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Thursday, May 21, 2009

Allianz to fund Bajaj’s life biz

German Co Gets To Up Stake At Fixed Price

AT A time when Indian business houses and financial conglomerates are looking at ways to fund their cash-guzzling life insurance ventures, the Bajaj group is banking on an innovative deal it had struck with its joint venture partner, Germany-based Allianz, to finance additional investment. An agreement between the two stipulates that Bajaj Allianz Life Insurance will receive all the money it needs from Allianz till regulations allow 74% foreign direct investment in insurance companies. The agreement also commits Allianz to funding the Indian business till 2016, even if Indian laws governing FDI in insurance do not change.
    Sharing details of the arrangement with ET, Sanjiv Bajaj, MD of Bajaj Fin-Serv, said: "We have a pre-fixed arrangement with Allianz, where they could increase their stake up to 74% until 2016 at a fixed-price formula, where a 16% return is assured to Bajaj... if one were to consider the fact that all the incremental capital in the business is being brought in by Allianz, we have got a fair deal."
    Some of this is known. In 2007, Bajaj Auto had disclosed that it had sold call options to Allianz allowing the foreign insurer to hike its stake to 74% at a fixed price. The new information disclosed on Thursday are the details of the deal with Allianz for meeting funding requirements. Essentially, Allianz will fund the Indian life insurance business till 2016 or till it can raise its stake to 74%, whichever is earlier. For the Bajaj group, the upside is that, unlike other promoters, it will not have to worry about funding the business for several years. PROFITABLE COVER
What's the deal
    Till govt allows 74% FDI, Allianz will fund Bajaj Allianz Life Insurance's needs. If there is no change in foreign ownership, arrangement will continue till 2016
What if FDI cap is set at 49%
    Then Allianz can raise its stake to 49% by paying less than Rs 50 cr. But till it gets a chance to hike its stake to 74%, Allianz will bring in the cash
How does Bajaj benefit
    Bajaj Group does
not need to worry about funding the business. Money infused by Allianz will show in Bajaj Allianz's books as share premium Allianz may get 49% in JV for just Rs 50cr
THE act of Parliament which governs India's insurance sector, the Insurance Regulatory and Development Act (IRDA), caps foreign investment at 26% of the equity capital of Indian insurance companies. The Congress-led UPA government proposes to increase this to 49%. While this is likely, given the UPA's increased numbers, there is no proposal to increase this to 74%.
    If regulations allow 49% FDI in insurance ventures, Allianz would be in a position to raise its stake to 49% by paying less than Rs 50 crore. This is because the money infused by Allianz is being accounted for in the books of Bajaj Allianz as share premium. The paid-up capital of the company is Rs 150 crore.
    The stake in the life insurance business, which was originally held by Bajaj Auto, was transferred to Bajaj FinServ following the demerger. The JV is among the most cost-efficient in terms of its ratio of capital deployed to total business. Earlier this month, Bajaj Allianz Life Insurance reported a net profit of Rs 45 crore against a loss of Rs 16 crore in the previous year. This in turn has enabled Bajaj FinServ report a net profit of Rs 71 crore against a loss of Rs 33 crore last year. According to Kamesh Goyal, CEO of Bajaj Allianz Life, the company should continue to make profits unless there is either a strong growth or a sharp fall in new business.
    The contractual arrangements between the two groups are different for the non-life business. "The call option to Allianz on the non-life business is only up to 50%," said Mr Bajaj.
    Bajaj Allianz General Insurance posted a net profit of Rs 95 crore for the current year. The general insurance business is less capitalintensive than the life business.
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