How will the ₹1,612 crore capital infusion support Max Life Insurance’s growth plans and emphasis on protection and annuity?
The solvency level of Max Life Insurance is now at 188%. Though it is significantly higher than the 150% that is prescribed by the IRDAI, we need growth capital. The organisation has huge plans for growth across all channels. And as a result of that Max Life Insurance will require capital over the next five years. Protection and annuity are our focus areas because of which the capital requirement is even higher. And hence, Axis Bank had to go up to 20% up from 13% bought in 2020.
Why did Axis Bank directly invest in Max Life and not in Max Financial Services like last time?
The first transaction was through the secondary route, which was sold by Max Financial Services to Axis Bank. However, this time when they have to raise stake, we decided that some part of that should come directly to Max Life Insurance because that will give us capital for growth. Otherwise, we would have had to separately raise capital once this entire 20% had happened so, we want to kill two birds with the same stone. We proposed to the management that the ₹1,612 crore that Axis Bank took approval from the Reserve Bank of India should come directly to the company. So as a result, they will be investing ₹1,612 crore in Max Life Insurance.
Was there any regulatory hurdle this time around?
The first transaction was done at book value, which the regulator IRDAI had some discomfort and they had prescribed that any future transaction should take place at discounted cash flow methodology on fair market value. So, this investment will take place at fair market value and hence back calculating what kind of shares will be preferentially allocated to Axis Bank – that will be a little over 6% which will take the overall stake of Axis Bank to 19.02% because of which they will have to transact 1% extra with Max Financial Services to take their stake to 20%. Do I expect any regulatory hurdles? Actually, there will be a regulatory approval process at three levels. This proposal will go through CCI, PFRDA, because of our pension fund management business, and then the regulator IRDAI. So we will follow the sequential process of approval and we are anticipating that within six months we will get all of them.
You have raised capital earlier too. How much more capital do you need over the next three to five years?
We have raised about ₹2,000 crore of equity and about ₹500 crore of debt so far. With this ₹1,600 crore extra coming in, our ability to raise debt will become higher because IRDAI now allows up to 50% of equity to be raised as subordinated debt. We have the capital for the next two years and if we need further capital, we will be raising in the form of debt. In the next five years, we are looking at close to about ₹4,000 crore but it depends a lot on the product mix that we are driving, the speed etc. and I think in five years it will become a self-sustaining business.Axis Bank and Banca channels make up 60% of your business. Is there any strategy change with new capital?
So the strategy is well in place actually and we needed this kind of capital to support it. We are not going to make fundamental shifts. In the next few years, we are looking at expeditious growth in all the channels. We are making investments in growing our own channels which have been doing well over the last 18 months. They are growing quite rapidly so we are making investments in agencies, in growing direct sales force teams, the digital teams, and in technology. Our product mix is quite well balanced, but there’s a lot more focus on growing protection and retail health segments.
Given the investments in channels and products, how will the margin look like this year?
Last year, we finished with a margin of a little over 31%. For the margin guidance this year, we are anticipating it to be somewhere around 27 to 28% because of all the investments that we are making, and the expenses going up. But by every passing year, I anticipate that the other operating leverage of the business will have a positive impact on the margin and over the next two to three years we hope to hit about 30%.
What is the impact of tax exemption going away from high-value non-participating products?
It gave an artificial boost to the business in March and the industry saw a very disproportionate month. Unlike how we all were expecting that the future year will be quite depressing. I am not seeing that trend. Actually, the trend is reasonably positive. Because in the first quarter, our overall sales grew by 25% and annualised premium equivalent (APE) was up 10%, I am not seeing a major impact but it is too early to conclude either way. It will take four or five more months to conclusively say if there is a big impact.
What kind of growth do you expect this year?
My hope and belief is it will be fairly robust. So with an exception to March, because you know the base was very large for last year. I am hoping that we will be clocking a 20%-plus number.
Have you made any changes to the commission structure post-April 1, once the norms were relaxed?
From a flexibility perspective, the only change that took place was the commission guidelines or commission caps have gone away. One needs to operate with product-level commissions and we haven’t made very significant changes in our commission structures.