2 min read.Updated: 25 Feb 2021, 11:10 AM ISTAparna Iyer
Max Life’s persistency ratios get weaker at longer time periods. For instance, 25th month persistency ratio was 69% while that of 37th month was 57%. In short, customers may be buying products from the life insurer but not sticking to it
MUMBAI: Max Financial Services Ltd has all the things in place now, having received the insurance regulator approval to the deal with Axis Bank on Tuesday. It is no surprise that shares of the company surged in early deals on Thursday.
Axis Bank will enter into a partnership with the company by increasing its stake in Max Life Insurance Ltd to 21%. The lender will acquire 9% directly and 3% through its subsidiaries. The rest of the money would be infused into the partnership as capital. The bank will get a strategic stake in Max Life along with three board seats. The Max group may merge Max Financial Services and Max Life for a direct listing of the insurance company, noted analysts at Jefferies India Pvt Ltd.
Axis Bank contributes more than 60% of Max Life’s business. The life insurer has other channel partners but Axis Bank has been the mainstay channel in terms of business. Ergo, the deal with the bank is critical for Max Life. With the culmination of the deal, Max Life is now poised for faster growth. As such, the insurer reported stellar numbers for the December quarter. Max Life reported a 65% rise in value of new business for the quarter while margins improved to 28.6%. Much of this growth can be easily attributed to the tie-up with Axis Bank. The bancassurance channel saw new business growth of 15% for the December quarter on annualised premium equivalent basis.
Investors are hoping that the Axis Bank partnership will result in reduced costs and more new business growth. Brokerage firm Jefferies has upgraded Max Financial to buy rating and the stock has gained an impressive 34% so far in 2021. Its gains have outpaced those of most valuable life insurer HDFC Life Insurance Company Ltd by a mile. HDFC Life’s shares have gained just 8.8% so far.
But investors need to watch out for risks too. Max Life’s persistency ratios get weaker at longer time periods. For instance, 25th month persistency ratio was 69% while that of 37th month was 57%. In short, customers may be buying products from the life insurer but they do not stick it out until the end. Insurance is a product where the insurer bears the cost upfront while returns are over a period of time. Weak persistency levels hit future incomes and increase cost inefficiencies.