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M&M forays into Life Insurance through a JV.

What’s new

* Mahindra & Mahindra (M&M) has formed a 50: 50: JV with Manulife, a leading Canadian life insurer and asset manager, to enter the life insurance sector in India.

* This JV will primarily target the rural and semi-urban areas where life insurance penetration is currently low.

* While the focus will be on rural markets, the JV will also cater to urban areas, although it is unlikely to be among the top players in urban markets in the near or medium term.

* The life insurance JV will sit under M&M and not under MMFS from a regulatory standpoint. As per management, any other diversification in Financial Services will come under MMFS and not under MM.

Why invest in Life Insurance

* The Indian life insurance market presents significant growth potential due to the high protection gap in India relative to other developed regions. For instance, the sum assured as % of nation’s GDP in India stands at just 85% relative to around 252% in Japan and USA and 153% in Malaysia.

* Additionally, rural areas, which represent 65% of the population and 45% of GDP, have only 2% of the life insurance branches.

* Given India’s favorable demographic yield (the middle to high-income households set to comprise 50% of the population by FY30), growth potential for life insurance is huge.

Critical success factors that will help the JV deliver on their commitments

* These include: 1) high trust and recall of the Mahindra group in India 2) Control over distribution with the help of MMFS. While MMFS has a significant rural reach which even some of the banking partners may not have, they also have an understanding of the rural customer which will be critical to formulate their needs. MMFSL is uniquely positioned with 1345 pan India branches and a deep rural and semi urban connect covering 500k villages and 8k+ towns 3) strong underwriting and product capability led by Manulife, who is a top tier global JV partner.

Investments required

* The JV’s long-term goal is to become the number one life insurer in rural and semi-urban markets.

* They would target to have much higher protection cover than competition.

* However, the path to profitability is expected to take over 10 years.

* However, valuation for life insurers is based upon the embedded value created in the interim. The target valuation for the JV over the next 10 years is projected to range between INR180 – 300b.

* Key monitorable for this business would be market share in key areas, with a focus on the embedded value it creates, whether they have developed a “right to win” in this business over a period and ensuring that returns meet the required targets.

* If the Insurance regulator approves a composite license for the JV, then they may look to expand into the General Insurance space at a later date

* Our View: Based on our limited understanding on the subject, although life insurance seems to be a big opportunity in India, it will also need continued investments to seed the business while returns will be back-ended. Further, couple of issues that remain unanswered are: 1) selling life insurance in rural areas itself can be tough given the lack of understanding of the subject there which is also possibly why the penetration is so low currently in rural regions 2) While distribution reach of MMFS remains an advantage, we remain circumspect if selling life Insurance products under the same set up would be a great idea. The saving grace seem to be the fact that the investment in this JV is not material considering MM’s strong internal cash generation (OCF in FY25 stood at INR 166b). The reason we believe it is a needless foray at this stage is that they already have significant growth opportunities within their own Group, including their investment plan in EVs as well as Growth Gems. Given that the core business outlook remains positive, we continue to have a Buy rating on M&M with a SoTP based TP of INR 4,122 per share

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