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Modest business growth; VNB margin expands sharply

Robust PAR growth and Persistency trends

* MAXLIFE reported a mixed quarter as APE growth remains modest, impacted by sluggish growth in Protection/Non-PAR segment, while PAR/ULIP witnessed healthy growth. As a result, Protection mix moderated over 1HFY22. On the distribution front, the Bancassurance/proprietary channel supported the growth momentum.

* VNB margin expanded sharply to 29.1% in 2QFY22 (v/s 19.7% in 1QFY21), supported by improving product mix and base effect of high OPEX in 1QFY22. We expect VNB margin to sustain at 25-26% and estimate 21% APE CAGR over FY21-24E. This would enable a 24% VNB CAGR over FY21-24E. We maintain our Buy rating

Healthy growth in PAR/ULIP; COVID-19 claims continue to remain high

* Gross written premium grew by ~18% YoY, led by a 37%/18% growth in single/renewal premium, while first year premium grew by ~9% YoY. Shareholders' pre-tax profit grew 163% YoY to ~INR710m (-8% QoQ), impacted by higher COVID-19 death claims.

* Individual APE grew at 10% YoY in 2QFY22. Total APE growth stood modest at 11% YoY (12% miss), within which the PAR/ULIP business grew 60%/17%. Protection trends were sluggish at 6% YoY. The share of Protection stood at 16% (v/s 17%/18% in 2QFY21/1QFY22), while PAR increased to 20% (v/s 14% in 2QFY21).

* COVID-19 update: 2QFY22 witnessed the highest number of claims. Gross/net claims settled stood at INR13.9b/INR8.4b (v/s INR10.3b/INR5.6b in 1QFY21). Unutilized reserves stood at INR2.35b in 2QFY22.

* Absolute VNB grew 15% YoY (25% for 1HFY22). Margin improved to 29.1% in 2Q (v/s 19.7%/25.3% in 1Q/1HFY22). EV grew 18% YoY, while operating RoEV moderated to 16.5% (18% without the impact of COVID-19).

* On the distribution side, banca/proprietary APE grew at 9%/10% YoY. Axis Bank share constitutes 63% of total APE over 2QFY22 (v/s 62% in 2QFY21).

* The 13th/61st month persistency improved by 300bp/200bp to 85%/55%.  On the cost front, OPEX-to-GWP ratio stood stable YoY at 21.7% (v/s 23.4% in 1QFY22).

Highlights from the management commentary

* The management remains upbeat on the long-term opportunity and will now start focusing on the Protection business going forward.

* It expects 2HFY22 to be better in terms of overall growth, particularly in the Protection business. Supply-side constraints are largely over now.

* VNB margin to remain at 25-26% in FY22.

Valuation and view

MAXLIFE reported modest trends in total APE, supported by robust growth in the PAR segment, and healthy growth in ULIP. The Non-PAR/Protection segment though remains muted. However, growth is likely to pick up over 2HFY22. Growth via the proprietary/banca channel too remains modest at 9-10%. VNB margin witnessed a sharp sequential uptick to 29.1%, even as VNB/EV growth stood at 15%/18%. Persistency trends have improved, while COVID-19 claims remain high, thereby impacting profitability. We estimate 21% APE CAGR over FY21-24E, with VNB margin sustaining at 25-26%. This would enable 24% VNB CAGR over FY21-24E, while operating RoEV would sustain ~22%. We maintain our BUY rating, with an unchanged TP of INR1,250 per share (3.6x Sep’23E EV with a 20% holding company discount).

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