Shares of Bajaj Finserv Ltd rose by around 5% on Monday after Mint reported that the company is likely to buy out the stake of its joint venture partner Allianz SE in its insurance businesses. While details are still fuzzy—like for instance, how the 10,000 crore deal value will be split between the general and life insurance firms—there are a couple of takeaways for investors.

One, if the deal happens, it will establish a clear valuation benchmark for these businesses. At present, investors and analysts use a variety of ways to value these businesses and even comparable deals that can be used as proxies don’t disclose all metrics.

Second, if Bajaj Finserv buys out Allianz, it gives the company some scope to bring in a new strategic investor or two, by offering up to 49% stake in both the insurance units.

Third, there appears to be a belief among analysts and investors that once the ownership issue is settled, there is likely to be a dividend distribution by the life insurance unit. The life insurance business is excessively capitalized with a solvency ratio of 793%, as it has conserved capital so far throughout years of profits without distributing them. According to an analyst with a domestic brokerage firm who didn’t want to be identified, the life insurance company has excess capital of around 4,500 crore. Some of this is likely to find its way into the hands of shareholders.

These appear to be the reasons why the stock rose so much in a dull market, which is still evaluating the implications of Brexit.

To be sure, the sustainability of these gains will depend to a large extent on the how the market ultimately perceives the valuation for the transaction when it is declared. A lot also depends on how much Bajaj Finserv will have to borrow and increase its leverage to finance this purchase. Currently, “the company is adequately positioned to meet the regulatory requirements of capital and leverage over the medium term too", said IIFL Holdings Ltd analysts in a 14 June note. But those are imponderables with the current set of information.

As far as the operations of the company are concerned, the latest set of financials proved to be a continuation of a trend seen in recent quarters. The finance arm continues to be the key driver of earnings with a 36% year-on-year profit increase in the March quarter.

The general insurance unit also continues to do well with a 44% profit increase. The life insurance business continues to struggle with a slow growth in new premiums and fall in renewal premiums. After recent setbacks such as the break-up with its bancassurance partner Standard Chartered, the path to a higher market share is long and hard. The promise of dividends somewhere down the line has helped investors keep the faith.

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