Key conference call takeaways(regarding merger of Bharti AXA)
ICICI Lombard believes the transaction makes a compelling case due to: a) a company that is well regarded, with strong management and cultural fit, b) a credible distribution engine, with nascent large bancassurance tie-ups that offer a significant runway for growth, c) a sizeable investment book of Rs47.6bn, and d) an opportunity to partner with Bharti and
Management believes this transaction will enable long-term value creation for shareholders through both, revenue and cost synergies. One such opportunity is through Bharti AXA’s (BAX’)
banca tie-ups, which it has recently entered into and which are in nascent stage (5.3% of FY20 GDPI mix). With this transaction, ILOM would have a tie-up with most large banking partners
across countries. While this channel currently focusses on motor insurance, ILOM will look to gradually increase the share of health insurance penetration in this channel.
The Motor segment contributes to 47% of BAX’ tie-ups; BAX has relationships with and healthy market share in several OEMs. ILOM indicated Bharti AXA was even ahead of them in an OEM.
Given ILOM’s investments and focus on the motor segment, Bharti AXA, a relatively stronger motor player, will help ILOM increase its penetration in the motor segment.
Bharti AXA had ~4,000 agents in 2017 which it has rapidly scaled up to 6,700. ILOM has internally sharpened its own focus on this
channel and would focus on improving the productivity of the combined agency workforce.
Given that BAX operates with an opex + commission ratio of 42.1%, ILOM sees significant headroom for operating leverage and cost synergies over time. Key areas that ILOM will
focus on include branch infrastructure costs, technology costs and branding costs.
ILOM’s focus will be on bringing the combined entity back to the operating levels of ~100% combined ratio.
Management commented that the combined entity would have a solvency margin well above the regulatory threshold, eliminating the need for any additional fund raise.
Bharti AXA had accumulated losses of Rs8.47bn as of FY20. ILOM indicated that the extent to which the combined entity could utilise such losses would be contingent on future profits it would generate and could be governed by income tax laws.
BAX has exposure to IL&FS, DHFL and Yes Bank and provided for Rs.1.57bn against the same in FY20. ILOM commented that Rs1.12bn of book value was still to be provided for, and ILOM had factored that into its valuations.
BAX’ reserving policies have been checked by Willis Towers Watson and by an independent actuary. ILOM’s own actuarial team has also analysed the reserving policies and believes they
have one of the better reserving policies.
Crop insurance contributed to 26% of BAX’ GDPI in FY20 and their FY21 crop mandate could be similar to that of FY20. While ILOM’s cautious view on the crop business has not materially
changed, it will honour all existing crop contracts, as some of these could have a duration of 2-3 years. Its tactical approach to the crop segment remains unchanged.
With a smaller exposure to the health segment (12% of GDPI mix), Bharti AXA currently works with a TPA to process its health insurance claims. ILOM indicated that the endeavour
would be to process them in-house.
ILOM has contractually agreed upon continuity of the existing banca tie-ups. Over the past few years, whenever ILOM has signed up as a smaller partner, it has provided significant value and grown to become the largest insurer within that partner.
Post successful completion of the transaction, ICICI Bank’s shareholding will drop to 48.1% and RBI regulations could entail further reduction to <30%. But ILOM indicated past precedents, when the parent bank was given dispensation.