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In today’s TVS Weekly:

1. Why is Bajaj paying ₹24,180 Crore to buy out Allianz?

2. Learn about the Dead Horse Theory.

Market Kya Keh Raha Hai Sir?

They say time heals all wounds. This week, time didn't. After a long 24-year Joint Venture, Bajaj Group and Allianz SE are separating.

In a deal worth ₹24,180 Cr, Bajaj is buying out Allianz's 26% share in the joint venture. The two insurance arms of the JV are Bajaj Allianz Life Insurance Co. (BALIC) and Bajaj Allianz General Insurance Co. (BAGIC).

A partnership lasting decades does not end without cause. Let's understand why this is happening.

In the beginning

Before the reforms in 1991, the insurance sector was a government duopoly. Life Insurance Corporation (LIC) and General Insurance Corporation (GIC) dominated the market.

All wasn't the same after 1991, as these two now had competition from private players. Competition with two giants was a challenge for the new players. They didn't have enough expertise or capital to sustain and compete.

To solve this, foreign players entered the market. Allianz, BNP Paribas Cardif, and AIG were among the first to join existing Indian players. Such a partnership helped both domestic and foreign players. The Indian companies could offer distribution and knowledge about India, while the foreign ones provided technical expertise.

This seemed like a marriage in heaven, but what changed?

India grew less protective of it's children

Initially, the insurance regulator of India allowed only a 26% stake for foreign insurance players. This limit was increased to 49% in 2015 and further to 74% in 2021.

The outcome of this increased limit was that foreign partners kept on asking for more share. Many Indian counterparts agreed. Here are a few examples of cases where foreign partners could increase their stake.

1. Generali Group with Future Group,

2. Ageas with Federal Bank, and

3. British Aviva with Dabur India.

Similarly, Allianz kept asking for more share, but Bajaj wasn't having it. It refused to follow the industry trend.

Partners disagree

In a sentence, Bajaj did not find a good enough reason to give Allianz more ownership. This did not stop Allianz, as it went on asking for more share. Eventually, Allianz became more frustrated, it did not want to remain a junior partner.

This was the central conflict. Eventually, Bajaj began to think about buying out Allianz. There wasn't a way out that both partners could agree with.

Bajaj did not give more share as the existing arrangement was already incredibly resilient and profitable.

According to Bajaj

India remains significantly underinsured compared to developed economies. Bajaj saw no reason to share more of the immense wealth created by the insurance business. Let's understand some numbers.

Bajaj Finserv's safety cushion, or solvency ratio, is 3-3.7x. This means that for every ₹100 worth of claims, it has ₹370 worth of assets to pay from. From both it’s life and general insurance arms, it collects an annual ₹40,000 Cr in insurance premiums. Specifically, general insurance’s collected premium grew 33% in FY24.

A key ratio to understand insurance companies is the combined ratio.

The combined ratio shows the relationship between the total insurance expense and total premiums earned. Expense is in the numerator; therefore a ratio of 100% means the company's income is equal to it's expenses.

Bajaj Allianz's combined ratio is 99.9.

These are impressive numbers. But, to Allianz, this success is bittersweet as they cannot further participate in the profits.

According to Allianz

It is clear that Allianz wanted more. Let's understand how it proposed to do this.

When both parties initially agreed to partner together, Allianz was given a call option. Think of it as an option in which Allianz could buy more shares in the JV at a future date.

The price at which Allianz could buy more shares was in the initial agreement itself. Allianz wanted to buy the additional share at the pre-agreed price

Divorce Finalises

Bajaj wanted to sell shares to Allianz at their fair value and not a predetermined price. Here, fair value would be the price at which the shares would be sold in an open market.

The fair value of the shares would be far more than the pre-agreed amount. This deal was not preferred by Allianz.

Therefore, after years of discussion on the price at which Bajaj would sell shares to Allianz, both parties had enough. Bajaj decided to go solo.

Partners move on

Bajaj Finserv moves on with the deal. It will acquire approximately 1.01%, making its share now 75.01%. Bajaj Holdings and Investment Ltd. will buy approximately 19.95%, and Jamnalal Sons Pvt. Ltd. will approximately buy 5.04%.

Allianz doesn't plan to leave India. They said that it would use the sale proceeds to reinvest in India. Seeing that its JV with Bajaj exceeded its expectations, it wants to enter another. Allianz and Jio Financial Services are now discussing a deal to enter the insurance business together.

It remains to be seen what the future holds for Allianz after its exit from the Bajaj joint venture.

MEME OF THE WEEK:

Dalal Street Dictionary

Think of the things you should have stopped long ago.

You thought of quitting, but you didn’t. Have you ever thought why? Consider this broader question. Why do people keep doing projects whose failure is obvious?

To understand this, we must look towards The Dead Horse Theory.

This theory speaks about a certain type of scenario. When handling unsolvable problems, people and organisations stick to justifying their actions instead of seeing the problem as unsolvable.

To solve this situation, this theory says, "When you discover you are riding a dead horse, the best strategy is to dismount." In other words, quit. However, in practice, the opposite usually happens. Metaphorically, people keep on replacing the saddle or getting a better whip instead of recognising the horse is dead.

For example, ever noticed how investors stuck to Yes Bank shares despite clear warning signs of trouble? Watching the stock drop from ₹400 to ₹200, then to ₹100, while still believing a recovery was imminent? This is the Dead Horse Theory in action. It is one of the most expensive lessons in India's banking sector.

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Recommendations

This week, I recommend watching an interview with Ruchir Sharma. He is the head of Rockefeller Capital Management. In this discussion, he shares his insights about the biggest trends in markets and geopolitics of the last 10-15 years.

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Song of the Week:

This is Parth Verma,
Signing off.