A win-win deal for Axis Bank and Max Life

In what could prove to be a win-win deal for both Axis Bank and Max Life, the leading private sector bank announced its decision to acquire an additional 29 per cent stake in Max Life, the fourth-largest private life insurer in the country. Axis Bank, which currently has a minor stake (about 2 per cent) in the life insurance company, will hold 30 per cent in Max Life after the transaction.

While the contours and value of the transaction are awaited, overall, the deal is a big positive for Max Life, given that its bancassurance partnership with Axis Bank has been a key growth driver. As of December 2019, 55 per cent of Max Life’s new business APE (annualised premium equivalent) was sourced by Axis Bank. But recently there had been some uncertainty over its future growth, owing to the overhang on the renewal of its partnership with Axis Bank (contract until September 2021) and with Axis Bank roping in another life insurance partner some time ago.

Axis Bank acquiring stake in Max Life provides the much-needed visibility and stability in the life insurer’s business. Also, given that Max Life is the only leading non-bank life insurance company (against SBI Life, ICICI Pru Life and HDFC Life that benefit immensely from their banking channels), Axis Bank’s deal can help strengthen its bancassurance business.

For Axis Bank, entry into the life insurance space ― which holds large potential ― can add significant value to its underlying business, aside from providing a boost to its fee income. The life insurance space in India has been gaining significant traction, with top private sector players delivering strong performance over the past two to three years. Near-term challenges (owing to the Covid-19-led disruption) aside, the sector offers attractive growth opportunity in the long run.

Max Life business

Max Financial Services (the listed entity) is the holding company (presently holding 72.5 per cent stake) of Max Life. Mitsui Sumitomo Insurance (MSI) owns 25.5 per cent stake, while the balance is held by Axis Bank.

Max Life holds 9 per cent market share among private players (as of December 2019) and is the fourth-largest player with assets under management (AUM) of about ₹69,000 crore.

Max Life enjoys good VNB (value of new business ― a measure that values future profit streams of the new business written during the year) margin, thanks to higher share of participating policies and good share of protection policies. In the nine months ended FY20, individual APE grew by 20 per cent, with increased contribution from protection and non-par savings products. The share of non-par has gone up sharply to 20 per cent in the nine months ended December 2019, from 6 per cent during the same period last year. VNB margins went up (150 bps year-on-year), driven by higher share of non-par; VNB increased 24 per cent year-on-year in the nine months ended December 2019.

Along with its bancassurance partnership with Axis Bank, Max Life has also built a strong agency network. But after partnering with LIC two or three years ago, Axis Bank had last year also roped in another life insurance partner (Bajaj Allianz). This had placed an overhang over the growth of Max Life (given that 55 per cent of new business is sourced from Axis Bank).

Axis Bank picking up a stake in Max Life, is, hence, a positive development for Max Life, which can re-rate the stock (Max Financial Services).

Attractive valuation

Embedded value is essentially the present value of shareholders’ interest in the earnings after sufficient allowance for aggregate risks. As of December 2019, Max Life’s embedded value stood at ₹10,077 crore.

There have been several reasons why Max Financial Services has been trading at a significant discount to peers at about 1.3 times its embedded value (HDFC Life, ICICI Pru Life and SBI Life trade at 3-4 times).

One is the existence of the holding structure. Max Financial Services is the listed company, the holding company of Max Life. Earlier, the company had initiated a transaction swapping part of a joint venture partner Mitsui Sumitomo’s stake in Max Life into Max Financial Services, in a bid to simplify the holding company structure. This was, however, terminated.

Now with Axis Bank buying stake, there will also be an swap of Mitsui Sumitomo’s 20.6 per cent stake in Max Life with a 21.9 per cent stake in Max Financial (balance 5-odd per cent stake will also be subsequently purchased by Max Financial). Hence, at the end of these transactions (post the necessary approvals by RBI, IRDAI and CCI), Max Life will become a 70:30 joint venture between Max Financial and Axis Bank, thus simplifying the holding structure. However, unless there is a reverse merger between the holding company and the life insurance company, the holding company discount assigned to Max Financial’s valuation will continue.

There is also the overhang of promoter pledging of shares that has gone up to 94.7 per cent as of March 2020, from 80.4 per cent in the June 2019 quarter. The Axis Bank deal proceeds accruing to Max Financial, if some portion is distributed as dividends to promoters, could be used in reducing the pledge.

What for Axis Bank

The value at which Axis Bank has picked up stake in Max Life is yet to be disclosed. But given that Max Life sports healthy margins, has good portfolio mix and strong agency network, Axis Bank’s move is likely to be value-accretive for investors in the long run.

At a time when banks’ core lending business is under pressure, growing fee income is imperative. Axis Bank’s retail fees has grown by 25 per cent CAGR over the past three years. As of December 2019, MF and insurance distribution fee constitutes 15 per cent of retail fees and grew by 20 per cent year-on-year. The Max Life deal can be a big boost for the bank’s fee income in the long run.

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