Private lender Axis Bank proposes to buy an additional 17.9% stake for nearly Rs. 1800 Cr. The bank will be taking 7.9% while the rest would be held through its non-banking unit. That is, the bank is to raise its stake in Max Life Insurance Company Limited.
The Axis bank will value Max Life at par with its current embedded value a source said. Embedded value or the sum of net asset value and the present value of future profits is a commonly used valuation metric for life insurers. If that valuation is taken as a base, the deal size will be close to Rs. 1800 Cr. This is for a 17.9% stake in Max Life. The valuation is at 1x the insurers EV when considering the fact that more than half of its premium comes through Axis Bank.
There is a lack of regulatory clarity on how much banks can hold in domestic insurers. In December the RBI had asked lenders to pare stakes in insurers to 30%. This is when the banking regulator had asked lenders stakes in insurers to 30%. The banking regulator was shielding banks from risks arising out of their non-banking businesses. The Axis Bank is also exploring the arrangement to hold a further 10% stake as part of the deal. This stake is in the form of convertible instruments. Convertible instruments include warrants. But the conversion will depend on the final RBI guidelines on permissible holding limits for banks in insurance companies.
In case the RBI does allow Axis Bank to hold up to 30% in Max Life, gross instruments can be converted into equity. But until then the lender would restrict its ownership to more than 19% in the life insurer. The deal technicalities are being negotiated and nothing has been finalized yet. Max Financial Services holds more than a 72% stake in Max Life. While one of Japan’s particular insurance and Axis Bank hold more than 25% and 2% respectively. Axis Bank and Max Life did not respond to E-mailed queries.
Max Group told exchanges on 20th February that Axis Bank, Max Financial Services Limited, and its unit Max Life are exploring the possibility of the lender entering into a long-term strategic partnership with Max Life. The companies did not disclose any financial details of the proposed transaction. 60% of Max Life’s premium income is contributed by Axis Bank, while YES Bank contributes the rest. This bancassurance arrangement between Axis Bank and Max Life is due for renewal in 2021. The deal is subjected to regulatory approvals.
