Allianz deal brings little cheer for Bajaj Finserv’s shareholders
The Bajaj Group and Allianz SE are finally parting ways after 24 years. Bajaj will buy Allianz’s 26% stake in its insurance business: Bajaj Allianz General Insurance Co. Ltd and Bajaj Allianz Life Insurance Co. Ltd.
Based on the price to be paid of ₹13,780 crore for the general insurance stake and ₹10,400 crore for the life insurance stake, the valuation of the two businesses works out to ₹53,000 crore and ₹40,000 crore.
The structure of the deal involves Bajaj Finserv and Bajaj Holdings buying out about 1% and 20%, respectively, with the rest to be bought by Jamnalal Sons. The Street’s reaction to the deal is muted, with shares of Bajaj Finserv and Bajaj Holdings remaining almost flat to negative.
After the transaction, Bajaj will get full ownership of the general and life insurance businesses. However, this may not persist for long as the management has discussed the possibility of listing both businesses in the future.
But does it need capital to grow?
On the contrary, as against the regulatory requirement of solvency ratio (similar to capital adequacy ratio) at 150%, the measure for Bajaj Allianz General and Bajaj Allianz Life is significantly higher at 300% and 369%, respectively. In fact, a very high solvency ratio or excess capital pushes down the return on equity.
What about valuation, then?
The valuation of Allianz’s stake acquisition has to be evaluated separately for non-life and life businesses, as both have different valuation parameters. Bajaj Allianz General and Bajaj Allianz Life can be compared with rivals ICICI Lombard General Insurance Co. Ltd and ICICI Prudential Life Insurance Co. Ltd, respectively.
During the nine-month ended 31 December 2024 (9MFY25), ICICI Lombard’s gross written premium was ₹21,354 crore, while Bajaj’s stood at ₹17,257 crore. ICICI Lombard’s profit after tax was ₹1,999 crore, and Bajaj’s ₹1,470 crore. If one considers the market capitalization-to-net profit ratio or, effectively, the price-to-earnings multiple, ICICI Lombard trades at 32x annualized FY25 earnings. Based on the deal value, the multiple works out to 27x for Bajaj.
While the future growth trajectory for both companies could be different, Bajaj Finserv has got itself a good deal for buying general insurance business stake at a 16% valuation discount vis-à-vis its larger competitor.
ICICI Pru had an annual premium equivalent (APE) income of ₹6,905 crore in 9MFY25 versus ₹5,506 crore for Bajaj Allianz Life. ICICI Pru’s market capitalization-to-APE multiple works out to 9x based on FY25 estimates. Applying the same multiple to Bajaj Allianz Life, its potential market capitalization works out to ₹66,000 crore. Here, the deal valuation at a discount of 40% compared to ICICI Pru appears rather steep. But the catch is that the VNB margin for Bajaj at 11% in 9MFY25 is also sharply lower than 23% for ICICI Pru.
The differential in VNB margin could be owing to various factors such as product mix, distribution costs and retention of active customers, known as the persistency ratio. Considering the much inferior profitability, this deal isn’t as attractive for Bajaj Finserv.
Overall, the focus now shifts to earnings. To be sure, even after this transaction, investors’ interest in Bajaj Finserv may not perk up substantially. The reason for that is simple. Investors seeking exposure in life or non-life insurance businesses (non-lending businesses) would not prefer Bajaj Finserv as it has exposure to lending business through its 51% stake in Bajaj Finance Ltd, which, in turn, has an 89% stake in Bajaj Housing Finance Ltd.
