Since norms don’t permit LIC to own over 10% in another insurer, IDBI Bank has put up its 48% holding in IDBI Federal Life for sale.
Since norms don’t permit LIC to own over 10% in another insurer, IDBI Bank has put up its 48% holding in IDBI Federal Life for sale.

LIC may sell stake in IDBI Federal Life at a cheaper valuation

  • After LIC came in as IDBI promoter, the bank began pushing mostly LIC insurance policies through its network
  • Since insurance regulations do not permit LIC to own more than 10% in another insurer, IDBI Bank has put up its 48% holding in IDBI Federal for sale

The loss of its top bancassurance partner will reduce the valuation of IDBI Federal Life Insurance Co. Ltd as its parent IDBI Bank looks to exit the insurance joint venture, a person aware of the matter said.

Since Life Insurance Corporation of India (LIC) acquired IDBI Bank earlier this year, the bank’s branches, which have been selling IDBI Federal policies so far, have begun hawking LIC’s policies. Since insurance regulations do not permit LIC to own more than 10% in another insurer, IDBI Bank has put up its 48% holding in IDBI Federal for sale.

“Earlier, when all the three shareholders of IDBI Federal wanted to exit the business, its bancassurance distribution had fetched it a high valuation multiple of 3-3.5 times. Now that there is no strong bancassurance distribution channel left within the business, the valuation will be closer to its present embedded value of 2,000 crore, as the ability to command a multiple on its distribution strength is gone," the person cited above said on condition of anonymity.

Bancassurance is the primary sales driver for IDBI Federal, with the insurer distributing about 87% of its insurance policies through this route as on 31 March. The distribution is provided through exclusive partnerships with its two shareholders IDBI Bank and Federal Bank Ltd.

On 4 September, Mint reported that IDBI Bank had mandated investment bank JP Morgan to manage the sale process. While IDBI holds 48%, Federal Bank and Belgian insurer Ageas hold 26% each in the company.

IDBI Bank’s 1,868 branches sold over half of IDBI Federal policies uptill 31 March 2019. But after LIC came in as IDBI’s new promoter, the bank began pushing mostly LIC’s policies through its network, leading to a fall in the sales of IDBI Federal policies. Its other shareholder Federal Bank, which has 1,200 branches in India, now contributes to most of IDBI Federal’s policy sales.

IDBI Federal’s new business premium fell 3% year-on-year to 806 crore as of fiscal ended 31 March, according to data from Insurance Regulatory and Development Authority (IRDAI). Its market share (based on new business premium), among private life insurers, fell to 1.11% from 1.4% during the period.

Last year, Max Life Insurance Co. Ltd had shown interest in acquiring IDBI Federal for a valuation of 6,000 crore. However, the talks failed due to lack of clarity on the continuity of the bancassurance tie-up with IDBI Bank.

“If IDBI Federal Life loses its largest bank channel, that distribution channel will either have to be quickly substituted or the life insurer will have to compensate the loss in business volume with improved profitability of its products, better customer retention and cross sell strategy—all of these factors will ultimately decide the multiple the insurer will be able to command from its investors," said Joydeep Roy, insurance leader, PwC India.

The sale of IDBI Bank’s stake in the life insurance business became imperative as IRDAI does not allow a promoter to own more than one life insurance entity. By that rule, LIC-owned IDBI Bank will either have to exit its stake in IDBI Federal completely or pare it down to less than 10%.

“This is a purely commercial decision between the buyer and the seller," said Vighnesh Shahane, chief executive officer at IDBI Federal Life Insurance, commenting on the company’s valuation.

“After LIC came on board as the promoter, our business from IDBI Bank fell by 50-60%, while Federal Bank ramped up its distribution of our policies and showed 40% growth in fiscal 2019. The challenge now will be to replace IDBI Bank with a new bancassurance partner."

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