Valuations, partnership structure make M&A in insurance a complicated affair

On June 8, Max Life Insurance announced it was dropping out of the race to acquire IDBI Federal Life Insurance. This was merely two months after the insurer received an approval to raise funds for an acquisition opportunity.

"We would like to inform you that as Max Life has decided not to pursue the current acquisition opportunity, the company is no longer considering any of the fund raising proposals…," its holding company told the exchanges in a disclosure.

With the other lone bidder Aditya Birla Sun Life Insurance also looking to exit, sources said that the stake sale could take another 6-8 months to be completedonce thebids are called for once again.

For the insurance sector, delays, and even breakdown, ofmergers and acquisitionsis now an accepted trend.Barring L&T General Insurance's merger with HDFC ERGO General Insurance, which was completed in 2017, others like Star Health Insurance and IDBI Federal have seen delays.

Valuation battles

Industry experts suggest that the primary reason for delay or scrapping of deals is valuation-related issues. As per the Insurance Laws (Amendment) Act 2015, any insurance company has to be valued at a fair value. This will include their insurance assets as well as factors like value of new business and policyholder liabilities.

In the case of the race to acquire IDBI Federal Life as well, almost eleven entities, including insurance companies and private equity firms, had expressed interest. As the process was underway, several of them dropped out citing valuation concerns.

Unlike other institutions, for insurance companies, the present value of future premiums to be collected is also taken into consideration at the time of valuation. However, since persistency, or the rate of renewals, is a fluctuating metric in the sector, deals have also wavered.

"In the initial stages, we see several bidders expressing interest for insurance companies, especially those who have large bank partners. But, when it comes to the process, valuation structures are often questioned by bidders taking into account the past records of the renewal rates," said an investment banker involved in one of the insurance deals.

Similarly, insurance companies with a bank as a promoter tend to be valued at least twice their other peers.Valuation professionals said that this is often a bone of contention between the seller and the buyer, since the size of the bank and its business done is also taken into account.

Deal structure

The way a deal is structured could also be a way of predicting whether it will sail through or not.

Take the example of the deal between and Max Life Insurance that was called off. Max Life had called off the deal in July 2017, after having struck the deal a year ago, due to the inordinate delay in the finalisation of the process.

This was due to the Insurance Regulatory and Development Authority of India (IRDAI) raising objections to the deal structure. Max Life Insurance was to be merged with Max Financial Services, which in turn was to be merged with HDFC Life Insurance.

As per insurance laws, only two insurance entities can be merged. Since this transaction involved merger of a non-insurance entity with an insurance company, questions were raised.

Distribution architecture

How attractive an insurance entity is can be determined by how many bancassurance partners they have. If it is involves large private sector or public sector banks, this can be an attractive factor for prospective bidders.

However, the distribution involving banks may also be a derailing factor. For instance, in the IDBI Federal stake sale, sources told Moneycontrol that both Max Life and Aditya Birla Sun Life had made several demands, including a 10-year exclusive bancassurance partnership as well as detailed estimates for product sales targets by the banks. These conditions did not go well with the two lenders.

Since insurance sales is not a core activity, not all bank branches actively sell insurance. Also, having a 5-year bancassurance agreement gives banks the freedom to exit poor-performing ventures. Sources said that in the case of IDBI Federal Life, the long term partnership sought by the insurers was not acceptable to the banks.

Shareholder objections

Most insurance companies have two or more shareholders, which complicates matters. In the case of the Star Health stake sale, UAE-based billionaire businessman Ahmed Abdulla Ahmed Al Ghurair moved the Madras High Court against the standalone health insurer. The matter is pending and the sale will proceed only after it is settled.

In the case of IDBI Federal Life, is ready to wait longer, while is looking to immediately sell its stake.

Sources also said that Ageas, one of the shareholders in IDBI Federal Life, is yet to arrive at a decision on whether or not to bid for the stake on sale. Only if it refuses can one of the other offers be selected, according to the initial terms of the life insurer's shareholding agreement.

Even in the past, a deal involving a large insurance company with multiple bank partners could not be consummated due to differences of opinion between the three shareholders. Here, the foreign partner wanted to exit but was unable to get a consensus from the Indian partners on the sale process.

Also, when it is a takeover of business ordered by the regulator, the insurers also have the right to move the Securities Appellate Tribunal. When was chosen to take over the policyholder assets of Sahara Life Insurance, the latter moved SAT and got the process stayed. IRDAI is yet to pass a fresh order on the matter.

Consolidation plans postponed

It is only the top ten players in both life and general insurance that have been able to post growth in both top line as well as bottom line. However, with merger deals taking more than a year to go through, new investors also have a limited horizon to look at.

Clarifying the terms and conditions in the bidding process, including what exactly the buyer would get, be it bank partners, type of business, as well as growth projections, would be a good start.