Greetings from Team Carnelian.
Hope you and your family are safe through the second wave hitting.
Many of you who have been following us must be aware of our MCO framework. We have received many requests seeking a case study of our magic portfolio to get insights into our approach. So, in this newsletter we would like to present a case study from our “Magic Basket” wherein our process is designed to capture a structurally sound business facing temporary challenges and valuation dislocation, thereby capturing both earnings growth and valuation rerating, in turn creating Magic for investors.
Along this framework we bought Max Financials (holding company of Max Life) as a part of our Magic Basket.
Why did we buy?
1. Max life is an incredible business we would love to own.
2. Short term dislocation and perception gap led to the stock trading at a significant discount to peers, despite strong business fundamentals.
We love such situations where if post our research, we are satisfied that the dislocation is temporary, business is great and we understand the catalyst in the medium-term horizon.
Why we like Max Life Insurance business….?
Max life is the 4th largest life insurance company built by the Max group over last 20 years. During this period of 20 years, it has consistently delivered and outperformed industry leaders on every parameter an insurance business (product, persistency, productivity) should be measured.
How did they do this? Max and New York life (JV partner) both were unknown brands in India in financial services compared to their competition like ICICI, SBI, HDFC etc. Max chose to take a difficult path right from the beginning - to go after long term sustainable business rather than chasing market share (“Delayed Gratification”). Max has hired and cultivated one of the best leadership teams, constituted a truly independent Board with members of global repute and hired a professional CEO – independent of promoters.
Max executed their chosen strategy very well – infact in most of our private interactions, even competition has admired and acknowledged them and their work. Max Life was the company HDFC Life, another player we admire, wanted to buy out owing to its business quality. “Deepak Parekh commented in 2017 that HDFC Life will pay premium to Max Life for its quality products.”
What were these strategic choices?
Product mix: Products of insurance industry can be broadly categorized into 2 buckets:
1. Traditional
- PAR and protection (primary purpose is selling cover for life, hence structural in nature)
2. Non traditional
- Non-PAR (offers guaranteed returns but prone to interest rate cycles and carries balance sheet risk)
- ULIP (offers market linked returns – akin to mutual fund, prone to market cycle)
Building traditional business requires significant upfront investments and hence can be a drag in the initial years, however it is more sustainable as compared to ULIPs which is cyclical. Non-PAR business sustenance is a function of interest rate cycle and carries a balance sheet risk, hence requires suitable hedging/risk management tools.
Max consciously chose to build the business with a focus on PAR portfolio and did a great job at it. Max’s PAR AUM @ INR 42K crores is the second highest next only to behemoth LIC, and much higher than industry leaders like HDFC Life, SBI Life. This clearly demonstrates the quality of business Max has built.
Max’s share in ULIP was significantly lower than peers….