Max Financial Services: Focus back on fundamentals as Axis deal concludes

December quarter results propped up by single premium products, protection plans stagnating

The stock of Max Financial Services, the holding company of Max Life Insurance, has surged 24 per cent in the past month. Much of the gains were in anticipation of Irdai’s approval, pending for almost a year, for its deal with Axis Bank and its entities.  

With the go-ahead coming last week, the bank and its associates will hold 18 per cent once the transaction concludes. Now that the uncertainty has closed out, the focus shifts back to fundamentals. If value of new business (VNB) and VNB margins are the benchmarks to judge a life insurer’s financials, there’s little to complain about Max Life’s perfor­mance, with 65 per cent year-on-year VNB growth in December quarter (Q3) and VNB margin at 28.6 per cent (up 760 basis points year-on-year).

However, if product-wise premium growth is considered, with a 36.5 per cent YoY increase in single premium plans in Q3, which accounted for 11 per cent of the quarter’s gross premium income, the segment grew faster than others, as seen in recent periods. Also, the contribution of protection plans is beginning to stagnate for the life insurer and at 16 per cent share in the total premium pool, its share is the lowest among listed life insurance firms. The protection business is crucial as it improves the company's long-term business visibility and profitability.

Analysts at Nirmal Bang note the company’s stated product strategy is to focus on long-term insurance products, such as protection and non-participating (non-par) savings. Currently, it’s largely the non-par plans that are propelling growth.

While the trend of stagnation of protection plans and savings product propelling gr­owth has been the case across life insurance companies for the past two quarters and also glaringly visible in Q3, for Max Life, in particular, it’s important to get the mix in favour of protection soon for the stock to defend its valuation.

Among the listed entities, Max Financial has witnessed the maximum increase in the share of non-par savings products, from 20 per cent a year ago to 33 per cent in Q3. On the other hand, the share of protection plans during this period has increased by only 200 percentage points, from 14 per cent to 16 per cent in Q3.

Meanwhile, Max Financial’s valuations have risen from 1.7x FY20 price-to-embedded value (P/EV) to 2.2x FY22 P/EV. While much of the rerating was largely in the last eight months, in anticipation of the deal with Axis Bank, at the current levels, Max Financial’s valuation has surpassed ICICI Prudential Life's 1.8x FY22 P/EV. Analysts at Kotak Institutional Equities note Max Financial has the strongest insurance franchise with its premium to ICICI Prudential Life expected to persist. However, given the recent rally, for the rerating to sustain, the insurer’s product mix will hold the key.

How soon the protection business engine fires will be closely watched by the Street.