The Hindu Business Line : Max New York Life plans to infuse Rs 800 cr this fiscal

Chennai, May 3 Some insurance companies are rationalising their branch network by shutting down or merging their branches to stay afloat due to dire market conditions. Max New York Life Insurance is taking a contrarian view, and planning for further expansion. The company plans to infuse fresh capital of Rs 800 crore this fiscal. In an interview to Business Line, Mr Rajit Mehta, Executive Director and Chief Operating Officer, shares his views on the expansion and profitability of the company. Excerpts from the interview:

Are you planning to pump in fresh capital this year?

Yes. We are planning to do it this year since our expansion did not happen last year. This fiscal we have already pumped Rs 70-80 crore; we may require Rs 800 crore this year. Our shareholders have agreed for a capital plan of Rs 3,800 crore by 2011-12.We are consolidating and ensuring that funds are sufficient for expansion. The long -term growth story of India as well as the insurance industry will not get impacted by this slowdown. We are watching the markets closely. Surely there will be a short to medium-term impact that we cannot deny.

Despite seven to eight years track record most of the private players are yet to make profit. When will they break even?

We are sure we will break even in 2011-12. We are looking forward to 2011-12 to break even and report profit.

As you write new business premium, losses are expected to grow.

How are you going to make profit?

As you expand the distribution, the new business trade will push the break even. Since most of the insurance companies were in an expansion mode in the last three-four years the break even has got postponed. In my view it may take 10-11 years (another few years) for a company to break even.

Now for most of the insurance companies the major new business is through sale of ULIPs. When you compare with mutual funds which have lesser expenses, a company with an AUM of Rs 12,800 crore reported a profit of a mere Rs 18 crore.

With such huge losses in insurance sector when do you foresee profits?

First of all, we see this business as distinct. Some companies confuse themselves by selling only wafer thin insurance and really selling a mutual fund. This is not our business. We were the last to enter the ULIP market.

When we entered, we had a three-year lock in for our product before IRDA guidelines came in. In our mind insurance is about protection and long term wealth creation. So we are not playing in the mutual fund space at all. Mutual fund will definitely have cost advantages and less cost of intermediation.

If you sell ULIP product and pay 12-15 per cent commission in the first year, whereas a MF pays 2-3.0 per cent, where do insurance companies stand?

If you are selling insurance with ULIP features then you can show break even. Let me illustrate that. If you are building a persistence business without lapsation, if you can collect renewal premium and your agent is able to go back to the same customer to get repeat business then they can control the expenses. Then the embedded value will be higher. That’s the right way to look into insurance business. I think we are building long-term business. The one parameter you must look into is sum assured to evaluate the business. Assume asset under management is Rs 5,000 crore and sum insured Rs 1,00,000 crore — you should take both into consideration to arrive at some conclusion.

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