakup, let me just say that the legal expenses point which you just mentioned is not just the legal cost per se. It also includes this support which Max India provides to Max Financial because if you look at it really, Max Financial has only 6, 7 people. So that is sort of one thing and which is why that cost broadly remains sticky. One second, I'll just pull out the other information for you, which is the employee cost. If I -- really I remember it, of the INR 55 crore, employee cost was about, I think, INR 25-odd crore. So just give me a minute, I'll see if I can find that number.
Okay. In the meantime, can you give me the production breakup of group?
On the group business side, yes, you will see our group business of about 4%. That is both -- the mix category, high level will be employees of GTL, [ recall, ] of 3% and maybe less than 1% for the credit life business.
Okay. Perfect.
On per team basis.
Yes, yes. Credit life, 1%, okay. And if you -- if that breakup would be given, then that would be great, on INR 55 crores, broadly the breakup.
Yes. Well, I'll just reconfirm that number. So the employee -- yes, like I said, the employees cost is about, say, about INR 25-odd crores of that, and the rest is other expenses. Actually, also, I'll tell you -- I'll just mention one more thing. See, legal expenses, you should not look at it at gross level because Max Financial also cross-charging -- for the services it provides. So mainly the legal and professional, we look at it at a net level, which is generally around INR 15 crores, INR 20 crores.
The next question is from the line of Suhani Doshi from Edelweiss Broking Ltd.
Sir, so my first question is, wanted to understand this 25% VNB margin guidance which you gave. Is that the structural level? Or is it the post-cost margin?
Post-cost.
Okay, okay. So by then, we are -- so also, if you can help me understand, when would we see this cost overrun reducing by then?
I mean cost overrun is a factor of investments. If you continue to make investments in growing our own channels, you need cost overrun marginally. However, our cost overruns are very low, less than 1%, so I really don't worry about it. But I think the year -- the next year, by next year, the cost overruns will [ go down ].
By FY '20, it should be done, with?
FY '21, it should be done.
Okay, okay, okay. Also, can I get the total number of agents for Max at the end of the year?
Max was about 50,000 agents.
50,000. And how much will be our active percentage at an average level, active number of agents in percentage terms?
Actually, we have gone beyond active [indiscernible] was active. No, we -- what we measure is agents broken into different levels of productivity numbers. And on charts that we have given on agency...
Page 17.
Page 17, you will have all the numbers.
Okay, active [ agents]. Okay. Also, is it possible to give the breakup of the ticket size at the channel-wise? Banca and agency, what will be the ticket size?
Proprietary, overall ticket size is around INR 40,000 to INR 45,000, which includes agency, Internet and direct channel. The agency ticket size is around INR 55,000. The banks are operating at a ticket size of INR 70,000 to INR 90,000.
The next question is from the line of Chandra Govind (sic) [Chandra Govindaraju] from Ashmore Group.
This is actually [ Jiten ]. Great set of numbers. One question on structuring. I was just wondering, when Max Life Insurance pays out this dividend and this money is used essentially to buy the stake with Axis Bank, is that leading to tax leakage by way of dividend distribution tax? And I'm just wondering, is there a better way to sort of use that cost?
We are -- there is, unfortunately, no better way to use that cost. If there were one, we would have loved to do it. But unfortunately, given all the constraints, this is the best way to sort of do this.
And is there -- again, I know you've told me this before, and I'm sorry I can't recall it. Sort of what's holding back the merger between the Financial Services and Life Insurance now -- and the insurance business now? Because there is really nothing else, barring the -- some of the costs sitting at the holdco.
The -- some of it, the -- so I'll call it the #1 item, which is the question that was asked in the call before, which is this whole conversation around our long-term arrangement with Axis Bank. So once we have cemented that, then really, we don't need to have the holdco, and then we will work towards collapsing the holdco. But like I said, the endeavor is also to sort of reduce the costs of the holdco to a minimalistic level wherein it becomes insignificant in overall scheme of things as in sort of like a Plan B.
No, no, I appreciate that. I heard that. But I was just wondering that if you collapse this, wouldn't it save you the dividend distribution cost? But I suppose you're looking at it as a limited cost for the next 2 years until this deal gets cemented. What should be the timeline by which we should expect an outcome?
If you ask our explanation as of yesterday, you know how these things are. And the dialogue takes a little bit of time to crystallize into a -- and cement into a transaction. But all I can say is [ in the course of the bidding matters ], we continue to be engaged. This timeline is something -- will be difficult at this stage to say. But I mean better if we can make that happen fairly soon.
The next question is from the line of Vinod Rajamani from HSBC.
I just wanted the ticket size by product, so in terms of, say, protection, in terms of par, nonpar savings and so on.
Yes. Vinod, if you could stand by, we will be very happy to respond. At a very high level, the smallest ticket size are for protection, followed by participating, followed by nonpar, followed by ULIP. That would be more or less.
The next question is from the line of [ Luzur Berma ] from Alphaline Wealth Advisors.
So a fairly large proportion of the promoter shareholding is pledged. Could you give me a reason behind that -- what is the rationale behind that?
Let me take this one. See, when we were doing the typing, it was very important to sort of understand what's caused that. Then there was a merger happening at HDFC Life. In some sense, the sponsor will have become financial investors in the merged entity. So there, the thing was to say that where is the sort next phase of growth we can find for the Max Group to really take it to the next level. And if the shareholding is becoming monetizable for me because I'm a financial investor, I might as well sort of make optimum use of this shareholding and start building the next phase of growth for Max Group. And so they have made certain -- so they made certain investments on the hospitality fund internationally. So that is one. The second is that from the overhead, the ownership through multiple round of fundraising had got diluted down to 30% across entities. And then over a period of time, they sort of kept buying to bring back their ownership to [ above ] 40%. That was the second big reason for price. So those were the top 2 reasons why there was a pledge on shares. Then what happened was that both, unfortunately, at Max Financial as well as at Max India fund, the prices corrected to almost 30-odd percent. And then this little IL&FS fiasco started because there was a further correction on the prices. So now with the stock prices sort of being almost 40% to 50% below their levels at which they were -- they used to be, the pledge went up. Now I think, again on the call, there was a question asked around some monetization at a Max Financial level. Now that plan remains obviously there from a medium-term perspective or [ leading on ] near term because like I said, we don't think it's the right time to monetize that -- any part of Max Financial shareholding at this stage. But you would have read about a monetization happening at the Max Healthcare front, where the idea is to sort of bring down the ledgers and therefore bring down the pledge. And we are very advanced in closing out that transaction. So I think it's just a matter of weeks and I wouldn't say months before this sort of [ turnaround ] around pledge becomes history.
The next question is from the line of Jigar Shroff from Financial Research Technologies.
Congratulations, sir, on a great set of numbers. I had 2 questions. One is, sir, the Axis Bank relationship is going to continue until '21, '22. Am I right?
Yes.
That's correct.
'21, right. And secondly, can you quantify one-offs which have been debited -- and because of which the group PBT is down by 30%. Can you give a breakup of that, sir?
Yes, sure. So I can give you breakup on the Max Financial level and to [indiscernible] Max Life level. So the first one-off, as we -- the put option liability of Axis Bank, which is about INR 106 crore, it's a noncash item in the P&L. That is one. Second is the acquisition-related finance cost of about INR 27 crore. And the third is the severance payout of about INR 25 crore.
What is the severance payout related to, sir?
Earlier in the call, we spoke about we were really trying to sort of bring down the cost at Max Financial level and therefore kind of severing some of the employees. And so that it can come down to about kind of rough level of INR 55-odd crore at the Max level. And I'm talking about the operating side and not the option liability because that can change depending on how the stock price moves. But really at an operating level, it can come down to about INR 55 crore at a Max level. Now so many people, so there is a INR 30 crore cost save that should flow through to the P&L. And I do realize that [indiscernible] some of the employees. And that's why there's severance cost up front.
Okay. So I mean that IDBI Federal and severance cost side, sir, would be a one-off. But this put option, Axis Bank, sir, would it be...
I mean for me, essentially from a value assessment standpoint because we already diluted our shareholding in Max Life to now 72%, so we own 71.8% of Max Life and not the 74%. So please understand that cost is already accounted for in the valuation. Now anything beyond that, it then becomes a book entry.
The next question is from the line of Neeraj Toshniwal from Emkay Global.
Sir, 2 more follow-up questions. On the operating variance, you said it's around INR 60 crores, so it addresses some of your operating assumption change. So are you sitting on actual assumptions, like it was simply 83%? Or should we have some room buffer available with us? Hello?
Please give me 30 seconds to answer that question.So the way it works actually is that we have to look at the demographic variance that has come, which are already there. And like I mentioned to you, about half of INR 126 crores is coming on account of [ various ] variance, broken into persistency and mortality broadly. Then there are more demographic assumption changes, and then there are other assumption changes with respect to looking at maintenance expenses and tuning it up for future or lapse revival assumptions. So the demographic variance is about INR 60 crores. The assumption changes with respect to demographic is about INR 20 crores that we expected. And the balance of INR 40 crores are changes that we have done with respect to assumptions on maintenance expenses and lapse revival impact on the LIC portfolio. So that's what we [ deliver ].
Okay. So INR 50 crores basically from demography and putting it out. Am I getting it right, INR 50 crores from demography?
About INR 60 crores from demography experience and INR 20 crore from assumption changes. So about INR 80 crores.
Okay, INR 80 crores. Okay. And the second question was on the sensitivity analysis. I think it has moved for the industry quite a lot from last time, so any sort of [ reason ] for that? I mean, for the 100 basis point movement, this seems to be about quite higher than last year. So any particular meaningful change or did the [ product environment ] Change?
The only reason [ that could be had ] that comes to my mind is the more nonpar portfolio, right, the sensitivity analysis goes up, but it's not significantly enhanced. I mean if you compare us with respect to many other competition, we are still running a very robust portfolio with respect to sensitivities of either interest rate or mortality on that section.
Yes. Maybe last year it had some bearing on the comparator, that's [ in the train ] saying. So okay, it's okay.
Yes. This was -- I don't know. If you're right, lower nonpar, there is an impact.
The next question is from the line of Ashish Kacholia from Lucky Investment Managers.
I just wanted to understand about how Axis Bank does their life insurance business. They now have a relationship with LIC as well, right?
Yes, but that's only from 2%, 3% of their overall sales.
Yes. So I mean is it that they are choosing to do less business with LIC or that's the strength of the respective products?
I think the industrial analysis there is good, for example, single premium [indiscernible], et cetera. For others, we just continue [indiscernible] and the bank is growing. So...
Okay. So I mean this is now just a hypothetical question, but it is do we really need to have a big-time sign-up with Axis Bank so that they continue to sell [indiscernible] -- continue to sell our product or like even without an agreement, will they continue to sell our product? Ultimately, it's a win-win deal, right?
[ Within product. ] Overall, an [ agreement ] requires some form of [ competency ] or the equity structure or whatever. There will be an agreement that will be required. And the objective of the -- from our perspective is to create abundance so that both the parties benefit from the relationship. In what shape, form it will come, time will tell.
Ladies and gentlemen, that was the last question. I now hand the conference over to the management for the closing comments.
Yes. Thank you so much, and thank you, ladies and gentlemen, for being on the Max Financial earnings call. We look forward to more interaction in the future. Please feel free to reach out to us for any follow-up questions which you may have. And thank you once again. Goodbye, and have a good day.
Thank you. Ladies and gentlemen, on behalf of Max Financial Services Limited, that concludes today's conference. Thank you for joining us, and you may now disconnect your lines. Thank you.