Mahindra Finance dividends to fund life insurance foray, says group head

Mumbai: The Mahindra Group is confident that the dividend from its financial services subsidiary will be more than sufficient to fund its ₹3,600 crore investment over a decade into its life insurance foray, as it bets on its distribution reach in underpenetrated rural and semi-urban India.

The group on Thursday announced its entry into the life insurance business through a joint venture with its asset management partner, Canada’s Manulife group. Mahindra will invest ₹250 crore each for the first five years, a period when it will monitor policy sales, premium growth, cost levels and trajectory, pace of business growth, and margin accretion, the company said.

“This actually will be funded by the dividend that Mahindra & Mahindra (M&M) Limited earns from Mahindra Finance,” Group chief executive officer and managing director Anish Shah said in a media call to announce the 50:50 joint venture. “In fact, only about one-third of the dividend it earns from Mahindra Finance will be required for funding this over the first five years.”

“This is a Mahindra commitment. Similarly, Manulife would also put in exactly the same amount of capital,” Shah said, adding that with the global reassurance expertise that Manulife has, it's possible that this capital requirement might “come down as well”. The group estimates that the life insurance business will have an embedded value of ₹18,000-30,000 crore in 10 years.

“Capital requirement is not a constraint; they can easily fund it. Anyway, the requirement for capital injection in insurance companies is much less than lending businesses,” said Asutosh Kumar Mishra, head of research at Ashika Stock Broking. At a later stage, the company may also opt for inorganic acquisitions, both in the life and general insurance space. “It’s more about the value proposition they can offer in insurance.”

Shah said business is expected to break even “closer to year 10” or even slightly longer, and added that life insurance is a business that has “certain dynamics that will require time to break even”. “It's not just about 10 years, it's about creating a business that's a very strong and meaningful value-add for the group, over a longer time frame as well.”

The Mahindra Group chose to enter the business through a JV instead of buying or investing in an existing insurer because it believes the group’s distribution and customer base offer a “strong proposition”, Shah said, adding that this route was also a lot more capital efficient, enabling “much greater returns” for shareholders.

Canada-based Manulife is among the top three life insurers and asset managers in Asia. Globally, it has $1.1 trillion in assets under management and 36 million customers.

The JV will apply for an insurance licence from the Insurance Regulatory and Development Authority of India (IRDAI) within two to three months and expects to commence operations in 15-18 months.

"The real investment will start in FY28 because of the regulatory approvals required. It will take that time to get it up and running, and we expect that," Shah said in an analyst call.

The JV will be housed under M&M and not under Mahindra Finance for regulatory ease and to better utilize group synergies, Shah said. “The NBFC (non-banking financial services company) regulatory landscape is evolving significantly. And, as you see, insurance companies that multiple NBFCS have, all of them are held by the parent and not by the NBFC for that reason.”

According to Ashika Stock Broking’s Mishra, it is always better to have the subsidiary under the parent because the capital will be provided directly by them. Mahindra is following in the footsteps of other large businesses like the Bajaj Group, which have a similar organization structure, he said. 

While life insurance is the first option given the “under penetration” in the country, the group remains open to entering the general insurance business as well, Shah said, calling it a “natural extension”.

“If the insurance regulations allow a composite license, that could be a potential upside for the JV, and that's something we will evaluate when that happens, and yes, general insurance is attractive as well, but given the opportunity, we see that's very meaningful today, we've started with life,” he said.

Rural focus

Shah said the aim is to become the “number one” life insurer in Mahindra’s core market of rural and semi-urban India, backed by the “footprint that Mahindra Finance enjoys”.

In addition, the company also wants to be a significant player in the urban market, given Manulife’s focus on affluent customer segments.

“We would want to take a leadership position in protection solutions, one that India is under-penetrated in today, and there are specific reasons why we feel that we are well-placed to be able to do that, despite the competition that we have in the space today in urban India,” Shah said.

Life insurance falls “very much” in line with the aspiration for Mahindra Finance to be a leading financial services provider in semi-urban and rural markets, and the group’s financial services footprint, he added. Mahindra Finance, which offers vehicle and small business loans, has a network of around 1,345 branches and 25 lakh live customers.

Currently, only 2% of life insurance branches are in rural and semi-urban areas, Shah said, adding that these areas are emerging “very rapidly” and are seeing a “significant amount” of wealth creation. “We feel that we should offer this set of products to that area as compared to what they have today.”

The company will bring its brand-led trust, existing customer base in tier-2 and 3 cities, ready distribution and branch network, and relationships with banking partners for bancassurance to the table. On the other hand, Manulife’s contribution will be its product knowhow, underwriting and risk management models, reinsurance and investment expertise, and strong Asia experience in agency management.

“We aim to build a very strong digital channel, which will really grow with time to come. And, therefore, it (distribution) is a combination of Mahindra Finance, digital, bancassurance and agency channels,” Shah said.

Mahindra Finance, which has its corporate agency licence for insurance distribution, will continue to sell products of multiple insurers as per regulatory requirements, he said. Its strength will be products tailored for the customers of Mahindra Finance and the insurance JV, he said.

Shares of M&M ended 1.5% lower at ₹3,699.40 on Thursday, while Mahindra & Mahindra Financial Services closed 0.1% lower at ₹309.05 compared with an almost unchanged benchmark Nifty 50.