RIL buys Bharti insurance stake

Mukesh Ambani today stormed into the crowded insurance business arena by acquiring Bharti group’s 74 per cent stake in its life insurance and general insurance entities for an undisclosed sum of money. The move will pit the elder Ambani scion against his sibling Anil Ambani who scrapped a non-compete agreement in May last year that removed virtually all turf restrictions that they had decided on when they carved up patriarch Dhirubhai Ambani’s empire in January 2006. Two Mukesh Ambani companies — group flagship Reliance Industries and Reliance Industrial Infrastructure Ltd (RIIL) —will acquire the stake that the telecom giant held in the two entities: Bharti AXA Life Insurance Company Ltd (Bharti AXA Life) and Bharti AXA General Insurance Company Ltd (Bharti AXA GI). Both insurance entities have raked in losses in 2009-10 with Bharti Axa Life suffering a loss of Rs 478.17 crore and Bharti Axa GI of Rs 142.30 crore. It isn’t clear how much Ambani has had to fork out for the insurance companies but it won’t be hard for him to pay. Reliance Industries is sitting on a $9.5-billion (Rs 42,393 crore) cash mountain and will rake in another $7.2 billion as soon as the government clears the deal it struck with British Petroleum in February under which the UK exploration giant will acquire a 30 per cent participating interest in the 23 oil and gasfields that RIL operates. Under the terms of the deal with the Bharti group, RIL and RIIL will effectively hold 57 per cent and 17 per cent, respectively, in both the insurance companies and will become AXA’s joint venture partners in India. The Paris-based group will retain its current 26 per cent shareholding in the insurance joint ventures and will continue to manage the day-to-day operations. Interestingly, there is an option under which AXA can acquire from RIL and RIIL up to 24 per cent in both the insurance companies if the FDI regulations and other norms permit such a purchase. It is contemplated that if this option is exercised, the two Reliance companies will effectively hold 50 per cent with RIL owning 45 per cent and RIIL the rest. AXA will then hold the remaining 50 per cent in both companies. However, it is assumed the life insurance business of Bharti AXA was alone valued at over Rs 3,000 crore. In March this year, Nippon Life had acquired a 26 per cent stake in Anil Ambani’s Reliance Life for Rs 3,062 crore. Analysts had then said the valuation given to Reliance Life was higher than anticipated. For Mukesh Ambani and Reliance which began with textiles, the acquisition of Bharti’s stake is another instance of it diversifying into areas other than oil and gas or petrochemicals. While RIL has already entered the organized retail business, last year, it had stunned observers when it entered the hospitality business by checking into EIH. In June last year, it acquired a 95 per cent stake in Infotel Broadband for Rs 4,800 crore. In March this year, RIL announced that it was entering financial services by joining hands with the DE Shaw group. Though insurance is a capital intensive business with a long gestation period, for a cash rich company like RIL, it can withstand the challenges in these businesses. Bharti AXA Life started operations in 2006 and has a market share of a little over one per cent in the insurance arena. During 2010-11, it collected total premium of Rs 790 crore. Data from IRDA show that the company’s new business premium income dropped to Rs 362 crore, a fall of 17 per cent. On the other hand, the gross premium underwritten by Bharti AXA GI stood at Rs 551.48 crore, an increase of 77 per cent over that in 2009-10.