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VNB margin disappoints owing to adverse product mix

Strong APE growth driven by 27% NOP growth

* MAX Financial Services (MAXLIFE) reported a weak performance in 1QFY25, mainly due to a sharp contraction of 470bp in VNB margin. Total APE grew 30.5% YoY to INR14.5b (in line), and absolute VNB rose 3% YoY to INR2.5b (22% miss) during the quarter.

* Surrender charges are likely to impact VNB margins by 100-200bp for the company. Management will distribute the impact among all stakeholders – customers, distributors, and shareholders.

* We have increased our APE growth estimates as 1Q momentum got stronger in Jul’24. However, we have cut our VNB margin assumptions given the adverse product mix trends (higher share of ULIPs). Reiterate Neutral with a TP of INR 1,030, premised on 2.0x Mar’26E EV and a holding company discount of 20%.

Margins contract due to a shift of product mix towards ULIPs

* Gross written premium grew to INR54b, +10.8% YoY (7% miss) in 1QFY25. The new business APE increased 30.5% YoY, led by 27% YoY growth in firstyear premium. The renewal premium grew 10.3% YoY (in line). Shareholders’ PAT grew 51.4% YoY to INR1.6b (12% miss).

* ULIPs reported an exponential growth of 104% YoY. Retail and Group protection grew 63% and 19% YoY, respectively. The non-par savings business declined 7% YoY to INR3.9b.

* On a YoY basis, the business mix moved in favor of ULIPs to 39% (vs. 25% in 1QFY24), and the share of non-PAR savings declined to 27% in 1QFY25 from 38% in 1QFY24.

* Absolute VNB grew 2.8% YoY to INR2.5b (22% miss), and VNB margin came in at 17.5% in 1QFY25 (vs our estimates of 23%).

* AUM grew 24.8% YoY (in line) to INR1.6t.

* On the distribution side, banca APE/proprietary channels grew 9%/60% YoY. The growth in proprietary business was aided by agency, cross-sell, and e-commerce.

* MAXLIFE posted a strong 46% YoY growth in PBT to INR1.5b in 1QFY25. MAXLIFE’s EV grew 30% YoY and operating RoEV stood at 14.2%.

* On the cost front, the opex-to-GWP ratio increased 50bp YoY to 17.9%.

* With the infusion of INR16.1b capital by Axis Bank into MAXLIFE, the solvency margin stood at 203% (vs. 188% in 1QFY24).

Highlights from the management commentary

* Absolute VNB is likely to grow in mid-teens in FY25. On the margin front, management maintains the same growth guidance (25-26%) despite surrender charges, as higher premium growth will offset the margin hit. It expects 100-200bp impact on account of surrender charge regulations.

* The product mix is expected to be re-balanced in the coming quarters. Focusing on product innovation, MAXLIFE launched Flexi Cap Fund and Max Life Smart Wealth Annuity Guaranteed Pension Plan during the quarter (contributed 42% growth in the retail annuity segment).

Valuation and view

MAXLIFE reported a weak performance in 1QFY25. Going forward, the surrender charges would hit margins by ~100-200bp, which will be offset by higher premium growth, new product launches, and restructuring of commissions. In terms of growth, banca and online channels are likely to maintain a strong growth momentum. MAXLIFE would maintain the countershare in the range of ~65-70% for the Axis Bank channel, despite Axis Bank partnering with multiple insurance players. We raise our APE growth estimates as 1Q momentum got stronger in Jul’24. However, we cut our VNB margin assumptions given the adverse product mix trends (higher share of ULIPs). Reiterate Neutral with a TP of INR 1,030, premised on 2.0x Mar’26E EV and a holding company discount of 20%.

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